##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-Q



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|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|          
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    February 28, 2003                                        
|          
|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 þ          No o

Indicate by check mark whether registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).     Yes þ          No o

The number of shares outstanding of the
Registrants Common Stock, $0.001 par value, was 36,900,736
as of March 31, 2003.



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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                                       
|EXHIBIT 10.3                                        
|EXHIBIT 10.6                                        
|EXHIBIT 10.7                                        
|EXHIBIT 10.41                                       
|EXHIBIT 10.42                                       
|EXHIBIT 99.1                                        



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##### Table of Contents



VERITY, INC.

FORM 10-Q

TABLE OF CONTENTS

|                              |  |                                                                                                                                                                                                     |    |      |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                                                                                                                     |    | Page
|                              |  |                                                                                                                                                                                                     |    |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements (unaudited)                                                                                                                                                                    |    |      | 2  | 
|                              |  | Condensed Consolidated Balance Sheets 
    As of February 28, 2003 and May 31, 2002                                                                                                                |    |      | 2  | 
|                              |  | Condensed Consolidated Statements of
    Operations  For the Three Months Ended
    February 28, 2003 and February 28, 2002, and the Nine
    Months Ended February 28, 2003 and February 28, 2002 |    |      | 3  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  For the Nine Months Ended February 28,
    2003 and February 28, 2002                                                                         |    |      | 4  | 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                                                                                            |    |      | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                                                                           |    |      | 13 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                                                      |    |      | 34 | 
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                             |    |      | 34 | 
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                                   |    |      | 35 | 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                                                                                                           |    |      | 36 | 
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                                                                                     |    |      | 36 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                                                                             |    |      | 36 | 
|Item 5.                       |  | Other Information                                                                                                                                                                                   |    |      | 36 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                                                                    |    |      | 36 | 
|Signature                     |  |                                                                                                                                                                                                     | 37 |     
|Certifications                |  |                                                                                                                                                                                                     | 38 |     



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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,
unaudited)


|                                 |                                                                                                              |                                            |         |         |         |  |         |         |         | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                 |                                                                                                              | February 28,                               |         | May 31,
|                                 |                                                                                                              | 2003                                       |         | 2002   
|                                 |                                                                                                              |                                            |         |        
|ASSETS                          
|Current assets:                  |                                                                                                              |                                            |         |         |         |  |         |        
|                                 | Cash and cash equivalents                                                                                    |                                            | $       | 21,418  |         |  | $       | 23,251  |        
|                                 | Short-term investments                                                                                       |                                            |         | 115,779 |         |  |         | 130,672 |        
|                                 | Trade accounts receivable, net                                                                               |                                            |         | 21,562  |         |  |         | 20,961  |        
|                                 | Deferred tax assets                                                                                          |                                            |         | 8,361   |         |  |         | 3,114   |        
|                                 | Prepaid and other                                                                                            |                                            |         | 4,259   |         |  |         | 5,497   |        
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total current assets                       |         |         | 171,379 |  |         |         | 183,495 | 
|Property and equipment, net      |                                                                                                              |                                            | 5,389   |         |         |  | 6,625   |        
|Long-term investments            |                                                                                                              |                                            | 83,379  |         |         |  | 91,433  |        
|Deferred tax assets              |                                                                                                              |                                            | 8,210   |         |         |  | 16,597  |        
|Goodwill                         |                                                                                                              |                                            | 15,534  |         |         |  |        |        
|Purchased intangible assets, net |                                                                                                              |                                            | 12,255  |         |         |  |        |        
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total assets                               |         | $       | 296,146 |  |         | $       | 298,150 | 
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|LIABILITIES                     
|Current liabilities:             |                                                                                                              |                                            |         |         |         |  |         |        
|                                 | Accounts payable                                                                                             |                                            | $       | 5,212   |         |  | $       | 5,749   |        
|                                 | Accrued compensation                                                                                         |                                            |         | 9,092   |         |  |         | 10,376  |        
|                                 | Other accrued liabilities                                                                                    |                                            |         | 3,335   |         |  |         | 2,779   |        
|                                 | Deferred revenue                                                                                             |                                            |         | 18,143  |         |  |         | 14,981  |        
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total current liabilities                  |         |         | 35,782  |  |         |         | 33,885  | 
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|Other non-current liabilities:   |                                                                                                              |                                            |         |         |         |  |         |        
|                                 | Deferred purchase payment                                                                                    |                                            |         | 3,000   |         |  |         |        |        
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total liabilities                          |         |         | 38,782  |  |         |         | 33,885  | 
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                
|Contingencies (Note 6)           |                                                                                                              |                                            |         |         |         |  |         |        
|STOCKHOLDERS EQUITY            
|Common stock, $0.001 par value:  |                                                                                                              |                                            |         |         |         |  |         |        
|                                 | Authorized: 200,000 shares                                                                                   |                                            |         |         |         |  |         |         |        
|                                 | Issued and outstanding: 34,819 shares as of
    February 28, 2003; and 35,775 shares as of
    May 31, 2002. |                                            |         | 35      |         |  |         | 36      |        
|Additional paid-in capital       |                                                                                                              |                                            | 233,781 |         |         |  | 250,133 |        
|Retained earnings                |                                                                                                              |                                            | 19,535  |         |         |  | 12,133  |        
|Other comprehensive income       |                                                                                                              |                                            | 4,013   |         |         |  | 1,963   |        
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total stockholders equity                 |         |         | 257,364 |  |         |         | 264,265 | 
|                                 |                                                                                                              |                                            |         |         |         |  |         |        
|                                 |                                                                                                              | Total liabilities and stockholders equity |         | $       | 296,146 |  |         | $       | 298,150 | 
|                                 |                                                                                                              |                                            |         |         |         |  |         |        

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

2



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share data,
unaudited)


|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |        |        | 
|------------------------------------------------------------------ | ------------------------------------------- | ------------------------ | ------ | ----------------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                   |                                             |                          |        |                  
|                                                                   |                                             | Three Months Ended       |        | Nine Months Ended
|                                                                   |                                             | February 28,             |        | February 28,     
|                                                                   |                                             |                          |        |                  
|                                                                   |                                             | 2003                     |        | 2002              |        | 2003 |        | 2002  
|                                                                   |                                             |                          |        |                   |        |      |        |       
|Revenues:                                                          |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Software products                           |                          | $      | 15,722            |        |      | $      | 15,968 |        |   | $      | 40,977 |        |   | $       | 39,509 |       
|                                                                   | Service and other                           |                          |        | 12,122            |        |      |        | 9,077  |        |   |        | 31,768 |        |   |         | 28,201 |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                                             | Total revenues           |        |                   | 27,844 |      |        |        | 25,045 |   |        |        | 72,745 |   |         |        | 67,710 | 
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Costs of revenues:                                                 |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Software products                           |                          |        | 243               |        |      |        | 659    |        |   |        | 895    |        |   |         | 1,845  |       
|                                                                   | Service and other                           |                          |        | 3,041             |        |      |        | 2,606  |        |   |        | 8,487  |        |   |         | 8,409  |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                                             | Total costs of revenues  |        |                   | 3,284  |      |        |        | 3,265  |   |        |        | 9,382  |   |         |        | 10,254 | 
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Gross profit                                                       |                                             |                          | 24,560 |                   |        |      | 21,780 |        |        |   | 63,363 |        |        |   | 57,456  |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Operating expenses:                                                |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   | Research and development                    |                          |        | 5,912             |        |      |        | 5,819  |        |   |        | 17,020 |        |   |         | 17,710 |       
|                                                                   | Marketing and sales                         |                          |        | 10,117            |        |      |        | 11,461 |        |   |        | 29,621 |        |   |         | 39,455 |       
|                                                                   | General and administrative                  |                          |        | 2,376             |        |      |        | 3,052  |        |   |        | 7,342  |        |   |         | 8,793  |       
|                                                                   | In-process research and development         |                          |        | 1,200             |        |      |        |       |        |   |        | 1,200  |        |   |         |       |       
|                                                                   | Amortization of purchased intangible assets |                          |        | 645               |        |      |        |       |        |   |        | 645    |        |   |         |       |       
|                                                                   | Restructuring charge                        |                          |        |                  |        |      |        |       |        |   |        | 993    |        |   |         | 1,563  |       
|                                                                   | Charitable contribution                     |                          |        |                  |        |      |        |       |        |   |        |       |        |   |         | 1,000  |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                   |                                             | Total operating expenses |        |                   | 20,250 |      |        |        | 20,332 |   |        |        | 56,821 |   |         |        | 68,521 | 
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Income (loss) from operations                                      |                                             |                          | 4,310  |                   |        |      | 1,448  |        |        |   | 6,542  |        |        |   | (11,065 | )     
|Other income, net                                                  |                                             |                          | 1,590  |                   |        |      | 2,255  |        |        |   | 5,398  |        |        |   | 7,754   |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Income (loss) before provision for (benefit
    from) income taxes |                                             |                          | 5,900  |                   |        |      | 3,703  |        |        |   | 11,940 |        |        |   | (3,311  | )     
|Provision for (benefit from) income taxes                          |                                             |                          | 2,242  |                   |        |      | 1,407  |        |        |   | 4,538  |        |        |   | (1,258  | )     
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss)                                                  |                                             | $                        | 3,658  |                   |        | $    | 2,296  |        |        | $ | 7,402  |        |        | $ | (2,053  | )     
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss) per share  basic                                |                                             | $                        | 0.11   |                   |        | $    | 0.06   |        |        | $ | 0.21   |        |        | $ | (0.06   | )     
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss) per share 
    diluted                          |                                             | $                        | 0.10   |                   |        | $    | 0.06   |        |        | $ | 0.20   |        |        | $ | (0.06   | )     
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Number of shares  basic                                           |                                             |                          | 34,739 |                   |        |      | 35,378 |        |        |   | 34,995 |        |        |   | 35,300  |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       
|Number of shares  diluted                                         |                                             |                          | 37,883 |                   |        |      | 38,277 |        |        |   | 36,765 |        |        |   | 35,300  |       
|                                                                   |                                             |                          |        |                   |        |      |        |        |        |   |        |        |        |   |         |       

