##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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FORM 10-Q



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|                                                      |  |                                                                                             
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                            |  |                                                                                             
|                                                     
|x                                                     |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                     
|For the quarterly period ended August 31,
    2002   
|                                                     
|OR                                                   
|                                                     
|o                                                     |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                     
|For the transition period
    from                 to

Commission File Number: 0-26880

VERITY, INC.

(Exact name of registrant as specified in its
charter)


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

894 Ross Drive

Sunnyvale, California 94089


(408) 541-1500


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


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

Yes x     No o

The number of shares outstanding of the
Registrants Common Stock, $0.001 par value, was 34,697,117
as of September 30, 2002.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    
|CERTIFICATION                
|INDEX TO EXHIBITS            
|EXHIBIT 10.40                
|EXHIBIT 99.1                 



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##### Table of Contents



VERITY, INC.

FORM 10-Q

TABLE OF CONTENTS

|                              |  |                                                                                                                          |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                              |  |                                                                                                                          |    | Page
|                              |  |                                                                                                                          |    |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements (unaudited)                                                                                         |    |      | 3  | 
|                              |  | Condensed Consolidated Balance Sheets 
    As of August 31, 2002 and May 31, 2002                                       |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of
    Operations  For the Three Months Ended August 31,
    2002 and August 31, 2001 |    |      | 4  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  For the Three Months Ended August 31,
    2002 and August 31, 2001 |    |      | 5  | 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                 |    |      | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                |    |      | 11 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                           |    |      | 26 | 
|Item 4.                       |  | Controls and Procedures                                                                                                  |    |      | 26 | 
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                        |    |      | 27 | 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                                |    |      | 27 | 
|Item 3.                       |  | Defaults upon Senior Securities                                                                                          |    |      | 27 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |      | 27 | 
|Item 5.                       |  | Other Information                                                                                                        |    |      | 27 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                         |    |      | 28 | 
|Signature                     |  |                                                                                                                          | 29 |     
|Certifications                |  |                                                                                                                          | 30 |     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial
Statements

VERITY, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands, except per share
data)


ASSETS

|                                      |                                                                                                       |                                            |         |         |         |  |         |         |         | 
|------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                      |                                                                                                       | August 31,                                 |         | May 31,
|                                      |                                                                                                       | 2002                                       |         | 2002   
|                                      |                                                                                                       |                                            |         |        
|                                      |                                                                                                       |                                           
|                                      |                                                                                                       | (unaudited)                               
|Current assets:                       |                                                                                                       |                                            |         |         |         |  |         |        
|                                      | Cash and cash equivalents                                                                             |                                            | $       | 14,384  |         |  | $       | 23,251  |        
|                                      | Short-term investments                                                                                |                                            |         | 119,958 |         |  |         | 130,672 |        
|                                      | Trade accounts receivable, net                                                                        |                                            |         | 17,278  |         |  |         | 20,961  |        
|                                      | Deferred tax assets                                                                                   |                                            |         | 2,636   |         |  |         | 3,114   |        
|                                      | Prepaid and other                                                                                     |                                            |         | 4,724   |         |  |         | 5,497   |        
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|                                      |                                                                                                       | Total current assets                       |         |         | 158,980 |  |         |         | 183,495 | 
|Property and equipment, net           |                                                                                                       |                                            | 6,100   |         |         |  | 6,625   |        
|Long-term investments                 |                                                                                                       |                                            | 108,548 |         |         |  | 91,433  |        
|Deferred tax assets                   |                                                                                                       |                                            | 16,597  |         |         |  | 16,597  |        
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|                                      |                                                                                                       | Total assets                               |         | $       | 290,225 |  |         | $       | 298,150 | 
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|LIABILITIES                          
|Current liabilities:                  |                                                                                                       |                                            |         |         |         |  |         |        
|                                      | Accounts payable                                                                                      |                                            | $       | 4,796   |         |  | $       | 5,749   |        
|                                      | Accrued compensation                                                                                  |                                            |         | 9,537   |         |  |         | 10,376  |        
|                                      | Other accrued liabilities                                                                             |                                            |         | 2,724   |         |  |         | 2,779   |        
|                                      | Deferred revenue                                                                                      |                                            |         | 12,271  |         |  |         | 14,981  |        
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|                                      |                                                                                                       | Total current liabilities                  |         |         | 29,328  |  |         |         | 33,885  | 
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|Contingencies (Note 6)                |                                                                                                       |                                            |         |         |         |  |         |        
|STOCKHOLDERS EQUITY                 
|Common stock, $0.001 par value:       |                                                                                                       |                                            |         |         |         |  |         |        
|                                      | Authorized: 200,000 shares                                                                            |                                            |         |         |         |  |         |         |        
|                                      | Issued and outstanding: 35,208 shares as of
    August 31, 2002; and 35,775 shares as of May 31, 2002 |                                            |         | 35      |         |  |         | 36      |        
|Additional paid-in capital            |                                                                                                       |                                            | 244,048 |         |         |  | 250,133 |        
|Retained earnings                     |                                                                                                       |                                            | 13,514  |         |         |  | 12,133  |        
|Additional other comprehensive income |                                                                                                       |                                            | 3,300   |         |         |  | 1,963   |        
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|                                      |                                                                                                       | Total stockholders equity                 |         |         | 260,897 |  |         |         | 264,265 | 
|                                      |                                                                                                       |                                            |         |         |         |  |         |        
|                                      |                                                                                                       | Total liabilities and stockholders equity |         | $       | 290,225 |  |         | $       | 298,150 | 
|                                      |                                                                                                       |                                            |         |         |         |  |         |        

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

3



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VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
data)