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

3



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands, unaudited)


|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |          |        |        |  
|----------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------- | -------------------------------------------------------- | -------- | ------ | ------- | - | -------- | ------ | ------ | -
|                                          |                                                                                              |                                                          
|                                          |                                                                                              | Nine Months Ended                                        
|                                          |                                                                                              | February 28,                                             
|                                          |                                                                                              |                                                          
|                                          |                                                                                              | 2003                                                      |                                                          | 2002    
|                                          |                                                                                              |                                                           |                                                          |         
|Cash flows from operating
    activities: |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          | Net income (loss)                                                                            |                                                           | $                                                        | 7,402    |        |         | $ | (2,053   | )     
|                                          | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                           |                                                          |          |        |         |   |          |       
|                                          |                                                                                              | Depreciation and amortization                             |                                                          |          | 3,229  |         |   |          | 3,293  |       
|                                          |                                                                                              | Provision for doubtful accounts                           |                                                          |          | 563    |         |   |          | 100    |       
|                                          |                                                                                              | Deferred income taxes                                     |                                                          |          | 3,141  |         |   |          | (1,257 | )     
|                                          |                                                                                              | Write-off of in-process research and development          |                                                          |          | 1,200  |         |   |          |       |       
|                                          |                                                                                              | Amortization of premium (discount) on
    securities, net |                                                          |          | 1,165  |         |   |          | (300   | )     
|                                          | Changes in operating assets and liabilities:                                                 |                                                           |                                                          |          |        |         |   |          |       
|                                          |                                                                                              | Trade accounts receivable                                 |                                                          |          | 2,310  |         |   |          | 18,446 |       
|                                          |                                                                                              | Prepaid and other current assets                          |                                                          |          | 1,354  |         |   |          | 628    |       
|                                          |                                                                                              | Accounts payable                                          |                                                          |          | (665   | )       |   |          | 308    |       
|                                          |                                                                                              | Accrued compensation and other accrued liabilities        |                                                          |          | (1,027 | )       |   |          | (2,151 | )     
|                                          |                                                                                              | Deferred revenue                                          |                                                          |          | (2,071 | )       |   |          | (4,378 | )     
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          |                                                                                              |                                                           | Net cash provided by operating activities                |          |        | 16,601  |   |          |        | 12,636 |  
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|Cash flows from investing
    activities: |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          | Acquisition of equipment and leasehold
    improvements                                      |                                                           |                                                          | (1,170   | )      |         |   | (2,665   | )     
|                                          | Purchases of marketable securities                                                           |                                                           |                                                          | (331,778 | )      |         |   | (413,787 | )     
|                                          | Maturity of marketable securities                                                            |                                                           |                                                          | 142,547  |        |         |   | 248,477  |       
|                                          | Proceeds from sale of marketable securities                                                  |                                                           |                                                          | 211,330  |        |         |   | 159,673  |       
|                                          | Purchase of business                                                                         |                                                           |                                                          | (23,826  | )      |         |   |         |       
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          |                                                                                              |                                                           | Net cash used in investing activities                    |          |        | (2,897  | ) |          |        | (8,302 | )
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|Cash flows from financing
    activities: |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          | Proceeds from the sale of common stock, net of
    issuance costs                            |                                                           |                                                          | 12,210   |        |         |   | 13,304   |       
|                                          | Repurchases of common stock                                                                  |                                                           |                                                          | (28,562  | )      |         |   | (12,236  | )     
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          |                                                                                              |                                                           | Net cash provided by (used in) financing
    activities  |          |        | (16,352 | ) |          |        | 1,068  |  
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          | Effect of exchange rate changes on cash                                                      |                                                           |                                                          | 815      |        |         |   | (454     | )     
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          |                                                                                              |                                                           | Net increase (decrease) in cash and cash
    equivalents |          |        | (1,833  | ) |          |        | 4,948  |  
|                                          | Cash and cash equivalents, beginning of period                                               |                                                           |                                                          | 23,251   |        |         |   | 12,210   |       
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         
|                                          | Cash and cash equivalents, end of period                                                     |                                                           | $                                                        | 21,418   |        |         | $ | 17,158   |       
|                                          |                                                                                              |                                                           |                                                          |          |        |         |   |         

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

4



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##### Table of Contents



VERITY, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




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

The unaudited condensed consolidated financial
statements for Verity, Inc. (the Company or
Verity) as of February 28, 2003 and for the
three and nine month periods ended February 28, 2003 and
2002 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
(SEC), 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.

Certain prior period balances have been
reclassified to conform to current period presentation.

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



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

Basic earnings per share are computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Dilutive common equivalent shares
consist of in-the-money stock options.
In-the-money options are those where the exercise
price is lower than the average market price being used to
determine the value. Veritys average market price for the
quarter ended February 28, 2003 was $14.74. All common
equivalent shares have been excluded from the computation of
diluted net loss per share for the nine month period ended
February 28, 2002 because the effect would be anti-dilutive.

Basic and diluted net income (loss) per share are
calculated as follows for the three and nine month periods ended
February 28, 2003 and 2002 (in thousands, except per
share data):

|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |        |  
|-------- | ------------------------------------------- | ------------------ | - | ----------------- |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | -
|         |                                             |                    |   |                  
|         |                                             | Three Months Ended |   | Nine Months Ended
|         |                                             | February 28,       |   | February 28,     
|         |                                             |                    |   |                  
|         |                                             | 2003               |   | 2002              |  | 2003 |   | 2002  
|         |                                             |                    |   |                   |  |      |   |       
|Basic:   |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 34,739            |  |      |   | 35,378 |  |  |   | 34,995 |  |  |   | 35,300 |  
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 3,658             |  |      | $ | 2,296  |  |  | $ | 7,402  |  |  | $ | (2,053 | )
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.11              |  |      | $ | 0.06   |  |  | $ | 0.21   |  |  | $ | (0.06  | )
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|Diluted: |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Weighted-average shares                     |                    |   | 34,739            |  |      |   | 35,378 |  |  |   | 34,995 |  |  |   | 35,300 |  
|         | Common equivalent shares from stock options |                    |   | 3,144             |  |      |   | 2,899  |  |  |   | 1,770  |  |  |   |       |  
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Shares used in per share calculation        |                    |   | 37,883            |  |      |   | 38,277 |  |  |   | 36,765 |  |  |   | 35,300 |  
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Net income (loss)                           |                    | $ | 3,658             |  |      | $ | 2,296  |  |  | $ | 7,402  |  |  | $ | (2,053 | )
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       
|         | Net income (loss) per share                 |                    | $ | 0.10              |  |      | $ | 0.06   |  |  | $ | 0.20   |  |  | $ | (0.06  | )
|         |                                             |                    |   |                   |  |      |   |        |  |  |   |        |  |  |   |       

5



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

As of February 28, 2003, available-for-sale
securities consist of the following (in thousands):

|                                        |                   |           |         |            |  |       |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | --------- | ------- | ---------- |  | ----- | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |           |         | Gross      |  |      
|                                        |                   | Amortized |         | Unrealized |  | Fair 
|                                        |                   | Cost      |         | Gains      |  | Value
|                                        |                   |           |         |            |  |      
|Corporate commercial paper  short-term |                   | $         | 114,647 |            |  | $     | 1,132 |       |  | $ | 115,779 |        
|Corporate commercial paper  long-term  |                   |           | 82,673  |            |  |       | 706   |       |  |   | 83,379  |        
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        
|                                        | Total investments |           | $       | 197,320    |  |       | $     | 1,838 |  |   | $       | 199,158 | 
|                                        |                   |           |         |            |  |       |       |       |  |   |         |        

At February 28, 2003, scheduled maturities
of investments classified as available-for-sale are as follows
(in thousands):

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Within one year                    |  | $ | 115,779 | 
|After one year through three years |  |   | 83,379  | 
|                                   |  |   |         | 
|                                   |  | $ | 199,158 | 
|                                   |  |   |         | 

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 |       | Nine Months 
|                                                                  |  | Ended        |       | Ended       
|                                                                  |  | February 28, |       | February 28,
|                                                                  |  |              |       |             
|                                                                  |  | 2003         |       | 2002         |  | 2003 |       | 2002
|                                                                  |  |              |       |              |  |      |       |     
|Net income (loss)                                                 |  | $            | 3,658 |              |  | $    | 2,296 |      |  | $ | 7,402 |  |  | $ | (2,053 | )
|Foreign currency translation gain (loss)                          |  |              | 842   |              |  |      | (325  | )    |  |   | 1,729 |  |  |   | (456   | )
|Unrealized gain (loss) on available-for-sale
    investments, net |  |              | (187  | )            |  |      | (552  | )    |  |   | 321   |  |  |   | 1,125  |  
|                                                                  |  |              |       |              |  |      |       |      |  |   |       |  |  |   |        |  
|Comprehensive income (loss)                                       |  | $            | 4,313 |              |  | $    | 1,419 |      |  | $ | 9,452 |  |  | $ | (1,384 | )
|                                                                  |  |              |       |              |  |      |       |      |  |   |       |  |  |   |        |  



|   |                  
|-- | -----------------
|5. | Business Segments

The Company has sales and marketing operations
located outside the United States in the Netherlands, the United
Kingdom, France, Germany, South Africa, Mexico and Australia, a
joint investment partnership in Brazil and a development and
technical support operation in Canada. Foreign branch and
subsidiary revenues consist primarily of maintenance and
consulting services and are being allocated based on foreign
branch and subsidiary location.

6



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|          |        |                    |   |                   |        |      |   |        |        |  |   |        |        |  |   |        |        | 
|--------- | ------ | ------------------ | - | ----------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|          |        |                    |   |                  
|          |        | Three Months Ended |   | Nine Months Ended
|          |        | February 28,       |   | February 28,     
|          |        |                    |   |                  
|          |        | 2003               |   | 2002              |        | 2003 |   | 2002  
|          |        |                    |   |                   |        |      |   |       
|Revenues: |        |                    |   |                   |        |      |   |        |        |  |   |        |        |  |   |       
|          | USA    |                    | $ | 23,927            |        |      | $ | 22,807 |        |  | $ | 61,495 |        |  | $ | 58,830 |       
|          | Europe |                    |   | 3,226             |        |      |   | 2,608  |        |  |   | 9,450  |        |  |   | 8,025  |       
|          | ROW    |                    |   | 691               |        |      |   | 350    |        |  |   | 1,800  |        |  |   | 855    |       
|          |        |                    |   |                   |        |      |   |        |        |  |   |        |        |  |   |       
|          |        | Consolidated       |   | $                 | 27,844 |      |   | $      | 25,045 |  |   | $      | 72,745 |  |   | $      | 67,710 | 
|          |        |                    |   |                   |        |      |   |        |        |  |   |        |        |  |   |       

|                   |        |              |   |         |        |  |   |        |        | 
|------------------ | ------ | ------------ | - | ------- | ------ |  | - | ------ | ------ | 
|                   |        | February 28, |   | May 31,
|                   |        | 2003         |   | 2002   
|                   |        |              |   |        
|Long-lived assets: |        |              |   |         |        |  |   |       
|                   | USA    |              | $ | 39,830  |        |  | $ | 21,106 |       
|                   | Europe |              |   | 689     |        |  |   | 838    |       
|                   | ROW    |              |   | 868     |        |  |   | 1,278  |       
|                   |        |              |   |         |        |  |   |       
|                   |        | Consolidated |   | $       | 41,387 |  |   | $      | 23,222 | 
|                   |        |              |   |         |        |  |   |       

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

No single customer accounted for more than 10% of
the Companys total revenues for the three and nine month
periods ended February 28, 2003 and 2002. Revenues derived
from sales to the United States government and its agencies were
10.2% and 5.5% of the Companys total revenues for the
three month periods ended February 28, 2003 and 2002,
respectively, and 10.2% and 6.0% of the Companys total
revenues for the nine month periods ended February 28, 2003
and 2002, 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

7



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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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



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

On June 20, 2002, Verity announced an
extension of the stock repurchase program it initiated on
September 12, 2001. The program calls for the repurchase of
outstanding shares of Veritys common stock up to an
aggregate value of $50.0 million. Through February 28,
2003, Verity repurchased and retired 3,952,005 shares of
its common stock through open market transactions, valued at
approximately $48.5 million. Verity repurchased and retired
2,449,805 and 1,038,800 shares, valued at approximately
$28.6 million and $12.2 million in the nine month
periods ended February 28, 2003 and 2002, respectively. The
program will terminate at the end of the current fiscal year
ending May 31, 2003 unless extended or shortened by the
Board of Directors.