|                                                                   |                            |                          |        |        |        |   |        |        |        | 
|------------------------------------------------------------------ | -------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                   |                            |                         
|                                                                   |                            | Three Months Ended      
|                                                                   |                            | August 31,              
|                                                                   |                            |                         
|                                                                   |                            | 2002                     |        | 2001  
|                                                                   |                            |                          |        |       
|                                                                   |                            |                         
|                                                                   |                            | (unaudited)             
|Revenues:                                                          |                            |                          |        |        |        |   |        |       
|                                                                   | Software products          |                          | $      | 12,306 |        |   | $      | 10,267 |       
|                                                                   | Service and other          |                          |        | 9,704  |        |   |        | 9,838  |       
|                                                                   |                            |                          |        |        |        |   |        |       
|                                                                   |                            | Total revenues           |        |        | 22,010 |   |        |        | 20,105 | 
|                                                                   |                            |                          |        |        |        |   |        |       
|Costs of revenues:                                                 |                            |                          |        |        |        |   |        |       
|                                                                   | Software products          |                          |        | 374    |        |   |        | 542    |       
|                                                                   | Service and other          |                          |        | 2,570  |        |   |        | 3,046  |       
|                                                                   |                            |                          |        |        |        |   |        |       
|                                                                   |                            | Total costs of revenues  |        |        | 2,944  |   |        |        | 3,588  | 
|                                                                   |                            |                          |        |        |        |   |        |       
|Gross profit                                                       |                            |                          | 19,066 |        |        |   | 16,517 |       
|                                                                   |                            |                          |        |        |        |   |        |       
|Operating expenses:                                                |                            |                          |        |        |        |   |        |       
|                                                                   | Research and development   |                          |        | 5,943  |        |   |        | 5,936  |       
|                                                                   | Marketing and sales        |                          |        | 10,204 |        |   |        | 14,598 |       
|                                                                   | General and administrative |                          |        | 2,595  |        |   |        | 2,832  |       
|                                                                   |                            |                          |        |        |        |   |        |       
|                                                                   |                            | Total operating expenses |        |        | 18,742 |   |        |        | 23,366 | 
|                                                                   |                            |                          |        |        |        |   |        |       
|Income (loss) from operations                                      |                            |                          | 324    |        |        |   | (6,849 | )     
|Other income, net                                                  |                            |                          | 1,904  |        |        |   | 2,870  |       
|                                                                   |                            |                          |        |        |        |   |        |       
|Income (loss) before provision for (benefit
    from) income taxes |                            |                          | 2,228  |        |        |   | (3,979 | )     
|Provision for (benefit from) income taxes                          |                            |                          | 847    |        |        |   | (1,512 | )     
|                                                                   |                            |                          |        |        |        |   |        |       
|Net income (loss)                                                  |                            | $                        | 1,381  |        |        | $ | (2,467 | )     
|                                                                   |                            |                          |        |        |        |   |        |       
|Net income (loss) per share  basic                                |                            | $                        | 0.04   |        |        | $ | (0.07  | )     
|                                                                   |                            |                          |        |        |        |   |        |       
|Net income (loss) per share 
    diluted                          |                            | $                        | 0.04   |        |        | $ | (0.07  | )     
|                                                                   |                            |                          |        |        |        |   |        |       
|Number of shares  basic                                           |                            |                          | 35,548 |        |        |   | 35,362 |       
|                                                                   |                            |                          |        |        |        |   |        |       
|Number of shares  diluted                                         |                            |                          | 36,645 |        |        |   | 35,362 |       
|                                                                   |                            |                          |        |        |        |   |        |       

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

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VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                             |                                                                   |                                                          |        |          |        |   |        |          |        |  
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | -
|                                                                                             |                                                                   |                                                         
|                                                                                             |                                                                   | Three Months Ended                                      
|                                                                                             |                                                                   | August 31,                                              
|                                                                                             |                                                                   |                                                         
|                                                                                             |                                                                   | 2002                                                     |        | 2001    
|                                                                                             |                                                                   |                                                          |        |         
|                                                                                             |                                                                   |                                                         
|                                                                                             |                                                                   | (unaudited)                                             
|Cash flows from operating
    activities:                                                    |                                                                   |                                                          |        |          |        |   |        |         
|Net income (loss)                                                                            |                                                                   | $                                                        | 1,381  |          |        | $ | (2,467 | )       
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             | Depreciation                                                      |                                                          |        | 887      |        |   |        | 1,129    |       
|                                                                                             | Provision for (recovery of) doubtful accounts                     |                                                          |        | 139      |        |   |        | (123     | )     
|                                                                                             | Deferred income taxes                                             |                                                          |        | 479      |        |   |        |         |       
|                                                                                             | Amortization of premium (discount) on
    securities, net         |                                                          |        | 332      |        |   |        | (100     | )     
|Changes in operating assets and liabilities:                                                 |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             | Trade accounts receivable                                         |                                                          |        | 4,006    |        |   |        | 15,167   |       
|                                                                                             | Prepaid and other current assets                                  |                                                          |        | 819      |        |   |        | (1,531   | )     
|                                                                                             | Accounts payable                                                  |                                                          |        | (997     | )      |   |        | 730      |       
|                                                                                             | Accrued compensation and other accrued liabilities                |                                                          |        | (979     | )      |   |        | (5,197   | )     
|                                                                                             | Deferred revenue                                                  |                                                          |        | (2,752   | )      |   |        | (3,022   | )     
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             |                                                                   | Net cash provided by operating activities                |        |          | 3,315  |   |        |          | 4,586  |  
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|Cash flows from investing
    activities:                                                    |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             | Acquisition of equipment and leasehold
    improvements           |                                                          |        | (361     | )      |   |        | (1,981   | )     
|                                                                                             | Purchases of marketable securities                                |                                                          |        | (142,038 | )      |   |        | (148,433 | )     
|                                                                                             | Maturity of marketable securities                                 |                                                          |        | 61,754   |        |   |        | 78,651   |       
|                                                                                             | Proceeds from sale of marketable securities                       |                                                          |        | 74,165   |        |   |        | 65,828   |       
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             |                                                                   | Net cash used in investing activities                    |        |          | (6,480 | ) |        |          | (5,935 | )
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|Cash flows from financing
    activities:                                                    |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             | Proceeds from the sale of common stock, net of
    issuance costs |                                                          |        | 479      |        |   |        | 3,817    |       
|                                                                                             | Repurchases of common stock                                       |                                                          |        | (6,566   | )      |   |        |         |       
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             |                                                                   | Net cash provided (used) by financing
    activities     |        |          | (6,087 | ) |        |          | 3,817  |  
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|Effect of exchange rate changes on cash                                                      |                                                                   |                                                          | 385    |          |        |   | (277   | )       
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|                                                                                             |                                                                   | Net increase (decrease) in cash and cash
    equivalents |        |          | (8,867 | ) |        |          | 2,191  |  
|Cash and cash equivalents, beginning of period                                               |                                                                   |                                                          | 23,251 |          |        |   | 12,210 |         
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         
|Cash and cash equivalents, end of period                                                     |                                                                   | $                                                        | 14,384 |          |        | $ | 14,401 |         
|                                                                                             |                                                                   |                                                          |        |          |        |   |        |         

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

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VERITY, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Information as of August 31, 2002 and
for the three months ended


August 31, 2002 and 2001 and thereafter
is unaudited)


1. Interim Financial Data
(Unaudited)

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

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

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

Basic earnings per share are computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Dilutive common equivalent shares
consist of in-the-money stock options.
In-the-money options are those where the exercise
price is lower than the average market price being used to
determine the value. Veritys average market price for the
first quarter in fiscal year 2003 was $10.5363. All common
equivalent shares have been excluded from the computation of
diluted net loss per share for the three months ended
August 31, 2001 because the effect would be anti-dilutive.

Basic and diluted net income (loss) per
share are calculated as follows for the three months ended
August 31, 2002 and 2001 (in thousands, except per share
data):

|         |                                             |                    |   |        |  |  |   |        |  
|-------- | ------------------------------------------- | ------------------ | - | ------ |  |  | - | ------ | -
|         |                                             |                   
|         |                                             | Three Months Ended
|         |                                             | August 31,        
|         |                                             |                   
|         |                                             | 2002               |   | 2001  
|         |                                             |                    |   |       
|Basic:   |                                             |                    |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 35,548 |  |  |   | 35,362 |  
|         |                                             |                    |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 1,381  |  |  | $ | (2,467 | )
|         |                                             |                    |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.04   |  |  | $ | (0.07  | )
|         |                                             |                    |   |        |  |  |   |       
|Diluted: |                                             |                    |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 35,548 |  |  |   | 35,362 |  
|         | Common equivalent shares from stock options |                    |   | 1,097  |  |  |   |       |  
|         |                                             |                    |   |        |  |  |   |       
|         | Shares used in per share calculation        |                    |   | 36,645 |  |  |   | 35,362 |  
|         |                                             |                    |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 1,381  |  |  | $ | (2,467 | )
|         |                                             |                    |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.04   |  |  | $ | (0.07  | )
|         |                                             |                    |   |        |  |  |   |       

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##### Table of Contents



VERITY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Information as of August 31, 2002 and
for the three months ended


August 31, 2002 and 2001 and thereafter
is unaudited)


As of August 31, 2002 and August 31,
2001, zero and 10,710,540 anti-dilutive shares have been
excluded from the dilutive effect of common stock equivalent
shares.

3. Investments

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

|                                        |                   |           |         |            |  |       |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | --------- | ------- | ---------- |  | ----- | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |           |         | Gross      |  |      
|                                        |                   | Amortized |         | Unrealized |  | Fair 
|                                        |                   | Cost      |         | Gains      |  | Value
|                                        |                   |           |         |            |  |      
|Corporate commercial paper  short-term |                   | $         | 119,235 |            |  | $     | 723   |       |  | $ | 119,958 |        
|Corporate commercial paper  long-term  |                   |           | 106,955 |            |  |       | 1,593 |       |  |   | 108,548 |        
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        
|                                        | Total investments |           | $       | 226,190    |  |       | $     | 2,316 |  |   | $       | 228,506 | 
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        

At August 31, 2002, scheduled maturities of
investments classified as available-for-sale are as follows
(in thousands):

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Within one year                    |  | $ | 119,958 | 
|After one year through three years |  |   | 108,548 | 
|                                   |  |   |         | 
|                                   |  | $ | 228,506 | 
|                                   |  |   |         | 

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

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

4. Comprehensive Income (Loss)

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

|                                                            |  |                    |       |      |  |   |        |  
|----------------------------------------------------------- |  | ------------------ | ----- | ---- |  | - | ------ | -
|                                                            |  |                   
|                                                            |  | Three Months Ended
|                                                            |  | August 31,        
|                                                            |  |                   
|                                                            |  | 2002               |       | 2001
|                                                            |  |                    |       |     
|Net income (loss)                                           |  | $                  | 1,381 |      |  | $ | (2,467 | )
|Foreign currency translations gain                          |  |                    | 721   |      |  |   |       |  
|Unrealized gains on available-for-sale
    investments, net |  |                    | 616   |      |  |   | 710    |  
|                                                            |  |                    |       |      |  |   |        |  
|Comprehensive income (loss)                                 |  | $                  | 2,718 |      |  | $ | (1,757 | )
|                                                            |  |                    |       |      |  |   |        |  

5. Business Segment

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

7



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##### Table of Contents



VERITY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Information as of August 31, 2002 and
for the three months ended


August 31, 2002 and 2001 and thereafter
is unaudited)


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

|                   |        |                    |   |        |        |  |   |        |        | 
|------------------ | ------ | ------------------ | - | ------ | ------ |  | - | ------ | ------ | 
|                   |        |                   
|                   |        | Three Months Ended
|                   |        | August 31,        
|                   |        |                   
|                   |        | 2002               |   | 2001  
|                   |        |                    |   |       
|Revenues:          |        |                    |   |        |        |  |   |       
|                   | USA    |                    | $ | 18,371 |        |  | $ | 17,181 |       
|                   | Europe |                    |   | 3,144  |        |  |   | 2,733  |       
|                   | ROW    |                    |   | 495    |        |  |   | 191    |       
|                   |        |                    |   |        |        |  |   |       
|                   |        | Consolidated       |   | $      | 22,010 |  |   | $      | 20,105 | 
|                   |        |                    |   |        |        |  |   |       
|Long-lived assets: |        |                    |   |        |        |  |   |       
|                   | USA    |                    | $ | 20,716 |        |  | $ | 6,115  |       
|                   | Europe |                    |   | 836    |        |  |   | 968    |       
|                   | ROW    |                    |   | 1,145  |        |  |   | 1,569  |       
|                   |        |                    |   |        |        |  |   |       
|                   |        | Consolidated       |   | $      | 22,697 |  |   | $      | 8,652  | 
|                   |        |                    |   |        |        |  |   |       

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

No single customer accounted for more than 10% of
the Companys total revenues for the three months ended
August 31, 2002 and 2001. Revenues derived from sales to
the United States government and its agencies were 9.1% and 6.4%
of the Companys total revenues for the three months ended
August 31, 2002 and 2001, respectively.

6. Contingencies

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

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

BroadVision answered Veritys complaint on
June 28, 2001 and denied the material allegations of the
Complaint and asserted affirmative defenses to Veritys
claims. BroadVision also asserted a counterclaim alleging that
Verity had breached the parties license and the implied
covenant of good faith and fair dealing

8



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##### Table of Contents



VERITY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Information as of August 31, 2002 and
for the three months ended


August 31, 2002 and 2001 and thereafter
is unaudited)


contained therein (1) by failing to pay
BroadVision referral fees that it claims Verity owes to
BroadVision for BroadVisions efforts in securing the sale
of Verity Advanced K-2 Search Modules; and (2) by failing
to provide support to BroadVision for VDK after Verity
terminated the parties license. BroadVision seeks by its
counterclaim, among other things, damages according to proof, a
declaration that BroadVision has not breached the parties
license and attorneys fees.

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

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

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

7. Stock Repurchase Program

On June 20, 2002, Verity announced an
extension of the stock repurchase program it initiated on
September 12, 2001. The program calls for the repurchase of
outstanding shares of Veritys common stock up to an
aggregate value of $50.0 million. Through August 31,
2002, Verity repurchased and retired 2,132,200 shares of
its common stock through open market transactions, valued at
approximately $26.5 million. The program will terminate at
the end of the current fiscal year ending May 31, 2003
unless extended or shortened by the Board of Directors.

8. Recent Accounting
Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141 (SFAS
No. 141), Business Combinations. This
standard eliminates the pooling-of-interests method of
accounting for business combinations, except for qualifying
business combinations that were initiated prior to July 1,
2001, and applies to all business combinations accounted for
under the purchase method that are completed after June 30,
2001.