8.     Recent
Accounting Pronouncements

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (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 the
Companys fiscal year beginning June 1, 2002. The
adoption of SFAS No. 144 did not have a significant impact
on the Companys financial position or results of
operations.

8



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must disclose and
recognize a liability for the fair value of the obligation it
assumes under that guarantee. The initial recognition and
measurement requirement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. As
of February 28, 2003, the Companys guarantees that
were issued or modified after December 31, 2002 were not
material. The Companys guarantees issued before
December 31, 2002, which would have been disclosed in
accordance with the disclosure requirements of FIN 45, were
not material.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends certain provisions of SFAS No. 123 and
is effective for financial statements for fiscal years ending
after December 15, 2002. It provides alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires the disclosure of
the pro forma effects on an entitys accounting policy with
respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial
statements. The Company does not currently intend to adopt the
fair value based method of accounting for stock-based employee
compensation and will continue to apply the intrinsic-value
based method.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
requires that if an entity has a controlling financial interest
in a variable interest entity, the assets, liabilities and
results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity.
FIN 46 requires that its provisions are effective
immediately for all arrangements entered into after
January 31, 2003. The Company does not have any variable
interest entities.

9



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Restructuring
Charges

During each of the nine month periods ended
February 28, 2003 and February 28, 2002, the Company
executed restructurings designed to reduce costs and to better
align expense levels with anticipated revenue levels and ensure
conservative spending during the current period of economic
uncertainty.

|                                       |                             |                          |     |              |  |   |       |       | 
|-------------------------------------- | --------------------------- | ------------------------ | --- | ------------ |  | - | ----- | ----- | 
|                                       |                             |                         
|                                       |                             | Nine Month Periods Ended
|                                       |                             |                         
|                                       |                             | February 28,             |     | February 28,
|                                       |                             | 2003                     |     | 2002        
|                                       |                             |                          |     |             
|                                       |                             |                         
|                                       |                             | (In thousands)          
|Restructuring charges:                 |                             |                          |     |              |  |   |       |      
|Severance costs                        |                             | $                        | 719 |              |  | $ | 1,216 |      
|Legal and other outside services costs |                             |                          | 101 |              |  |   | 273   |      
|Other charges                          |                             |                          | 173 |              |  |   | 74    |      
|                                       |                             |                          |     |              |  |   |       |      
|                                       | Total restructuring charges |                          | $   | 993          |  |   | $     | 1,563 | 
|                                       |                             |                          |     |              |  |   |       |      

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

|                        |                              |                |      |                  |  |       |     |       |  |   |     |     |  |   |      |     | 
|----------------------- | ---------------------------- | -------------- | ---- | ---------------- |  | ----- | --- | ----- |  | - | --- | --- |  | - | ---- | --- | 
|                        |                              | Workforce      |      | Legal and Other  |  |       |     |      
|                        |                              | Reduction      |      | Outside Services |  | Other |     | Total
|                        |                              |                |      |                  |  |       |     |      
|                        |                              |               
|                        |                              | (In thousands)
|Restructuring provision |                              | $              | 719  |                  |  | $     | 101 |       |  | $ | 173 |     |  | $ | 993  |    
|Cash payments           |                              |                | (717 | )                |  |       | (59 | )     |  |   | (1  | )   |  |   | (777 | )  
|                        |                              |                |      |                  |  |       |     |       |  |   |     |     |  |   |      |    
|                        | Balance at February 28, 2003 |                | $    | 2                |  |       | $   | 42    |  |   | $   | 172 |  |   | $    | 216 | 
|                        |                              |                |      |                  |  |       |     |       |  |   |     |     |  |   |      |    

Of the total $1.0 million restructuring
charge, approximately $0.2 million remains unpaid at
February 28, 2003. The remaining $0.2 million mostly
relates to a facilities lease and will be paid out ratably over
the remaining life of the lease, which terminates in October
2005.

During the quarter ended November 30, 2001,
the Company implemented a worldwide restructuring and recorded a
$1.6 million restructuring charge, of which approximately
$1.2 million was related to severance costs associated with
the reduction in the worldwide workforce by 65 employees,
approximately $0.3 million to legal and other outside
services in connection with the restructuring and approximately
$0.1 million to other costs associated with the
restructuring. The restructuring impacted operations in the
U.S., Canada, the U.K., Germany, France, the Netherlands, Sweden
and South Africa. There is no remaining unpaid amount.

10.     Business
Combination

During the quarter ended February 28, 2003,
Verity completed the purchase of certain assets and obligations
of Inktomi Corporations enterprise search software
business (Enterprise), which management believes
qualifies as a business, as defined by the SEC. The purchase
augments Veritys product portfolio in the enterprise
search and intellectual capital management markets, bringing
Verity a product to address an

10



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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

additional segment of the market and gain access
to Inktomis enterprise search customer base of
2,500 companies worldwide, considerably expanding
Veritys installed base of customers.

The total estimated purchase price of the
acquisition of Enterprise is as follows (in thousands):

|                            |                      |   |        |        | 
|--------------------------- | -------------------- | - | ------ | ------ | 
|Cash                        |                      | $ | 22,000 |       
|Deferred payment            |                      |   | 3,000  |       
|Estimated acquisition costs |                      |   | 1,826  |       
|                            |                      |   |        |       
|                            | Total purchase price |   | $      | 26,826 | 
|                            |                      |   |        |       

Under the purchase method of accounting, the
total estimated purchase price is allocated to Enterprises
net tangible and identifiable intangible assets based upon their
estimated fair value as of the date of completion of the
acquisition. The final purchase price is dependent on the actual
cash paid and actual direct acquisition costs. Based upon the
estimated purchase price and the preliminary independent
valuation, the preliminary purchase price allocation, which is
subject to change based on Veritys final analysis, is as
follows (in thousands):

|                                                                  |                            |                                       |                                                    |       |        |        | 
|----------------------------------------------------------------- | -------------------------- | ------------------------------------- | -------------------------------------------------- | ----- | ------ | ------ | 
|Identifiable intangible assets acquired
    (Useful life (years)) |                            |                                       |                                                    |      
|                                                                  | Existing technology(5)     |                                       | $                                                  | 8,300 |       
|                                                                  | Patents/core technology(5) |                                       |                                                    | 2,800 |       
|                                                                  | Maintenance agreements(5)  |                                       |                                                    | 1,800 |       
|                                                                  |                            |                                       |                                                    |      
|                                                                  |                            | Total amortizable intangible assets   |                                                    |       | 12,900 |       
|                                                                  |                            | In-process technology                 |                                                    |       | 1,200  |       
|                                                                  |                            | Fair value of net liabilities assumed |                                                    |       | (2,808 | )     
|                                                                  |                            | Goodwill                              |                                                    |       | 15,534 |       
|                                                                  |                            |                                       |                                                    |      
|                                                                  |                            |                                       | Total purchase price (including transaction costs) |       | $      | 26,826 | 
|                                                                  |                            |                                       |                                                    |      

The following table presents details of
Veritys total purchased intangible assets (in thousands):

|                                 |  |       |        |              |  |     |     |  |  |   |        | 
|-------------------------------- |  | ----- | ------ | ------------ |  | --- | --- |  |  | - | ------ | 
|                                 |  |       |        | Accumulated  |  |    
|February 28, 2003                |  | Gross |        | Amortization |  | Net
|                                 |  |       |        |              |  |    
|Existing technology              |  | $     | 8,300  |              |  | $   | 415 |  |  | $ | 7,885  | 
|Patents/core technology          |  |       | 2,800  |              |  |     | 140 |  |  |   | 2,660  | 
|Maintenance agreements           |  |       | 1,800  |              |  |     | 90  |  |  |   | 1,710  | 
|                                 |  |       |        |              |  |     |     |  |  |   |        | 
|Purchased intangible assets, net |  | $     | 12,900 |              |  | $   | 645 |  |  | $ | 12,255 | 
|                                 |  |       |        |              |  |     |     |  |  |   |        | 

The estimated future amortization expense of
purchased intangible assets as of February 28, 2003 is as
follows (in thousands):

|                          |  |        |        | 
|------------------------- |  | ------ | ------ | 
|Fiscal Year               |  | Amount
|                          |  |       
|2003 (remaining 3 months) |  | $      | 645    | 
|2004                      |  |        | 2,580  | 
|2005                      |  |        | 2,580  | 
|2006                      |  |        | 2,580  | 
|2007                      |  |        | 2,580  | 
|2008                      |  |        | 1,290  | 
|                          |  |        |        | 
|Total                     |  | $      | 12,255 | 
|                          |  |        |        | 

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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Veritys methodology for allocating the
purchase price to in-process research and development
(in-process R&D) is determined through
established valuation techniques in the high-technology software
industry and expensed upon acquisition because technological
feasibility has not been established and no future alternative
uses exist. The fair value allocation to in-process research and
development was determined by identifying the research projects
for which technological feasibility had not been achieved and
which had no alternative future use at the acquisition date,
assessing the stage and expected date of completion of the
research and development effort at the acquisition date, and
calculating the net present value of the cash flows expected to
result from the successful deployment of the new technology
resulting from the in-process research and development effort.