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

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121),
however it retains the fundamental provisions of SFAS
No. 121 for (1) the recognition and measurement of the
impairment of long-lived assets to be held and

9



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##### Table of Contents



VERITY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Information as of August 31, 2002 and
for the three months ended


August 31, 2002 and 2001 and thereafter
is unaudited)


used and (2) the measurement of long-lived
assets to be disposed of by sale. SFAS No. 144 develops a
single accounting model for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired
assets and consequently amends Accounting Principles Board
Opinion No. 30, Reporting Results of
Operations  Reporting the Effects of Disposal of a
Division of a Business. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and interim
periods within those fiscal years. The adoption of SFAS
No. 144 did not have a significant impact on the
Companys financial position or results of operations.

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

9. Subsequent Event

On September 18, 2002, the Company announced
the elimination of about 50 positions within the Company,
or about a 12 percent reduction. The move was made in order
to reduce operating expenses and to position the Company to
achieve its goal of continued profitability. The Company expects
to record a charge related to severance and other payments of
approximately $0.9 million in the quarter ending
November 30, 2002. The employees affected by this staffing
reduction were located in the United States and Canada.

10



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##### Table of Contents








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

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

Overview

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

Results of Operations

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

|                                                                   |                            |                          |      |      |       |  |       |      |       | 
|------------------------------------------------------------------ | -------------------------- | ------------------------ | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                                                   |                            |                         
|                                                                   |                            | Three Months            
|                                                                   |                            | Ended                   
|                                                                   |                            | August 31,              
|                                                                   |                            |                         
|                                                                   |                            | 2002                     |      | 2001
|                                                                   |                            |                          |      |     
|                                                                   |                            |                         
|                                                                   |                            | (unaudited)             
|Revenues:                                                          |                            |                          |      |      |       |  |       |     
|                                                                   | Software products          |                          |      | 55.9 | %     |  |       | 51.1 | %    
|                                                                   | Service and other          |                          |      | 44.1 |       |  |       | 48.9 |      
|                                                                   |                            |                          |      |      |       |  |       |     
|                                                                   |                            | Total revenues           |      |      | 100.0 |  |       |      | 100.0 | 
|                                                                   |                            |                          |      |      |       |  |       |     
|Costs of revenues:                                                 |                            |                          |      |      |       |  |       |     
|                                                                   | Software products          |                          |      | 1.7  |       |  |       | 2.7  |      
|                                                                   | Service and other          |                          |      | 11.7 |       |  |       | 15.1 |      
|                                                                   |                            |                          |      |      |       |  |       |     
|                                                                   |                            | Total costs of revenues  |      |      | 13.4  |  |       |      | 17.8  | 
|                                                                   |                            |                          |      |      |       |  |       |     
|Gross profit                                                       |                            |                          | 86.6 |      |       |  | 82.2  |     
|                                                                   |                            |                          |      |      |       |  |       |     
|Operating expenses:                                                |                            |                          |      |      |       |  |       |     
|                                                                   | Research and development   |                          |      | 27.0 |       |  |       | 29.5 |      
|                                                                   | Marketing and sales        |                          |      | 46.3 |       |  |       | 72.6 |      
|                                                                   | General and administrative |                          |      | 11.8 |       |  |       | 14.1 |      
|                                                                   |                            |                          |      |      |       |  |       |     
|                                                                   |                            | Total operating expenses |      |      | 85.1  |  |       |      | 116.2 | 
|                                                                   |                            |                          |      |      |       |  |       |     
|Income (loss) from operations                                      |                            |                          | 1.5  |      |       |  | (34.0 | )   
|Other income, net                                                  |                            |                          | 8.7  |      |       |  | 14.2  |     
|                                                                   |                            |                          |      |      |       |  |       |     
|Income (loss) before provision for (benefit
    from) income taxes |                            |                          | 10.2 |      |       |  | (19.8 | )   
|Provision for (benefit from) income taxes                          |                            |                          | 3.9  |      |       |  | (7.5  | )   
|                                                                   |                            |                          |      |      |       |  |       |     
|Net income (loss)                                                  |                            |                          | 6.3  | %    |       |  | (12.3 | )%  
|                                                                   |                            |                          |      |      |       |  |       |     

11



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##### Table of Contents



Revenues



| |               
| | --------------
| | Total revenues

|                   |  |                       |      |            |  |        |      |  |  |  |      | 
|------------------ |  | --------------------- | ---- | ---------- |  | ------ | ---- |  |  |  | ---- | 
|                   |  | August 31,            |      | August 31, |  |       
|                   |  | 2002                  |      | 2001       |  | Change
|                   |  |                       |      |            |  |       
|                   |  |                       |      |           
|                   |  | (dollars in millions) |      |           
|Three months ended |  | $                     | 22.0 |            |  | $      | 20.1 |  |  |  | 9.5% | 

The increase in our total revenues for the three
month period ended August 31, 2002, compared with the same
period a year ago, was primarily due to an increase in license
sales, particularly our K2 Enterprise application, partially
offset by a modest decrease in service and other revenues.

Revenues derived from foreign operations
accounted for 16.5% and 14.5% of total revenues for the three
month periods ended August 31, 2002 and 2001, respectively.
Our export sales consist primarily of products licensed for
delivery outside of the United States. For the three month
periods ended August 31, 2002 and 2001, export sales
accounted for 19.4% and 21.6% of total revenues, respectively.

No single customer accounted for more than 10% of
our total revenues for the three month periods ended
August 31, 2002 and 2001. Revenues derived from sales to
the United States government and its agencies were 9.1% and 6.4%
of our total revenues for the three month periods ended
August 31, 2002 and 2001, respectively.



| |                          
| | -------------------------
| | Software product revenues

|                   |                              |                       |      |            |   |        |      |      |   |  |       |  | 
|------------------ | ---------------------------- | --------------------- | ---- | ---------- | - | ------ | ---- | ---- | - |  | ----- |  | 
|                   |                              | August 31,            |      | August 31, |   |       
|                   |                              | 2002                  |      | 2001       |   | Change
|                   |                              |                       |      |            |   |       
|                   |                              |                       |      |           
|                   |                              | (dollars in millions) |      |           
|Three months ended |                              | $                     | 12.3 |            |   | $      | 10.3 |      |   |  | 19.9% | 
|                   | Percentage of total revenues |                       |      | 55.9       | % |        |      | 51.1 | % |  |       |  | 

We saw an increase in demand for our software
products in the three month period ended August 31, 2002,
compared with the same period a year ago. This increase in
software product revenues was principally due to increased
revenue from sales of our K2 Enterprise application.