The stages of completion were determined by
estimating the costs and time incurred to date relative to the
costs and time incurred to develop the in-process technology
into a commercially viable technology or product, while
considering the relative difficulty of completing the various
tasks and obstacles necessary to attain technological
feasibility. As of the acquisition date, Enterprise had released
Ultraseek 5.0, XML Toolkit 1.0, and the latest version
of Quiver to the market. Current development efforts, considered
in-process R&D, were focused on Ultraseek 5.1 and XML
Toolkit 2.0. There were no development efforts (that meet
the criteria of in-process R&D) related to the Quiver
product line as of the acquisition date. The estimated stage of
completion of both Ultraseek 5.1 and XML toolkit 2.0 was
55% complete. Total in-process R&D expense for the quarter
ended February 28, 2003 was $1.2 million.

Of the total purchase price, Verity retained
$3.0 million in order to secure Inktomis
indemnification obligations under the Purchase Agreement. On
June 17, 2004, Verity is obligated to pay Inktomi an amount
equal to the sum of (i) $3.0 million plus
(ii) simple interest thereon calculated from the
December 17, 2002 through the date of payment at an annual
rate of 1.5%. Verity shall have the right to withhold or deduct
from the deferred payment amount any sum that may be owed to it
by Inktomi pursuant to Inktomis indemnification
obligations under the Purchase Agreement. Verity believes the
likelihood of such indemnifications is remote.

The Consolidated Financial Statements include the
operating results of Enterprise from the date of acquisition.
The following unaudited pro forma financial information presents
the combined results of Verity and Enterprise as if the purchase
had occurred on June 1, 2001, after giving effect to
certain adjustments, including amortization of identifiable
intangible assets and in-process research and development
expense. Pro forma results of operations for the periods ended
February 28, 2003 do not include any adjustments to the
results for the three month period ended February 28, 2003
as the purchase occurred near the beginning of the period. For
the three month period ended February 28, 2003, in-process
research and development expenses has been removed, as that
expense would have occurred in the three month period ended
August 31, 2001 had the purchase occurred on June 1,
2001.

|                                          |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |         |  
|----------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | -------- | - |  | - | ------- | -
|                                          |  |                    |        |                  
|                                          |  | Three Months Ended |        | Nine Months Ended
|                                          |  | February 28,       |        | February 28,     
|                                          |  |                    |        |                  
|                                          |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                          |  |                    |        |                   |  |      |        |     
|                                          |  |                    |        |                  
|                                          |  | (Unaudited)        |        | (Unaudited)      
|Total revenues                            |  | $                  | 27,844 |                   |  | $    | 30,979 |      |  | $ | 82,433   |   |  | $ | 85,310  |  
|                                          |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |         |  
|Net income (loss)                         |  | $                  | 4,402  |                   |  | $    | (3,134 | )    |  | $ | (238,653 | ) |  | $ | (13,820 | )
|                                          |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |         |  
|Net income (loss) per share  basic       |  | $                  | 0.13   |                   |  | $    | (0.09  | )    |  | $ | (6.82    | ) |  | $ | (0.39   | )
|                                          |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |         |  
|Net income (loss) per share 
    diluted |  | $                  | 0.12   |                   |  | $    | (0.09  | )    |  | $ | (6.82    | ) |  | $ | (0.39   | )
|                                          |  |                    |        |                   |  |      |        |      |  |   |          |   |  |   |         |  

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

The following discussion should be read in
conjunction with our 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 that help organizations
maximize the return on their intellectual capital investment by
utilizing our enterprise search, classification and
personalization technologies. Our software is used for sharing
information within and between enterprises; for facilitating
e-commerce sales; and for business-to-business activities on
Web-based market exchanges. In addition, our technology serves
as a core component of many leading e-business applications.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of assets and liabilities. On an on-going
basis, we evaluate our critical accounting policies and
estimates, including those related to revenue recognition, bad
debts, income taxes and intangible assets. We base our estimates
on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



| |                  
| | -----------------
| | Intangible Assets

We record intangible assets when we acquire other
companies. The cost of the acquisition is allocated to the
assets and liabilities acquired, including intangible assets,
with the remaining amount being classified as goodwill. Certain
intangible assets such as purchased technology and maintenance
agreements are amortized to operating expense over time, while
in-process research and development is recorded as a one-time
charge on the acquisition date. Under current accounting
guidelines that became effective on July 1, 2001, goodwill
arising from transactions occurring after July 1, 2001 and
any existing goodwill as of February 1, 2002 are not
amortized to expense but rather periodically assessed for
impairment.

The allocation of the acquisition cost to
intangible assets and goodwill therefore has a significant
impact on our future operating results. The allocation process
requires the extensive use of estimates and assumptions,
including estimates of future cash flows expected to be
generated by the acquired assets. Further, when impairment
indicators are identified with respect to previously recorded
intangible assets, the values of the assets are determined using
discounted future cash flow techniques, which are based on
estimated future operating results. Significant management
judgment is required in the forecasting of future operating
results which are used in the preparation of projected
discounted cash flows and should different conditions prevail,
material write downs of net intangible assets and/or goodwill
could occur.

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (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.
There can be no assurance that at the time that the review is
completed a material impairment charge will not be required and
recorded. We are required to perform an initial impairment
review of goodwill in fiscal 2003 and an annual impairment
review thereafter. We periodically review the estimated

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remaining useful lives of our intangible assets.
A reduction in our estimate of remaining useful lives, if any,
could result in increased amortization expense in future periods.


Results of Operations

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

|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |       |       | 
|------------------------------------------------------------------ | ------------------------------------------- | ------------------------ | ---- | ------------ | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- |  | ----- | ----- | ----- | 
|                                                                   |                                             |                          |      |             
|                                                                   |                                             | Three Months             |      | Nine Months 
|                                                                   |                                             | Ended                    |      | Ended       
|                                                                   |                                             | February 28,             |      | February 28,
|                                                                   |                                             |                          |      |             
|                                                                   |                                             | 2003                     |      | 2002         |       | 2003 |      | 2002
|                                                                   |                                             |                          |      |              |       |      |      |     
|                                                                   |                                             |                          |      |             
|                                                                   |                                             | (Unaudited)              |      | (Unaudited) 
|Revenues:                                                          |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   | Software products                           |                          |      | 56.5         | %     |      |      | 63.8 | %     |  |      | 56.3 | %     |  |       | 58.4% |      
|                                                                   | Service and other                           |                          |      | 43.5         |       |      |      | 36.2 |       |  |      | 43.7 |       |  |       | 41.6  |      
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   |                                             | Total revenues           |      |              | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 |  |       |       | 100.0 | 
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Costs of revenues:                                                 |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   | Software products                           |                          |      | 0.9          |       |      |      | 2.6  |       |  |      | 1.2  |       |  |       | 2.7   |      
|                                                                   | Service and other                           |                          |      | 10.9         |       |      |      | 10.4 |       |  |      | 11.7 |       |  |       | 12.4  |      
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   |                                             | Total costs of revenues  |      |              | 11.8  |      |      |      | 13.0  |  |      |      | 12.9  |  |       |       | 15.1  | 
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Gross profit                                                       |                                             |                          | 88.2 |              |       |      | 87.0 |      |       |  | 87.1 |      |       |  | 84.9  |      
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Operating expenses:                                                |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   | Research and development                    |                          |      | 21.2         |       |      |      | 23.2 |       |  |      | 23.4 |       |  |       | 26.2  |      
|                                                                   | Marketing and sales                         |                          |      | 36.4         |       |      |      | 45.8 |       |  |      | 40.7 |       |  |       | 58.3  |      
|                                                                   | General and administrative                  |                          |      | 8.5          |       |      |      | 12.2 |       |  |      | 10.1 |       |  |       | 13.0  |      
|                                                                   | In-process research and development         |                          |      | 4.3          |       |      |      | 0.0  |       |  |      | 1.6  |       |  |       | 0.0   |      
|                                                                   | Amortization of purchased intangible assets |                          |      | 2.3          |       |      |      | 0.0  |       |  |      | 0.9  |       |  |       | 0.0   |      
|                                                                   | Restructuring charge                        |                          |      | 0.0          |       |      |      | 0.0  |       |  |      | 1.4  |       |  |       | 2.3   |      
|                                                                   | Charitable contribution                     |                          |      | 0.0          |       |      |      | 0.0  |       |  |      | 0.0  |       |  |       | 1.5   |      
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|                                                                   |                                             | Total operating expenses |      |              | 72.7  |      |      |      | 81.2  |  |      |      | 78.1  |  |       |       | 101.3 | 
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Income (loss) from operations                                      |                                             |                          | 15.5 |              |       |      | 5.8  |      |       |  | 9.0  |      |       |  | (16.4 | )    
|Other income, net                                                  |                                             |                          | 5.7  |              |       |      | 9.0  |      |       |  | 7.4  |      |       |  | 11.5  |      
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Income (loss) before provision for (benefit
    from) income taxes |                                             |                          | 21.2 |              |       |      | 14.8 |      |       |  | 16.4 |      |       |  | (4.9  | )    
|Provision for (benefit from) income taxes                          |                                             |                          | 8.1  |              |       |      | 5.6  |      |       |  | 6.2  |      |       |  | (1.9  | )    
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      
|Net income (loss)                                                  |                                             |                          | 13.1 | %            |       |      | 9.2  | %    |       |  | 10.2 | %    |       |  | (3.0  | )%   
|                                                                   |                                             |                          |      |              |       |      |      |      |       |  |      |      |       |  |       |      

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



| |               
| | --------------
| | Total Revenues

|                   |  |                       |      |              |  |        |      |  |  |  |      |  
|------------------ |  | --------------------- | ---- | ------------ |  | ------ | ---- |  |  |  | ---- | -
|                   |  | February 28,          |      | February 28, |  |       
|                   |  | 2003                  |      | 2002         |  | Change
|                   |  |                       |      |              |  |       
|                   |  |                       |      |             
|                   |  | (Dollars in millions) |      |             
|Three months ended |  | $                     | 27.8 |              |  | $      | 25.0 |  |  |  | 11.2 | %
|Nine months ended  |  | $                     | 72.7 |              |  | $      | 67.7 |  |  |  | 7.4  | %

The increase in our total revenues for the three
month period ended February 28, 2003, compared with the
same period a year ago, was due to a $3.0 million increase
in service and other revenues, offset in part by a
$0.2 million decrease in software product sales. The
increase in our total revenues for the nine month period ended
February 28, 2003 was due to a $3.6 million increase
in service and other revenues, and a $1.5 million increase
in software product sales. See Software product
revenues and Service and other revenues tables
below for a further discussion.

Revenues derived from foreign operations consist
primarily of maintenance, consulting and training revenues
performed outside of the United States and accounted for 14.1%
and 11.8% of total revenues for the three month periods ended
February 28, 2003 and 2002, respectively, and 15.5% and
13.1% of total revenues for the nine month periods ended
February 28, 2003 and 2002, respectively. Our export sales
consist primarily of products licensed for delivery outside of
the United States. For the three month periods ended
February 28, 2003 and 2002, export sales accounted for
23.9% and 22.3% of total revenues, respectively. For the nine
month periods ended February 28, 2003 and 2002, export
sales accounted for 21.9% and 20.7% of total revenues,
respectively.

No single customer accounted for more than 10% of
our total revenues for the three and nine month periods ended
February 28, 2003 and 2002. Revenues derived from sales to
the United States government and its agencies were 10.2% and
5.5% of our total revenues for the three month periods ended
February 28, 2003 and 2002, respectively, and 10.2% and
6.0% of our total revenues for the nine month periods ended
February 28, 2003 and 2002, respectively.



| |                          
| | -------------------------
| | Software Product Revenues

|                   |                              |                       |      |              |   |        |      |      |   |  |      |    | 
|------------------ | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ---- | -- | 
|                   |                              | February 28,          |      | February 28, |   |       
|                   |                              | 2003                  |      | 2002         |   | Change
|                   |                              |                       |      |              |   |       
|                   |                              |                       |      |             
|                   |                              | (Dollars in millions) |      |             
|Three months ended |                              | $                     | 15.7 |              |   | $      | 16.0 |      |   |  | (1.5 | )%
|                   | Percentage of total revenues |                       |      | 56.5         | % |        |      | 63.8 | % |  |      |    | 
|Nine months ended  |                              | $                     | 41.0 |              |   | $      | 39.5 |      |   |  | 3.7  | % 
|                   | Percentage of total revenues |                       |      | 56.3         | % |        |      | 58.4 | % |  |      |    | 

We continue to operate in a difficult global
economic environment and, as a result, we experienced a slight
decrease in software product sales in the three month period
ended February 28, 2003, compared with the same period a
year ago. The decrease was attributable to a decrease in sales
of our K2 product application, offset to a large extent by
sales resulting from the addition of our Ultraseek product which
came from the purchase of assets and obligations of Inktomi
Corporations enterprise search software business
(Enterprise) during the quarter. The increase in
software product revenues for the nine month period ended
February 28, 2003 was principally the result of unusually
low sales in the quarter ended August 31, 2001,
contributing to the increase in software product revenues for
the fiscal 2003 nine month period, despite the decrease in
software product revenues for the third quarter ended
February 28, 2003. We anticipate that software product
revenues will increase next quarter, in part as a result of a
having sales of our new Ultraseek product for a full quarter.

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| |                           
| | --------------------------
| | Service and Other Revenues

|                   |                              |                       |      |              |   |        |      |      |   |  |      |   | 
|------------------ | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ---- | - | 
|                   |                              | February 28,          |      | February 28, |   |       
|                   |                              | 2003                  |      | 2002         |   | Change
|                   |                              |                       |      |              |   |       
|                   |                              |                       |      |             
|                   |                              | (Dollars in millions) |      |             
|Three months ended |                              | $                     | 12.1 |              |   | $      | 9.1  |      |   |  | 33.5 | %
|                   | Percentage of total revenues |                       |      | 43.5         | % |        |      | 36.2 | % |  |      |   | 
|Nine months ended  |                              | $                     | 31.8 |              |   | $      | 28.2 |      |   |  | 12.6 | %
|                   | Percentage of total revenues |                       |      | 43.7         | % |        |      | 41.6 | % |  |      |   | 

Our service and other revenues consist primarily
of fees for software maintenance, consulting and training. The
increases in service and other revenues for the three and nine
month periods ended February 28, 2003, compared with the
same periods a year ago, were due to increased sales of
consulting services and to increased maintenance revenue which
results from maintenance contracts acquired as part of the
Enterprise purchase.

Costs of
Revenues



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

|                   |                                         |                       |     |              |   |        |     |     |   |  |       |    | 
|------------------ | --------------------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ----- | -- | 
|                   |                                         | February 28,          |     | February 28, |   |       
|                   |                                         | 2003                  |     | 2002         |   | Change
|                   |                                         |                       |     |              |   |       
|                   |                                         |                       |     |             
|                   |                                         | (Dollars in millions) |     |             
|Three months ended |                                         | $                     | 0.2 |              |   | $      | 0.7 |     |   |  | (63.1 | )%
|                   | Percentage of software product revenues |                       |     | 1.5          | % |        |     | 4.1 | % |  |       |    | 
|Nine months ended  |                                         | $                     | 0.9 |              |   | $      | 1.8 |     |   |  | (51.5 | )%
|                   | Percentage of software product revenues |                       |     | 2.2          | % |        |     | 4.7 | % |  |       |    | 

Costs of our software products consists primarily
of product media, duplication, manuals, packaging materials,
shipping expenses, and in certain instances, royalties for
licensing of third-party software incorporated in our products.
The decreases in costs of software products in absolute dollars
and as a percentage of software product revenues for the three
and nine month periods ended February 28, 2003, compared
with the same periods a year ago, were primarily attributable to
decreased costs of third-party software components and to
decreased costs for manuals and other shipping expenses from the
prior periods which had approximately $0.1 million in total
one-time costs associated with the start-up of European
distribution operations. We anticipate that costs of third-party
software components will continue to constitute a lower
percentage of software product revenues as compared with
previous periods.

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



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

|                   |                                          |                       |     |              |   |        |     |      |   |  |      |   | 
|------------------ | ---------------------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ---- | - | 
|                   |                                          | February 28,          |     | February 28, |   |       
|                   |                                          | 2003                  |     | 2002         |   | Change
|                   |                                          |                       |     |              |   |       
|                   |                                          |                       |     |             
|                   |                                          | (Dollars in millions) |     |             
|Three months ended |                                          | $                     | 3.0 |              |   | $      | 2.6 |      |   |  | 16.7 | %
|                   | Percentage of service and other revenues |                       |     | 25.1         | % |        |     | 28.7 | % |  |      |   | 
|Nine months ended  |                                          | $                     | 8.5 |              |   | $      | 8.4 |      |   |  | 0.9  | %
|                   | Percentage of service and other revenues |                       |     | 26.7         | % |        |     | 29.8 | % |  |      |   | 

Costs of service and other revenues consist of
costs incurred in providing consulting services, customer
training, telephone support and product upgrades to customers.
The increase in absolute dollars of costs of service and other
revenues for the three month period ended February 28,
2003, compared with the same period a year ago, was due to
increased compensation costs due to increased headcount
necessary to respond to higher demand for services, in large
part resulting from the purchase of Enterprise. The decrease as a

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percentage of service and other revenues was
related to an increase in service and other revenues and to
increased utilization of resources.


The increase in absolute dollars for the nine
month period ended February 28, 2003, compared with the
same period a year ago, was due to increased compensation and
other employee related expenses resulting from a slightly higher
average headcount. The higher average headcount results from the
addition of personnel necessary to respond to increased demand
for services and in connection with the Enterprise purchase in
December 2002. This compares with the prior year period in which
headcount began at a higher level than at any time during the
first two quarters of fiscal year 2003, but was reduced during
our staffing reorganization during the quarter ended
November 30, 2001. The decrease as a percentage of service
and other revenues was related to an increase in service and
other revenues.



| |                   
| | ------------------
| | Operating Expenses



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

|                   |                              |                       |      |              |   |        |      |      |   |  |      |    | 
|------------------ | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ---- | -- | 
|                   |                              | February 28,          |      | February 28, |   |       
|                   |                              | 2003                  |      | 2002         |   | Change
|                   |                              |                       |      |              |   |       
|                   |                              |                       |      |             
|                   |                              | (dollars in millions) |      |             
|Three months ended |                              | $                     | 5.9  |              |   | $      | 5.8  |      |   |  | 1.6  | % 
|                   | Percentage of total revenues |                       |      | 21.2         | % |        |      | 23.2 | % |  |      |    | 
|Nine months ended  |                              | $                     | 17.0 |              |   | $      | 17.7 |      |   |  | (3.9 | )%
|                   | Percentage of total revenues |                       |      | 23.4         | % |        |      | 26.2 | % |  |      |    | 

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 they
are essential to maintaining our competitive position. We
believe that research and development expenses will increase in
absolute dollars, in our quarter ending May 31, 2003,
primarily as a result of staffing additions associated the
Enterprise purchase, which closed on December 17, 2002. We
expect to see increased compensation and other employee related
expenses associated with having the additions for the full
quarter ending May 31, 2003.

The slight increase in research and development
expenses in absolute dollars for the three month period ended
February 28, 2003, compared with the same period a year
ago, was due to an increase in capital equipment costs
associated with our continued investment in development
capabilities. The decrease as a percentage of total revenues was
the result of the increase in total revenues.

The decrease in research and development expenses
in absolute dollars for the nine month period ended
February 28, 2003, compared with the same period a year
ago, was primarily due to a decrease in compensation and other
employee related expenses associated with the reduction in
staffing in our research and development organization during
each of November 2001 and 2002, offset in part by the addition
of personnel in connection with the Enterprise purchase during
the quarter ended February 28, 2003. The decrease as a
percentage of total revenues was due to the decrease in absolute
dollars and the increase in total revenues.



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

|                   |                              |                       |      |              |   |        |      |      |   |  |       |    | 
|------------------ | ---------------------------- | --------------------- | ---- | ------------ | - | ------ | ---- | ---- | - |  | ----- | -- | 
|                   |                              | February 28,          |      | February 28, |   |       
|                   |                              | 2003                  |      | 2002         |   | Change
|                   |                              |                       |      |              |   |       
|                   |                              |                       |      |             
|                   |                              | (Dollars in millions) |      |             
|Three months ended |                              | $                     | 10.1 |              |   | $      | 11.5 |      |   |  | (11.7 | )%
|                   | Percentage of total revenues |                       |      | 36.4         | % |        |      | 45.8 | % |  |       |    | 
|Nine months ended  |                              | $                     | 29.6 |              |   | $      | 39.5 |      |   |  | (24.9 | )%
|                   | Percentage of total revenues |                       |      | 40.7         | % |        |      | 58.3 | % |  |       |    | 

17



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Marketing and sales expenses consist primarily of
employee compensation and benefits, tradeshows, marketing and
other lead generation activities, public relations, travel
expenses associated with our sales staff and corporate overhead
allocations. We anticipate that we will continue to make
significant investments in marketing and sales with the goal of
continuing to align marketing and sales expenses with
anticipated revenues. We believe that marketing and sales
expenses will increase in absolute dollars, in our quarter
ending May 31, 2003, as a result of staffing additions and
increased program spending associated with the Enterprise
purchase, which closed on December 17, 2002. We expect to
see increased compensation and other employee related expenses
associated with having the additions for the full quarter ending
May 31, 2003.