| |                           
| | --------------------------
| | Service and other revenues

|                   |                              |                       |     |            |   |        |     |      |   |  |        |  | 
|------------------ | ---------------------------- | --------------------- | --- | ---------- | - | ------ | --- | ---- | - |  | ------ |  | 
|                   |                              | August 31,            |     | August 31, |   |       
|                   |                              | 2002                  |     | 2001       |   | Change
|                   |                              |                       |     |            |   |       
|                   |                              |                       |     |           
|                   |                              | (dollars in millions) |     |           
|Three months ended |                              | $                     | 9.7 |            |   | $      | 9.8 |      |   |  | (1.4)% | 
|                   | Percentage of total revenues |                       |     | 44.1       | % |        |     | 48.9 | % |  |        |  | 

Our service and other revenues consist primarily
of fees for software maintenance, consulting and training. The
slight decrease in service and other revenues for the three
month period ended August 31, 2002, compared with the same
period a year ago, was related to a decrease in maintenance
revenue resulting from normal recognition of maintenance revenue
derived from a lower level of license revenues in the same
period of the prior year. We recognize revenues associated with
maintenance fees ratably over the period of the maintenance
contract, which is typically twelve months. Revenues associated
with fees for consulting and training remained flat.

Costs of Revenues



| |                           
| | --------------------------
| | Costs of software products

|                   |                                         |                       |     |            |   |        |     |     |   |  |         |  | 
|------------------ | --------------------------------------- | --------------------- | --- | ---------- | - | ------ | --- | --- | - |  | ------- |  | 
|                   |                                         | August 31,            |     | August 31, |   |       
|                   |                                         | 2002                  |     | 2001       |   | Change
|                   |                                         |                       |     |            |   |       
|                   |                                         |                       |     |           
|                   |                                         | (dollars in millions) |     |           
|Three months ended |                                         | $                     | 0.4 |            |   | $      | 0.5 |     |   |  | (31.0)% | 
|                   | Percentage of software product revenues |                       |     | 3.0        | % |        |     | 5.3 | % |  |         |  | 

12



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Costs of our software products consists primarily
of product media, duplication, manuals, packaging materials,
shipping expenses, and in certain instances, royalties for
licensing of third-party software incorporated in our products.
The decrease in costs of software products in absolute dollars
and as a percentage of software product revenues for the three
month period ended August 31, 2002, compared with the same
period a year ago, was primarily attributable to decreased costs
of third party software components and to decreased costs for
manuals and other shipping expenses. In addition, during fiscal
years 2002 and 2003, we did not capitalize any software
development costs as these costs were not material.



| |                           
| | --------------------------
| | Costs of service and other

|                   |                                          |                       |     |            |   |        |     |      |   |  |         |  | 
|------------------ | ---------------------------------------- | --------------------- | --- | ---------- | - | ------ | --- | ---- | - |  | ------- |  | 
|                   |                                          | August 31,            |     | August 31, |   |       
|                   |                                          | 2002                  |     | 2001       |   | Change
|                   |                                          |                       |     |            |   |       
|                   |                                          |                       |     |           
|                   |                                          | (dollars in millions) |     |           
|Three months ended |                                          | $                     | 2.6 |            |   | $      | 3.0 |      |   |  | (15.6)% | 
|                   | Percentage of service and other revenues |                       |     | 26.5       | % |        |     | 31.0 | % |  |         |  | 

Costs of service and other revenues consist of
costs incurred in providing consulting services, customer
training, telephone support and product upgrades to customers.
The decrease in absolute dollars and as a percentage of costs of
service and other revenues for the three month period ended
August 31, 2002 was primarily due to reduced compensation
and other employee related expenses associated with the
reduction in staffing in our professional services organization
during the quarter ended November 30, 2001.

Operating Expenses



| |                         
| | ------------------------
| | Research and development

|                   |                              |                       |     |            |   |        |     |      |   |  |      |  | 
|------------------ | ---------------------------- | --------------------- | --- | ---------- | - | ------ | --- | ---- | - |  | ---- |  | 
|                   |                              | August 31,            |     | August 31, |   |       
|                   |                              | 2002                  |     | 2001       |   | Change
|                   |                              |                       |     |            |   |       
|                   |                              |                       |     |           
|                   |                              | (dollars in millions) |     |           
|Three months ended |                              | $                     | 5.9 |            |   | $      | 5.9 |      |   |  | 0.1% | 
|                   | Percentage of total revenues |                       |     | 27.0       | % |        |     | 29.5 | % |  |      |  | 

Research and development expenses consist
primarily of employee compensation and benefits, payments to
outside contractors, depreciation on equipment used for
development and corporate overhead allocations. We anticipate
that research and development expenditures will continue to
comprise a significant percentage of total revenues, because in
our judgment, they are essential to maintaining our competitive
position. We believe that research and development expenses will
decrease in absolute dollars as a result of the workforce
reduction discussed in note 9 of the Notes to Condensed
Consolidated Financial Statements in Item 1 of Part I
of this Quarterly Report on Form 10-Q.

Research and development expenses in absolute
dollars for the three month period ended August 31, 2002
were flat with the comparable prior period. Employee
compensation and benefits expenses increased modestly during the
three month period ended August 31, 2002 and were offset
entirely by decreased payments to outside contractors. The
decrease in research and development expenses as a percentage of
total revenues for the three month period ended August 31,
2002 was due to the increase in total revenues for the period.



| |                    
| | -------------------
| | Marketing and sales

|                   |                              |                       |      |            |   |        |      |      |   |  |         |  | 
|------------------ | ---------------------------- | --------------------- | ---- | ---------- | - | ------ | ---- | ---- | - |  | ------- |  | 
|                   |                              | August 31,            |      | August 31, |   |       
|                   |                              | 2002                  |      | 2001       |   | Change
|                   |                              |                       |      |            |   |       
|                   |                              |                       |      |           
|                   |                              | (dollars in millions) |      |           
|Three months ended |                              | $                     | 10.2 |            |   | $      | 14.6 |      |   |  | (30.1)% | 
|                   | Percentage of total revenues |                       |      | 46.3       | % |        |      | 72.6 | % |  |         |  | 

Marketing and sales expenses consist primarily of
employee compensation and benefits, tradeshows, outbound
marketing and other lead generation activities, public
relations, travel expenses associated with our sales staff and
corporate overhead allocations. We anticipate that we will
continue to make significant

13



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##### Table of Contents



investments in marketing and sales with the goal
of continuing to align marketing and sales expenses with
anticipated revenues. We believe that marketing and sales
expenses will decrease in absolute dollars as a result of the
workforce reduction discussed in note 9 of the Notes to
Condensed Consolidated Financial Statements in Item 1 of
Part I of this Quarterly Report on Form 10-Q.