The decrease in marketing and sales expenses in
absolute dollars for the three month period ended
February 28, 2003, compared with the same period a year
ago, was due to a decrease in compensation and other employee
related expenses associated with lower average headcount for the
period. The lower average headcount results from the reduction
in staffing in our marketing and sales organization during the
quarter ended November 30, 2002, offset in part by the
addition of personnel in connection with the Enterprise purchase
during the quarter ended February 28, 2003. The decrease in
marketing and sales expenses as a percentage of total revenues
for the three month period ended February 28, 2003 was due
to the decrease in absolute costs combined with the increase in
total revenues for the period.

The decrease in marketing and sales expenses in
absolute dollars for the nine month period ended
February 28, 2003, compared with the same period a year
ago, was due to a $8.8 million decrease in compensation and
other employee related expenses associated with the reduction in
staffing in our marketing and sales organization during the
quarters ended November 30, 2002 and 2001, offset in part
by the addition of personnel in connection with the Enterprise
purchase during the quarter ended February 28, 2003, and to
a $0.5 million decrease in overall marketing program
spending. The decrease in marketing and sales expenses as a
percentage of total revenues for the nine month period ended
February 28, 2003 was due to the decrease in absolute costs
combined with the increase in total revenues for the period.



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

|                   |                              |                       |     |              |   |        |     |      |   |  |       |    | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ----- | -- | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 2.4 |              |   | $      | 3.1 |      |   |  | (22.1 | )%
|                   | Percentage of total revenues |                       |     | 8.5          | % |        |     | 12.2 | % |  |       |    | 
|Nine months ended  |                              | $                     | 7.3 |              |   | $      | 8.8 |      |   |  | (16.5 | )%
|                   | Percentage of total revenues |                       |     | 10.1         | % |        |     | 13.0 | % |  |       |    | 

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 expect general and administrative costs
to increase modestly in absolute dollars during the next quarter.

The decrease in general and administrative
expenses in absolute dollars for the three month period ended
February 28, 2003, compared with the same period a year
ago, was due to a $0.4 million decrease in expenses for
outside professional services, including legal fees, and audit
and tax fees and a $0.3 million reduction in bad debt expenses,
offset in part by a $0.1 million increase in insurance
costs. The decrease as a percentage of total revenues for the
three month period ended February 28, 2003 was due to the
decrease in absolute costs combined with the increase in total
revenues.

The decrease in general and administrative
expenses in absolute dollars for the nine month period ended
February 28, 2003, compared with the same period a year
ago, was due to a $1.1 million decrease in expenses for
outside professional services including legal fees, and audit
and tax fees and a $0.5 million decrease in bad debt expense and
a $0.2 million decrease in other miscellaneous expenses,
offset by a $0.3 million increase in insurance costs. The
decrease as a percentage of total revenues for the nine month
period ended February 28, 2003 was due to the decrease in
absolute costs combined with the increase in total revenues.

18



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| |                                    
| | -----------------------------------
| | In-process research and development

|                   |                              |                       |     |              |   |        |     |     |   |  |    |  | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | -- |  | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 1.2 |              |   | $      | 0.0 |     |   |  | nm | 
|                   | Percentage of total revenues |                       |     | 4.3          | % |        |     | 0.0 | % |  |    |  | 
|Nine months ended  |                              | $                     | 1.2 |              |   | $      | 0.0 |     |   |  | nm | 
|                   | Percentage of total revenues |                       |     | 1.6          | % |        |     | 0.0 | % |  |    |  | 

Total in-process R&D expense of
$1.2 million for the three month period ended
February 28, 2003 was attributable to the Enterprise
purchase. The methodology for allocating the purchase price to
in-process R&D is determined through established valuation
techniques as outlined in the In-Process R&D Practice Aidpublished by the American Institute of Certified Public
Accountants, Inc. (AICPA). The fair value allocation
to in-process research and development was determined, and
expensed upon acquisition, by identifying the research projects
for which technological feasibility had not been achieved and
which had no alternative future use at the acquisition date,
assessing the stage and expected date of completion of the
research and development effort at the acquisition date, and
calculating the net present value of the cash flows (by
discounting expected future cash flows to present value)
expected to result from the successful deployment of the new
technology resulting from the in-process research and
development effort. The discount rates used in the present value
calculations are typically derived from a weighted-average cost
of capital analysis and venture capital surveys, adjusted upward
to reflect additional risks inherent in the development life
cycle based on each in-process R&D projects stage of
completion. The discount rates for existing technology and
in-process R&D were 28% and 33%, respectively.

The stages of completion were determined by
estimating the costs and time incurred to date relative to the
costs and time incurred to develop the in-process technology
into a commercially viable technology or product, while
considering the relative difficulty of completing the various
tasks and obstacles necessary to attain technological
feasibility. As of the acquisition date, Enterprise had released
Ultraseek 5.0, XML Toolkit 1.0, and the latest version of Quiver
to the market. Current development efforts, considered
in-process R&D, were focused on Ultraseek 5.1 and XML
Toolkit 2.0. There were no development efforts (that meet the
criteria of in-process R&D) related to the Quiver product
line as of the acquisition date. The estimated stage of
completion of both Ultraseek 5.1 and XML toolkit 2.0 was 55%
complete.

The development of the acquired in-process
R&D remains a significant risk due to the remaining efforts
to achieve technical feasibility, rapidly changing customer
markets, uncertain standards for new products, and significant
competitive threats from several companies. The nature of the
efforts to develop these technologies into commercially viable
products consists principally of completing the software
development relating to the planned new functionalities, and
testing activities necessary to determine that the technologies
can meet market expectations, including functionality and
technical requirements. Failure to bring these products to
market in a timely manner could result in a loss of market share
or a lost opportunity to capitalize on emerging markets, and
could have a material adverse impact on our business and
operating results.

The key assumptions underlying the valuations for
our purchase acquisition primarily consist of an expected
completion date for the in-process projects, estimated costs to
complete the projects, revenue and expense projections assuming
the products have entered the market, and discount rates based
on the risks associated with the stage of completion of the
in-process technology acquired.

19



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| |                                                
| | -----------------------------------------------
| | Amortization of purchased intangible
    assets

|                   |                              |                       |     |              |   |        |     |     |   |  |    |  | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | -- |  | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 0.6 |              |   | $      | 0.0 |     |   |  | nm | 
|                   | Percentage of total revenues |                       |     | 2.3          | % |        |     | 0.0 | % |  |    |  | 
|Nine months ended  |                              | $                     | 0.6 |              |   | $      | 0.0 |     |   |  | nm | 
|                   | Percentage of total revenues |                       |     | 0.9          | % |        |     | 0.0 | % |  |    |  | 

During the three month period ended
February 28, 2003, we amortized $0.6 million of the
purchased intangible assets acquired in connection with our
Enterprise purchase. We will record quarterly amortization
expenses of $0.6 million associated with the purchased
intangible assets of Enterprise for a period of 5 years.
For additional information regarding purchased intangible
assets, see Note 10 to the Consolidated Financial Statements.



| |                      
| | ---------------------
| | Restructuring charges

|                   |                              |                       |     |              |   |        |     |     |   |  |       |    | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ----- | -- | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 0.0 |              |   | $      | 0.0 |     |   |  | nm    |   
|                   | Percentage of total revenues |                       |     | 0.0          | % |        |     | 0.0 | % |  |       |    | 
|Nine months ended  |                              | $                     | 1.0 |              |   | $      | 1.6 |     |   |  | (36.5 | )%
|                   | Percentage of total revenues |                       |     | 1.4          | % |        |     | 2.3 | % |  |       |    | 

During each of November 2001 and 2002, we
executed restructurings designed to reduce costs and to better
align our expense levels with anticipated revenue levels and
ensure conservative spending during the current period of
economic uncertainty.

|                                                 |                                        |                             |   |              |     |  |   |     |     | 
|------------------------------------------------ | -------------------------------------- | --------------------------- | - | ------------ | --- |  | - | --- | --- | 
|                                                 |                                        | February 28,                |   | February 28,
|                                                 |                                        | 2003                        |   | 2002        
|                                                 |                                        |                             |   |             
|                                                 |                                        |                            
|                                                 |                                        | (Dollars in millions)      
|Restructuring charges:(nine month periods ended) |                                        |                             |   |              |     |  |   |    
|                                                 | Severance costs                        |                             | $ | 0.7          |     |  | $ | 1.2 |    
|                                                 | Legal and other outside services costs |                             |   | 0.1          |     |  |   | 0.3 |    
|                                                 | Other charges                          |                             |   | 0.2          |     |  |   | 0.1 |    
|                                                 |                                        |                             |   |              |     |  |   |    
|                                                 |                                        | Total restructuring charges |   | $            | 1.0 |  |   | $   | 1.6 | 
|                                                 |                                        |                             |   |              |     |  |   |    

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

Of the total $1.0 million restructuring
charge, approximately $0.2 million remains unpaid at
February 28, 2003. The remaining $0.2 million relates
to a facilities lease and will be paid out ratably over the
remaining life of the lease, which terminates in October 2005.

During the quarter ended November 30, 2001,
we implemented a worldwide restructuring and recorded a
$1.6 million restructuring charge, of which approximately
$1.2 million was related to severance costs

20



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associated with the reduction in the worldwide
workforce by 65 employees, approximately $0.3 million to legal
and other outside services in connection with the restructuring
and approximately $0.1 million to other costs associated
with the restructuring. The restructuring impacted operations in
the U.S., Canada, the U.K., Germany, France, the Netherlands,
Sweden and South Africa. There is no remaining unpaid amount.




| |                         
| | ------------------------
| | Charitable contributions

|                   |                              |                       |     |              |   |        |     |     |   |  |        |    | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | --- | - |  | ------ | -- | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 0.0 |              |   | $      | 0.0 |     |   |  | nm     |   
|                   | Percentage of total revenues |                       |     | 0.0          | % |        |     | 0.0 | % |  |        |    | 
|Nine months ended  |                              | $                     | 0.0 |              |   | $      | 1.0 |     |   |  | (100.0 | )%
|                   | Percentage of total revenues |                       |     | 0.0          | % |        |     | 1.5 | % |  |        |    | 

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



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

|                   |                              |                       |     |              |   |        |     |      |   |  |       |    | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | --- | ---- | - |  | ----- | -- | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 1.6 |              |   | $      | 2.3 |      |   |  | (29.5 | )%
|                   | Percentage of total revenues |                       |     | 5.7          | % |        |     | 9.0  | % |  |       |    | 
|Nine months ended  |                              | $                     | 5.4 |              |   | $      | 7.8 |      |   |  | (30.4 | )%
|                   | Percentage of total revenues |                       |     | 7.4          | % |        |     | 11.5 | % |  |       |    | 

Other income consists primarily of interest
income and realized gains from our investments in marketable
securities and, to a lesser extent, the realized foreign
currency translation gain (loss).

The decreases in other income in absolute dollars
for the three and nine month periods ended February 28,
2003, compared with the same period a year ago, were primarily
due to decreasing overall yields on our portfolio of marketable
securities caused by the decreasing interest rate environment,
in addition to slightly lower average balances of marketable
securities resulting from our repurchases of our common stock.
The decrease in other income as a percentage of total revenues
for the three and nine month periods ended February 28,
2003 were due to the decreases in absolute dollars combined with
the increases in total revenues.



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

|                   |                              |                       |     |              |   |        |      |      |    |  |      |   | 
|------------------ | ---------------------------- | --------------------- | --- | ------------ | - | ------ | ---- | ---- | -- |  | ---- | - | 
|                   |                              | February 28,          |     | February 28, |   |       
|                   |                              | 2003                  |     | 2002         |   | Change
|                   |                              |                       |     |              |   |       
|                   |                              |                       |     |             
|                   |                              | (Dollars in millions) |     |             
|Three months ended |                              | $                     | 2.2 |              |   | $      | 1.4  |      |    |  | 59.3 | %
|                   | Percentage of total revenues |                       |     | 8.1          | % |        |      | 5.6  | %  |  |      |   | 
|Nine months ended  |                              | $                     | 4.5 |              |   | $      | (1.3 | )    |    |  | nm   |  
|                   | Percentage of total revenues |                       |     | 6.2          | % |        |      | (1.9 | )% |  |      |   | 

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.

21



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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
February 28, 2003. For the same reasons, we also applied an
effective tax rate of 38.0% to the results of the nine month
period ended February 28, 2003 and the three and nine month
periods ended February 28, 2002. We anticipate that the
effective tax rate for the quarter and annual periods ending
May 31, 2003 will also be 38.0%. 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

|                                                        |  |                       |       |              |  |   |      |  
|------------------------------------------------------- |  | --------------------- | ----- | ------------ |  | - | ---- | -
|                                                        |  | February 28,          |       | February 28,
|                                                        |  | 2003                  |       | 2002        
|Nine Month Periods Ended                                |  |                       |       |             
|                                                        |  |                      
|                                                        |  | (Dollars in millions)
|Net cash provided by operating activities               |  | $                     | 16.6  |              |  | $ | 12.6 |  
|Net cash used in investing activities                   |  | $                     | (2.9  | )            |  | $ | (8.3 | )
|Net cash provided by (used in) financing
    activities |  | $                     | (16.4 | )            |  | $ | 1.1  |  

As of February 28, 2003, we had
$220.6 million in cash and cash equivalents and
available-for-sale securities compared to $245.4 million at
May 31, 2002. At February 28, 2003, our principal
sources of liquidity were our cash and cash equivalents and
short-term investments of $137.2 million. As of
February 28, 2003, we had a $3 million deferred
purchase payment to Inktomi Corp. in connection with the
acquisition of certain assets from Inktomi.

Our cash provided by operating activities
increased to $16.6 million for the nine month period ended
February 28, 2003, compared to $12.6 million in the
prior year period. This $4.0 million increase was primarily
due to the increase in net income of $9.5 million, the
effect on cash flow of which was further increased by
approximately $7.5 million due to greater non-cash expenses
in the 2003 period over the prior year period. However, these
differences were offset to a large extent by changes in
operating assets and liabilities, comprised mostly of a
$18.4 million decrease in accounts receivable in the 2002
period compared only to a $2.3 million decrease in the 2003
period, and to a lesser extent by a $4.4 million increased
in deferred revenue in the 2002 period compared to
$2.1 million increase in the 2003 period.

Cash used in investing activities for the nine
month periods ended February 28, 2003 and 2002 was
$2.9 million and $8.3 million, respectively, as the
result of net sales of marketable securities offset by capital
expenditures of $1.2 million and $2.7 million in the
respective periods, and for the nine month period ended
February 28, 2003, $23.8 million in costs related to
the purchase of the Inktomi Enterprise business. For the nine
month periods ended February 28, 2003 and 2002, the capital
expenditures consisted primarily of purchases for computer
hardware and software.

Cash used in financing activities for the nine
month period ended February 28, 2003 consisted of
$28.6 million in repurchases of our common stock through
our stock repurchase program, partially offset by a
$12.2 million in proceeds from the sale of common stock as
a result of stock option exercises and from the issuance of
common stock in connection with our Employee Stock Purchase
Plan. Cash provided by financing activities for the nine month
period ended February 28, 2002 consisted of
$13.3 million in proceeds from the sale of common stock as
a result of stock option exercises and from the issuance of
common stock in connection with our Employee Stock Purchase Plan
partially offset by $12.2 million in repurchases of our
common stock through our stock repurchase program.

Our principal commitments as of February 28,
2003, as set forth in the table below consist of obligations
under operating leases, totaling $9.3 million over the life
of these leases. In addition, we hold $3.0 million as a
deferred purchase payment related to Enterprise. On
June 17, 2004, we are obligated to pay Inktomi an amount
equal to the sum of (i) $3.0 million plus
(ii) simple interest thereon calculated from the
December 17, 2002 through the date of payment at an annual
rate of 1.5%. We shall have the right to withhold or deduct from
the deferred payment amount any sum that may be owed to us by
Inktomi pursuant to Inktomis indemnification obligations
under the Purchase Agreement.

22



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|                                   |  |                        |      |           |  |           |     |           |  |         |     |  |  |   |     |  |  |   |     | 
|---------------------------------- |  | ---------------------- | ---- | --------- |  | --------- | --- | --------- |  | ------- | --- |  |  | - | --- |  |  | - | --- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |      | Less than |  |           |     | After    
|                                   |  | Total                  |      | 1 year    |  | 1-3 years |     | 4-5 years |  | 5 years
|Contractual Obligations            |  |                        |      |           |  |           |     |           |  |        
|                                   |  |                       
|                                   |  | ($ in millions)       
|Operating Leases                   |  | $                      | 9.3  |           |  | $         | 2.8 |           |  | $       | 3.8 |  |  | $ | 1.0 |  |  | $ | 1.7 | 
|Deferred Purchase Payment          |  |                        | 3.1  |           |  |           | 0.0 |           |  |         | 3.1 |  |  |   | 0.0 |  |  |   | 0.0 | 
|                                   |  |                        |      |           |  |           |     |           |  |         |     |  |  |   |     |  |  |   |     | 
|Total Contractual Cash Obligations |  | $                      | 12.4 |           |  | $         | 2.8 |           |  | $       | 6.9 |  |  | $ | 1.0 |  |  | $ | 1.7 | 
|                                   |  |                        |      |           |  |           |     |           |  |         |     |  |  |   |     |  |  |   |     | 

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 February 28, 2003, we
repurchased and retired 3,952,005 shares of our common stock
through open market transactions, valued at approximately
$48.5 million. The program will terminate at the end of the
current fiscal year ending May 31, 2003 unless extended or
shortened by our board of directors.

On December 17, 2002, we completed the
purchase of certain assets and obligations of Inktomi
Corporations enterprise search software business. In
addition to the cash commitment in this transaction, we may also
incur substantial costs related to the integration of this
business. These costs may be incurred in subsequent quarters and
may affect our results of operations.

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



| |                          
| | -------------------------
| | Related Party Transaction

During the quarter ended February 28, 2003,
we extended our current management agreement with Regent Pacific
Management Corporation until February 28, 2005, and have an
option to further extend the term of this agreement through
August 2005. Under the amended agreement, Regent Pacific will
continue to provide the services of Gary J. Sbona, the
Chief Executive Officer of Regent Pacific, as executive chairman
of Verity, and will continue to provide additional Regent
Pacific management services to Verity. In accordance with the
agreement as originally in effect, Verity pays Regent Pacific
$50,000 per week for the management services that Regent Pacific
provides to Verity.

Recent Accounting Pronouncements

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

In November 2001, the Emerging Issues Task Force
(EITF) of the FASB reached a consensus on Issue
No. 01-09, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors
Products. EITF No. 01-09 addresses whether
consideration from a vendor to a reseller of the

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vendors products is an adjustment to the
selling prices of the vendors products and, therefore,
should be deducted from revenue when recognized in the
vendors results of operations, or a cost incurred by the
vendor for assets or services received from the reseller and,
therefore, should be an expense when recognized in the
vendors results of operations. EITF No. 01-09 is
effective for us beginning November 1, 2001. The adoption
of EITF No. 01-09 did not have a significant impact on our
financial position or results of operations.


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

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must disclose and
recognize a liability for the fair value of the obligation it
assumes under that guarantee. The initial recognition and
measurement requirement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. As
of February 28, 2003, our guarantees that were issued or
modified after December 31, 2002 were not material. Our
guarantees issued before December 31, 2002, which would
have been disclosed in accordance with the disclosure
requirements of FIN 45, were not material.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends certain provisions of SFAS No. 123 and
is effective for financial statements for fiscal years ending
after December 15, 2002. It provides alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires the disclosure of
the pro forma effects on an entitys accounting policy with
respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial
statements. We do not currently intend to adopt the fair value
based method of accounting for stock-based employee compensation
and will continue to apply the intrinsic-value based method.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
requires that if an entity has a controlling financial interest
in a variable interest entity, the assets, liabilities and
results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity.
FIN 46 requires that its provisions are effective
immediately for all arrangements entered into after
January 31, 2003. We do not have any variable interest
entities.

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



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

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



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

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



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

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| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 cause our
stock price to fall.



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

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



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

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



| |                                                            
| | -----------------------------------------------------------
| | Changes in effective tax rates could affect
    our results

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



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

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

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

Any delay in sales of our products and services
could cause our quarterly revenue and operating results to
fluctuate. The typical sales cycle of our products is lengthy,
generally between six to 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. We believe our sales cycle lengthened in
2002 and 2003 as a result of macro-economic factors and we
cannot be certain that this cycle will not continue to lengthen
in the future.