The decrease in marketing and sales expenses in
absolute dollars for the three months ended August 31,
2002, compared with the same period a year ago, was primarily
due to a $3.7 million decrease in compensation and other
employee related expenses associated with the reduction in
staffing in our marketing and sales organization during the
quarter ended November 30, 2001 and to a $0.3 million
decrease in overall marketing program spending. The decrease in
marketing and sales expenses as a percentage of total revenues
for the three months ended August 31, 2002 was due to the
decrease in absolute costs combined with the increase in total
revenues for the period.



| |                           
| | --------------------------
| | General and administrative

|                   |                              |                       |     |            |   |        |     |      |   |  |        |  | 
|------------------ | ---------------------------- | --------------------- | --- | ---------- | - | ------ | --- | ---- | - |  | ------ |  | 
|                   |                              | August 31,            |     | August 31, |   |       
|                   |                              | 2002                  |     | 2001       |   | Change
|                   |                              |                       |     |            |   |       
|                   |                              |                       |     |           
|                   |                              | (dollars in millions) |     |           
|Three months ended |                              | $                     | 2.6 |            |   | $      | 2.8 |      |   |  | (8.4)% | 
|                   | Percentage of total revenues |                       |     | 11.8       | % |        |     | 14.1 | % |  |        |  | 

General and administrative expenses consist
primarily of personnel costs for finance, legal, human resources
and general management, provisions for doubtful accounts,
insurance, fees for external professional advisors and corporate
overhead allocations. We believe that general and administrative
expenses will remain relatively flat in absolute dollars for the
foreseeable future.

The decrease in general and administrative
expenses in absolute dollars for the three month period ended
August 31, 2002, compared with the same period a year ago,
was primarily related to decreased expenses for outside
professional services including various tax studies. The
decrease as a percentage of total revenues for the three month
period ended August 31, 2002 was primarily due to the
decrease in absolute costs combined with the increase in total
revenues.



| |                  
| | -----------------
| | Other income, net

|                   |                              |                       |     |            |   |        |     |      |   |  |         |  | 
|------------------ | ---------------------------- | --------------------- | --- | ---------- | - | ------ | --- | ---- | - |  | ------- |  | 
|                   |                              | August 31,            |     | August 31, |   |       
|                   |                              | 2002                  |     | 2001       |   | Change
|                   |                              |                       |     |            |   |       
|                   |                              |                       |     |           
|                   |                              | (dollars in millions) |     |           
|Three months ended |                              | $                     | 1.9 |            |   | $      | 2.9 |      |   |  | (33.7)% | 
|                   | Percentage of total revenues |                       |     | 8.7        | % |        |     | 14.2 | % |  |         |  | 

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

The decrease in other income in absolute dollars
for the three month period ended August 31, 2002, compared
with the same period a year ago, was primarily due to decreasing
overall yields on our portfolio of marketable securities caused
by the decreasing interest rate environment, partially offset by
a slightly higher balance of marketable securities. The decrease
in other income as a percentage of total revenues for the three
month period ended August 31, 2002 was due to the decrease
in absolute dollars combined with the increase in total revenues.



| |                               
| | ------------------------------
| | Income tax provision (benefit)

|                   |                              |                       |     |            |   |        |      |      |    |  |    |  | 
|------------------ | ---------------------------- | --------------------- | --- | ---------- | - | ------ | ---- | ---- | -- |  | -- |  | 
|                   |                              | August 31,            |     | August 31, |   |       
|                   |                              | 2002                  |     | 2001       |   | Change
|                   |                              |                       |     |            |   |       
|                   |                              |                       |     |           
|                   |                              | (dollars in millions) |     |           
|Three months ended |                              | $                     | 0.8 |            |   | $      | (1.5 | )    |    |  | nm | 
|                   | Percentage of total revenues |                       |     | 3.9        | % |        |      | (7.5 | )% |  |    |  | 

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

We expect the tax savings for fiscal 2003 due to
research and development tax credits to result in a marginally
lower effective tax rate and accordingly applied an effective
tax rate of 38.0% to the results of our quarter ended
August 31, 2002. We will continue to reassess the impact of
our research and development expenses on our effective tax rate
in future periods.

Liquidity and Capital Resources

|                          |                                                      |                       |   |            |   |  |   |      |  
|------------------------- | ---------------------------------------------------- | --------------------- | - | ---------- | - |  | - | ---- | -
|                          |                                                      | August 31,            |   | August 31,
|                          |                                                      | 2002                  |   | 2001      
|                          |                                                      |                       |   |           
|                          |                                                      |                      
|                          |                                                      | (dollars in millions)
|Three month periods ended |                                                      |                       |   |            |   |  |   |     
|                          | Net cash provided by operating activities            |                       | $ | 3.3        |   |  | $ | 4.6  |  
|                          | Net cash used in investing activities                |                       | $ | (6.5       | ) |  | $ | (5.9 | )
|                          | Net cash provided (used) by financing
    activities |                       | $ | (6.1       | ) |  | $ | 3.8  |  

As of August 31, 2002, we had
$242.9 million in cash and cash equivalents and
available-for-sale securities compared to $245.4 million at
May 31, 2002. At August 31, 2002, our principal
sources of liquidity were our cash and cash equivalents and
short-term investments of $134.3 million. As of
August 31, 2002, we had no outstanding debt obligations.

Cash provided by operating activities for the
three month period ended August 31, 2002 was primarily due
to a $4.0 million decrease in accounts receivable, net
income of $1.4 million plus depreciation expense of
$0.9 million, and a $0.8 million decrease in prepaid
and other current assets, partially offset by a
$2.8 million decrease in deferred revenue, a
$1.0 million decrease is accrued compensation and other
accrued liabilities and a $1.0 million decrease in accounts
payable. Cash provided by operating activities for the three
month period ended August 31, 2001 was primarily due to a
$15.2 million decrease in accounts receivable, partially
offset by a loss from operations of $2.5 million, a
$5.2 million decrease in accrued compensation and a
$3.0 million decrease in deferred revenue.

Cash used in investing activities for the three
month period ended August 31, 2002 and 2001 was the result
of capital expenditures of $0.4 million and
$2.0 million in the respective periods and net purchases of
marketable securities. For the three month period ended
August 31, 2002 and 2001, the capital expenditures
consisted primarily of purchases for computer hardware and
software.

Cash used by financing activities for the three
month period ended August 31, 2002 consisted of
$6.6 million in repurchases of our common stock through our
stock repurchase program, partially offset by $0.5 million
in proceeds from the sale of common stock as a result of stock
option exercises. Cash provided by financing activities for the
three month period ended August 31, 2001 was from the sale
of common stock as a result of stock option exercises.

Our principal commitments as of August 31,
2002 consist of obligations under operating leases, totaling
$11.0 million over the life of these leases.

On June 20, 2002, we announced an extension
of the stock repurchase program we initiated on
September 12, 2001. The program calls for the repurchase of
outstanding shares of our common stock up to an aggregate value
of $50.0 million. Through August 31, 2002, we
repurchased and retired 2,132,200 shares of our common
stock through open market transactions, valued at approximately
$26.5 million. The program will terminate at the end of the
current fiscal year ending May 31, 2003 unless extended or
shortened by the Board of Directors.

We believe that our current cash and cash
equivalents, interest income and cash generated from operations,
if any, will provide adequate liquidity to meet our working
capital and operating resource

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expenditure requirements through at least fiscal
2004. If the global economy weakens further, our cash, cash
equivalents and investments balances may decline. As a result,
or if our spending plans materially change, we may find it
necessary to seek to obtain additional sources of financing to
support our capital needs, but we cannot assure you that a
financing will be available on commercially reasonable terms, or
at all.


Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141 (SFAS
No. 141), Business Combinations. This
standard eliminates the pooling-of-interests method of
accounting for business combinations, except for qualifying
business combinations that were initiated prior to July 1,
2001, and applies to all business combinations accounted for
under the purchase method that are completed after June 30,
2001.

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

In October 2001, the FASB issued SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes
Accounting for the Impairment of Long- Lived Assets and
for Long-Lived Assets to Be Disposed Of (SFAS
No. 121), however it retains the fundamental provisions of
SFAS No. 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and
(2) the measurement of long-lived assets to be disposed of
by sale. SFAS No. 144 develops a single accounting model
for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired assets and
consequently amends Accounting Principles Board Opinion
No. 30, Reporting Results of Operations 
Reporting the Effects of Disposal of a Division of a
Business. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS
No. 144 is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal
years. The adoption of SFAS No. 144 did not have a
significant impact on our financial position or results of
operations.

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

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RISK FACTORS

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

Risks Related to Our Business



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

We have incurred net losses in the past and,
although we reported net income in fiscal year 2002 and the
first quarter of fiscal year 2003, we may not be able to
maintain profitability. In the future, our revenues may decline,
remain flat, or grow at a rate slower than was experienced in
the quarter ended August 31, 2002, especially in light of
the current economic environment. To achieve revenue growth and
maintain fiscal year profitability, we must:



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

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



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

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



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

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

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



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

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



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

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



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

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

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

In the past, securities class action litigation
has often been brought against a company following a decline in
the market price of its securities. For example, in December
1999 our stock price dramatically declined and a number of
lawsuits were filed against us. Because we expect our stock
price to continue to fluctuate significantly, we may be the
target of similar litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources, and could seriously
harm our business.



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

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

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



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

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

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



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

Regent Pacific Management Corporation, a
management firm of which Gary J. Sbona, our chairman of the
board and chief executive officer, is chief executive officer,
provides management services for our company under a management
services agreement. The management services provided under our
agreement with Regent Pacific include the services of Regent
Pacific personnel as part of Veritys management team. The
agreement terminates on August 31, 2003, but provides us
with an option to further extend the term of this agreement
through February 2004. This agreement may be cancelled at the
option of the board after February

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2004. If the agreement with Regent Pacific were
canceled or not renewed, the loss of the Regent Pacific
personnel could negatively affect our operations, especially
during the transition phase to a new management. Similarly, if
any adverse change in Veritys relationship with Regent
Pacific occurs, it could hinder managements ability to
direct our business and materially and adversely affect our
results of operations and financial condition.




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

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



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

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

Service and other revenues derived from foreign
operations accounted for 16.5%, 13.9%, 6.3% and 6.7% of total
revenues for the three month period ended August 31, 2002,
and fiscal years 2002, 2001, and 2000, respectively. Our export
sales consist primarily of products licensed for delivery
outside of the United States. For the three months ended
August 31, 2002 and fiscal years 2002, 2001 and 2000,
export sales accounted for 19.4%, 21.8%, 26.0% and 19.0% of
total revenues, respectively. We expect that revenues derived
from foreign operations and export sales will continue to
account for a significant percentage of our revenues for the
foreseeable future. These revenues may fluctuate significantly
as a percentage of revenues from period to period. In addition,
a portion of these revenues was derived from sales to foreign
government agencies, which may be subject to risks similar to
those described immediately below.



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

Revenues derived from sales to the federal and
state governments and their agencies were 9.1%, 6.1%, 7.4% and
7.8% of total revenues for the three months ended
August 31, 2002 and fiscal years 2002, 2001 and 2000,
respectively. Future reductions in government spending on
information technologies could harm our operating results. In
recent years, budgets of many government agencies have been
reduced, causing certain

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customers and potential customers of our products
to re-evaluate their needs. These budget reductions are expected
to continue over at least the next several years.


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



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

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

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

We strive to achieve compatibility between our
products and the text publication formats we believe are or will
become popular and widely adopted. We invest substantial
resources in development efforts aimed at achieving
compatibility. Any failure by us to anticipate or respond
adequately to technology or market developments could result in
a loss of competitiveness or revenue. For instance, to date we
have focused our efforts on integration with the Adobe PDF and
Lotus Notes environments and, more recently, the Microsoft
Exchange environment. Should any of these products or
technologies lose or fail to achieve acceptance in the
marketplace or be replaced by other products or technologies,
our business could be materially and adversely affected.

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



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

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

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

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

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



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

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

Effective copyright and trade secret protection
may be unavailable or limited in some foreign countries. To
license our products, we frequently rely on shrink
wrap licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of several
jurisdictions. In addition, employees, consultants and others
who participate in the development of our products may breach
their agreements with us regarding our intellectual property,
and we may not have adequate remedies for any such breach. We
also realize that our trade secrets may become known through
other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors
may be able to develop products that are equal or superior to
our products without infringing on any of our intellectual
property rights.



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

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



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

Some of the technology used by our products is
licensed from third parties, generally on a nonexclusive basis.
We believe that there are alternative sources for each of the
material components of technology we license from third parties.
However, the termination of any of these licenses, or the
failure of the third-party licensors to adequately maintain or
update their products, could result in delay in our ability to
ship these products while we seek to implement technology
offered by alternative sources. Any required replacement
licenses could prove costly. Also, any delay, to the extent it
becomes extended or occurs at or near the end of a fiscal
quarter, could harm our quarterly results of operations. While
it may be necessary or desirable in the

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future to obtain other licenses relating to one
or more of our products or relating to current or future
technologies, we cannot assure you that we will be able to do so
on commercially reasonable terms or at all.




| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Potential acquisitions may have unexpected
    consequences or impose additional costs on us

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



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in integration of the operations,
    technologies, and products of the acquired companies;                                                       
|
| |  | the risk of diverting managements attention
    from normal daily operations of the business;                                                                 
|
| |  | accounting consequences, including changes in
    purchased research and development expenses, resulting in
    variability in our quarterly earnings;         
|
| |  | potential difficulties in completing projects
    associated with purchased in-process research and development;                                               
|
| |  | risks of entering markets in which we have no or
    limited direct prior experience and where competitors in these
    markets have stronger market positions;
|
| |  | the potential loss of key employees of the
    acquired company; and                                                                                           
|
| |  | the assumption of unforeseen liabilities of the
    acquired company.                                                                                          

We cannot assure you that our future acquisitions
will be successful and will not adversely affect our business.
We must also maintain our ability to manage any growth
effectively. Failure to manage growth effectively and
successfully integrate acquisitions we make could harm our
business.