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

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



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

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

Service and other revenues derived from foreign
operations accounted for 15.5%, 13.9%, 6.3% and 6.7% of total
revenues for the nine month period ended February 28, 2003,
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 nine month period ended
February 28, 2003 and fiscal years 2002, 2001 and 2000,
export sales accounted for 21.9%, 21.8%, 26.0% and 19.0% of
total revenues, respectively. We expect that revenues derived
from foreign operations and export sales will continue to
account for a significant percentage of our revenues for the
foreseeable future. These revenues may fluctuate significantly
as a percentage of revenues from period to period. In addition,
a portion of these revenues was derived from sales to foreign
government agencies, which may be subject to risks similar to
those described immediately below.

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

Revenues derived from sales to the federal and
state governments and their agencies were 10.2%, 6.1%, 7.4% and
7.8% of total revenues for the nine month period ended
February 28, 2003 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 governments and/or their agencies
have been reduced, causing certain customers and potential
customers of our products to re-evaluate their needs. These
budget reductions are expected to continue over at least the
next several years.

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



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

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

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



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

The computer software industry is subject to
rapid technological change, changing customer requirements,
frequent new product introductions, and evolving industry
standards that may render existing products and services
obsolete. As a result, our position in our existing markets or
other markets that we may enter could be eroded rapidly by any
of these factors, including 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

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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.



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

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



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

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

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

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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 to or superior to our products without infringing on
any of our intellectual property rights.




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

Third parties may assert that our products
infringe their proprietary rights, or may assert claims for
indemnification resulting from infringement claims against us.
Any such claims may cause us to delay or cancel shipment of our
products, which could harm our business. In addition,
irrespective of the validity or the successful assertion of
claims, we could incur significant costs in defending against
claims. To date, no third party has asserted such claims.



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

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



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

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

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



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

Regent Pacific Management Corporation, a
management firm of which Gary J. Sbona, our executive chairman
of the board, is chief executive officer, provides management
services for us 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
February 28, 2005, but provides us with an option to
further extend the term of this agreement through August 2005.
If we exercise this option, the agreement will terminate after
August 2005 unless Regent Pacific and the board agree to further
extend it. Verity may discharge Regent Pacific at any time after
February 28, 2004 provided that Verity has delivered a
60-day written notice of intent to cancel this agreement. 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.

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

The information retrieval, classification and
recommendation software markets are intensely competitive and we
cannot assure you that we will maintain our current position or
market share. A number of companies offer competitive products
addressing these markets. We compete with Autonomy, Convera,
Endeca, FAST, Google and Microsoft, among others. We also
compete indirectly with database vendors, such as Oracle, portal
vendors, such as Plumtree, and content management system
vendors, such as Interwoven, that offer information search and
retrieval capabilities with their core products.

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



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

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



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

31



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

Acquisitions may also cause us to:



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

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

Risks Related to Our Industry



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

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

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



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



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

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



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

32



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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 us or our
    competitors;                                           
|
| |  | quarterly variations in operating results;                                                           
|
| |  | announcements of technological innovations;                                                          
|
| |  | the introduction of new products or changes in
    product pricing policies by us or our competitors;
|
| |  | announcements of acquisitions by us or
    competitors;                                              
|
| |  | litigation involving proprietary rights or other
    matters; 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;

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| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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                                                         
|
| |  | advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted upon by stockholders at stockholder meetings.                            

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






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

Interest Rate Risk.The primary objective of our
investment activities is to preserve the principal while at the
same time maximizing yields without significantly increasing the
risk. To achieve this objective, we maintain our portfolio of
cash equivalents and investments in a variety of securities,
including both government and corporate obligations and money
market funds. As of February 28, 2003, approximately 62% 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 only
material market risk to which these instruments are subject is
interest rate risk. None of our investments are entered into for
trading purposes.

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 February 28, 2003:

|                       |  |                        |        |        |  |        |        |        |  |       |        |            |  |   |        |   |  |   |         |  |  |   |         | 
|---------------------- |  | ---------------------- | ------ | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------- |  |  | - | ------- | 
|                       |  | FY2003                 |        | FY2004 |  | FY2005 |        | FY2006 |  | Total |        | Fair Value
|                       |  |                        |        |        |  |        |        |        |  |       |        |           
|                       |  |                       
|                       |  | (Dollars in thousands)
|Cash equivalents       |  | $                      | 21,418 |        |  |        |       |        |  |       |       |            |  |   |       |   |  | $ | 21,418  |  |  | $ | 21,418  | 
|Average interest rate  |  |                        | 0.5    | %      |  |        |       |        |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Short-term investments |  | $                      | 68,159 |        |  | $      | 47,620 |        |  |       |       |            |  |   |       |   |  | $ | 115,779 |  |  | $ | 115,779 | 
|Average interest rate  |  |                        | 2.7    | %      |  |        | 4.3    | %      |  |       |       |            |  |   |       |   |  |   |         |  |  |   |         | 
|Long-term investments  |  |                        |       |        |  | $      | 10,272 |        |  | $     | 43,295 |            |  | $ | 29,812 |   |  | $ | 83,379  |  |  | $ | 83,379  | 
|Average interest rates |  |                        |       |        |  |        | 3.2    | %      |  |       | 3.3    | %          |  |   | 3.3    | % |  |   |         |  |  |   |         | 

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




Item 4.Controls
and Procedures

(a) Evaluation of disclosure controls and
procedures. Our chief executive officer and our chief financial
officer, after evaluating the effectiveness of Veritys
disclosure controls and procedures(as
defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15-d-14(c)) as of a date within
90 days before the

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filing date of this quarterly report, have
concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by
Verity in reports that we file or submit under the Exchange Act
(i) is accumulated and communicated to Veritys
management, including our chief executive officer and our chief
financial officer, to allow timely decisions regarding required
disclosure, and (ii) is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms.


(b) Changes in internal controls. There were
no significant changes in our internal controls or to our
knowledge in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were
no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.

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




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

35



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copyright infringement against BroadVision based
on allegations that BroadVision knowingly facilitated the use by
end users of unlicensed functionality of VDK. BroadVision
answered Veritys amended complaint on August 29, 2002
and denied the material allegations of the amended complaint and
asserted affirmative defenses to Veritys claims.
BroadVision also reasserted its counterclaim described above.
Verity answered the counterclaim on September 23, 2002 and
denied the material allegations of the counterclaim and asserted
various affirmative defenses to BroadVisions claims.


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




Item 2.     Changes
in Securities and Use of Proceeds

Not Applicable.




Item 3.     Defaults
upon Senior Securities

Not Applicable.




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

Not Applicable.




Item 5.     Other
Information

Non-audit Services

Consistent with Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, the Company is responsible for
listing the non-audit services approved by the Companys
Audit Committee to be performed by PricewaterhouseCoopers LLP,
the companys external auditor. Non-audit services are
defined as services other than those provided in connection with
an audit or a review of the financial statements of the Company.
Following the quarterly period covered by this filing, the Audit
Committee approved no new or recurring engagements of
PricewaterhouseCoopers LLP. The Company has previously approved
for fiscal 2003 the following non-audit services: (1) tax
compliance services; (2) tax consulting services; and
(3) financial due diligence in connection with potential
mergers or acquisitions.




Item 6.     Exhibits
and Reports on Form 8-K

A.     Exhibits 
See Exhibit Index

B.     Reports on
Form 8-K

We filed one report on Form 8-K and one
report on Form 8-K/ A during the quarter covered by this
report.

|                  |  |                                                                                                                                                               
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date              |  | Item Reported On                                                                                                                                              
|                  |  |                                                                                                                                                               
|December 20, 2002 |  | Items 2 and 7. On December 17, 2002 we
    announced that we had completed the purchase of certain assets
    from Inktomi Corporation.                       
|February 27, 2003 |  | Item 7. Financial Statements, Pro forma
    Financial Information and Exhibits in connection with the
    purchase of certain assets from Inktomi Corporation.

36



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##### Table of Contents






SIGNATURE

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



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



| |     |                          
| | --- | -------------------------
| | By: | /s/ STEVEN R. SPRINGSTEEL

| |                                               
| | ----------------------------------------------
| |                                               
| | Steven R. Springsteel                         
| | Senior Vice President of Finance and          
| | Administration and Chief Financial
    Officer

Dated: April 10, 2003

37



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##### Table of Contents






CERTIFICATION

I, Anthony J. Bettencourt, III., certify that:



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



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



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



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



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



| |                                          
| | -----------------------------------------
| | /s/ ANTHONY J. BETTENCOURT, III.         
| |                                          
| | Anthony J. Bettencourt, III.             
| | President and Chief Executive
    Officer

Date: April 10, 2003

38



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##### Table of Contents



CERTIFICATION

I, Steven R. Springsteel, certify that:



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



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



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



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



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



| |                                               
| | ----------------------------------------------
| | /s/ STEVEN R. SPRINGSTEEL                     
| |                                               
| | Steven R. Springsteel                         
| | Senior Vice President of Finance and          
| | Administration and Chief Financial
    Officer

Date: April 10, 2003

39



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##### Table of Contents



INDEX TO EXHIBITS

|        |       |                         |  |                                                                                                                                                                                                                                                              
|------- | ----- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 2.1   |                         |  | Asset Purchase Agreement among Inktomi
    Corporation, Quiver, Inc., Ultraseek Corporation, Quiver Ltd.
    and the Company, dated November 13, 2002.(1)                                                                                                    
|        | 2.2   |                         |  | Amendment No. 1 to Asset Purchase Agreement
    among Inktomi Corporation, Inktomi Quiver Corporation, Ultraseek
    Corporation, Quiver Ltd. and the Company, dated
    December 17, 2002, amending Asset Purchase Agreement dated
    November 13, 2002.(1)
|        | 3.1   |                         |  | Restated Certificate of Incorporation of the
    Company.(2)                                                                                                                                                                                                 
|        | 3.2   |                         |  | By-Laws.(2)                                                                                                                                                                                                                                                  
|        | 10.3  |                         |  | 1995 Stock Option Plan, as amended.                                                                                                                                                                                                                          
|        | 10.6  |                         |  | 1996 Nonstatutory Stock Option Plan, as amended.                                                                                                                                                                                                             
|        | 10.7  |                         |  | 1997 Nonstatutory Stock Option Plan for Verity
    Canada, as amended.                                                                                                                                                                                       
|        | 10.41 |                         |  | Offer Letter, between Steven R. Springsteel and
    the Company, dated December 27, 2002.                                                                                                                                                                    
|        | 10.42 |                         |  | Sixth Amendment to Retainer Agreement between
    Regent Pacific Management Corporation and Verity, Inc., dated
    March 4, 2003.                                                                                                                           
|        | 99.1  |                         |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                                                                                                                                                                    



---



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

40