Risks Related to Our Industry



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

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

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



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | use of the Internet, the Web and other online
    services does not continue to increase or increases more slowly
    than expected;    
|
| |  | the infrastructure for the Internet, the Web and
    other online services does not effectively support expansion
    that may occur; or

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| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Internet, the Web and other online services
    do not create a viable commercial marketplace, inhibiting the
    development of electronic commerce and reducing the need for our
    products and services.



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

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



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

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



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

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



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

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

Risks Related to Ownership of Our Common
Stock



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

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



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | future announcements concerning Verity or its
    competitors;                                   
|
| |  | quarterly variations in operating results;                                                       
|
| |  | announcements of technological innovations;                                                      
|
| |  | the introduction of new products or changes in
    product pricing policies by us or competitors;

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| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | proprietary rights or other litigation; and                    
|
| |  | changes in earnings estimates by analysts or
    other factors.

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



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

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



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

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

25



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##### Table of Contents






Item 3. Quantitative and
Qualitative Disclosures About Market Risk

Interest Rate Risk.The primary objective of our
investment activities is to preserve the principal while at the
same time maximizing yields without significantly increasing the
risk. To achieve this objective, we maintain our portfolio of
cash equivalents and investments in a variety of securities,
including both government and corporate obligations and money
market funds. As of August 31, 2002, approximately 55% of
our portfolio matures in one year or less, with the remainder
maturing in less than three years. We do not use derivative
financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy,
limit the amount of credit exposure to any one issuer.

The following table presents the amounts of our
cash equivalents and investments that are subject to interest
rate risk by year of expected maturity and average interest
rates as of August 31, 2002:

|                       |  |                |         |        |  |        |        |        |  |       |        |            |  |   |        |   |  |   |         |  |  |   |         | 
|---------------------- |  | -------------- | ------- | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------- |  |  | - | ------- | 
|                       |  | FY2003         |         | FY2004 |  | FY2005 |        | FY2006 |  | Total |        | Fair Value
|                       |  |                |         |        |  |        |        |        |  |       |        |           
|                       |  |               
|                       |  | (in thousands)
|Cash equivalents       |  | $              | 14,384  |        |  |        |       |        |  |       |       |            |  |   |       |   |  | $ | 14,384  |  |  | $ | 14,384  | 
|Average interest rate  |  |                | 1.1     | %      |  |        |       |        |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Short-term investments |  | $              | 113,896 |        |  | $      | 6,062  |        |  |       |       |            |  |   |       |   |  | $ | 119,958 |  |  | $ | 119,958 | 
|Average interest rate  |  |                | 3.4     | %      |  |        | 4.0    | %      |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Long-term investments  |  |                |        |        |  | $      | 67,151 |        |  | $     | 25,808 |            |  | $ | 15,589 |   |  | $ | 108,548 |  |  | $ | 108,548 | 
|Average interest rates |  |                |        |        |  |        | 4.3    | %      |  |       | 4.2    | %          |  |   | 3.6    | % |  |   |         |  |  |   |         | 

Foreign Currency Risk.We transact business in various
foreign currencies, including the Euro, the British pound, the
Canadian dollar, the Australian dollar, the Swedish krona, the
South African rand, the Mexican peso, the Brazilian real and the
Singaporean dollar. We have established a foreign currency
hedging program utilizing foreign currency forward exchange
contracts to hedge certain sales contracts denominated in
foreign currency. Under this program, fluctuations in foreign
currencies during the period from the signing of the contract
until payment are partially offset by realized gains and losses
on the hedging instruments. The goal of this hedging program is
to lock in exchange rates on our sales contracts denominated in
foreign currencies. The notional amount of hedged contracts and
the estimated fair value are not material.




Item 4. Controls and
Procedures



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

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PART II. OTHER INFORMATION




Item 1. Legal
Proceedings

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

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

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

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

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




Item 2. Changes in Securities and
Use of Proceeds

Not Applicable.




Item 3. Defaults upon Senior
Securities

Not Applicable.




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

Not Applicable.




Item 5. Other
Information

Not Applicable.

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Item 6. Exhibits and Reports on
Form 8-K

A. Exhibits  See
Exhibit Index

B. Reports on Form 8-K

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

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SIGNATURE

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



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



| |     |                   
| | --- | ------------------
| | By: | /s/ TODD K. YAMAMI

| |                                             
| | --------------------------------------------
| |                                             
| | Todd K. Yamami                              
| | Vice President & Chief Financial
    Officer
| | (Principal Financial Officer)               



Dated: October 15, 2002

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##### Table of Contents






CERTIFICATION

I, Gary J. Sbona, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Verity, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

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

Date: October 15, 2002

/s/ GARY J. SBONA




Gary J. Sbona


Chief Executive Officer


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CERTIFICATION

I, Todd K. Yamami, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Verity, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

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

Date: October 15, 2002

/s/ TODD K. YAMAMI




Todd K. Yamami


Vice President & Chief Financial Officer


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INDEX TO EXHIBITS

|        |    |                         |  |                                                                                                                 
|------- | -- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 3  | .1                      |  | Restated Certificate of Incorporation of the
    Company.(1)                                                    
|        | 3  | .2                      |  | By-Laws.(1)                                                                                                     
|        | 4  | .1                      |  | Amended and Restated Rights Agreement dated
    August 1, 1995, as amended.(2)                                  
|        | 4  | .2                      |  | Form of Rights Agreement between Verity, Inc. and
    First National Bank of Boston dated September 18, 1996.(3)
|        | 4  | .3                      |  | First Amendment to Rights Agreement dated as of
    July 23, 1999 among Verity, Inc. and BankBoston, N.A.(4)    
|        | 10 | .40                     |  | Amendment to Employment Agreement between Anthony
    J. Bettencourt and the Company dated September 1, 2001.   
|        | 99 | .1                      |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                       



---



|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the exhibits with
    corresponding numbers from the Companys Form 10-Q for
    the quarter ended November 30, 2000.                               
|   
|(2) | Incorporated by reference from the exhibits with
    corresponding numbers from the Companys Registration
    Statement (No. 33-96228), declared effective on
    October 5, 1995.
|   
|(3) | Incorporated by reference from
    Exhibit No. 1 to the Companys Form 8-K as
    filed with the Securities and Exchange Commission on
    October 10, 1996.                       
|   
|(4) | Incorporated by reference to Exhibit 99.2
    from the Companys Report on Form 8-K filed on
    July 29, 1999.                                                                    

32