##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-Q



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|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
	November 30, 2001                                         
|          
|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 and telephone number 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

The number of shares outstanding of the
Registrants Common Stock, $0.001 par value, was 34,978,000
as of November 30, 2001.



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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                           
|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                                                                                   



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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)                                                                                                                             |    |      |    | 
|                                |  | Condensed Consolidated Balance Sheets as of
	November 30, 2001 and May 31, 2001                                                                              |    |      | 2  | 
|                                |  | Condensed Consolidated Statements of Operations
	for the Three Months Ended November 30, 2001 and 2000, and
	the Six Months Ended November 30, 2001 and 2000 |    |      | 3  | 
|                                |  | Condensed Consolidated Statements of Cash Flows
	for the Six Months Ended November 30, 2001 and 2000                                                         |    |      | 4  | 
|                                |  | Notes to Condensed Consolidated Financial
	Statements                                                                                                        |    |      | 5  | 
|Item 2.                         |  | Managements Discussion and Analysis of
	Financial Condition and
	Results of Operations                                                                      |    |      | 9  | 
|Item 3.                         |  | Quantitative and Qualitative Disclosures About
	Market Risk                                                                                                  |    |      | 24 | 
|PART II.  OTHER
	INFORMATION   
|Item 1.                         |  | Legal Proceedings                                                                                                                                            |    |      | 25 | 
|Item 2.                         |  | Changes in Securities and Use of Proceeds                                                                                                                    |    |      | 25 | 
|Item 3.                         |  | Defaults upon Senior Securities                                                                                                                              |    |      | 25 | 
|Item 4.                         |  | Submission of Matters to a Vote of Security
	Holders                                                                                                         |    |      | 26 | 
|Item 5.                         |  | Other Information                                                                                                                                            |    |      | 26 | 
|Item 6.                         |  | Exhibits and Reports on Form 8-K                                                                                                                             |    |      | 26 | 
|Signature                       |  |                                                                                                                                                              | 27 |     

1



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##### Table of Contents






PART I.     FINANCIAL
INFORMATION




Item 1.     Financial
Statements

VERITY, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                |                                                                                                               |                                            |         |         |         |  |         |         |         | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                |                                                                                                               | November 30,                               |         | May 31,
|                                |                                                                                                               | 2001                                       |         | 2001   
|                                |                                                                                                               |                                            |         |        
|                                |                                                                                                               |                                           
|                                |                                                                                                               | (In thousands, except share               
|                                |                                                                                                               | and per share data)                       
|                                |                                                                                                               | (Unaudited)                               
|ASSETS                         
|                               
|Current assets:                 |                                                                                                               |                                            |         |         |         |  |         |        
|                                | Cash and cash equivalents                                                                                     |                                            | $       | 12,185  |         |  | $       | 12,210  |        
|                                | Short-term investments                                                                                        |                                            |         | 107,471 |         |  |         | 126,687 |        
|                                | Trade accounts receivable, net                                                                                |                                            |         | 26,439  |         |  |         | 37,741  |        
|                                | Deferred tax assets                                                                                           |                                            |         | 22,786  |         |  |         | 20,121  |        
|                                | Prepaid and other                                                                                             |                                            |         | 7,056   |         |  |         | 6,788   |        
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|                                |                                                                                                               | Total current assets                       |         |         | 175,937 |  |         |         | 203,547 | 
|Property and equipment, net     |                                                                                                               |                                            | 7,866   |         |         |  | 7,804   |        
|Long-term investments           |                                                                                                               |                                            | 106,679 |         |         |  | 92,248  |        
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|                                |                                                                                                               | Total assets                               |         | $       | 290,482 |  |         | $       | 303,599 | 
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|LIABILITIES                    
|                               
|Current liabilities:            |                                                                                                               |                                            |         |         |         |  |         |        
|                                | Accounts payable                                                                                              |                                            | $       | 6,323   |         |  | $       | 6,790   |        
|                                | Accrued compensation                                                                                          |                                            |         | 9,698   |         |  |         | 11,799  |        
|                                | Other accrued liabilities                                                                                     |                                            |         | 2,660   |         |  |         | 3,793   |        
|                                | Deferred revenue                                                                                              |                                            |         | 13,718  |         |  |         | 17,073  |        
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|                                |                                                                                                               | Total current liabilities                  |         |         | 32,399  |  |         |         | 39,455  | 
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|Contingencies (Note 5)          |                                                                                                               |                                            |         |         |         |  |         |        
|STOCKHOLDERS EQUITY           
|                               
|Common stock, $0.001 par value: |                                                                                                               |                                            |         |         |         |  |         |        
|                                | Authorized: 200,000,000 shares                                                                                |                                            |         |         |         |  |         |         |        
|                                | Issued and outstanding: 34,978,000 shares as of
	November 30, 2001; and 35,158,000 shares as of May 31,
	2001 |                                            |         | 35      |         |  |         | 35      |        
|Additional paid-in capital      |                                                                                                               |                                            | 249,475 |         |         |  | 252,733 |        
|Other comprehensive income      |                                                                                                               |                                            | 2,198   |         |         |  | 652     |        
|Retained earnings               |                                                                                                               |                                            | 6,375   |         |         |  | 10,724  |        
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|                                |                                                                                                               | Total stockholders equity                 |         |         | 258,083 |  |         |         | 264,144 | 
|                                |                                                                                                               |                                            |         |         |         |  |         |        
|                                |                                                                                                               | Total liabilities and stockholders equity |         | $       | 290,482 |  |         | $       | 303,599 | 
|                                |                                                                                                               |                                            |         |         |         |  |         |        

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

2



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |        |        | 
|------------------------------------------------ | -------------------------- | ------------------------------------- | ------ | ---------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                 |                            |                                       |        |                 
|                                                 |                            | Three Months Ended                    |        | Six Months Ended
|                                                 |                            | November 30,                          |        | November 30,    
|                                                 |                            |                                       |        |                 
|                                                 |                            | 2001                                  |        | 2000             |        | 2001 |        | 2000  
|                                                 |                            |                                       |        |                  |        |      |        |       
|                                                 |                            |                                      
|                                                 |                            | (In thousands, except per share data)
|                                                 |                            |                                       |        |                 
|                                                 |                            | (Unaudited)                           |        | (Unaudited)     
|Revenues:                                        |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 | Software products          |                                       | $      | 13,274           |        |      | $      | 25,558 |        |   | $       | 23,541 |        |   | $      | 48,356 |       
|                                                 | Service and other          |                                       |        | 9,286            |        |      |        | 8,962  |        |   |         | 19,124 |        |   |        | 17,454 |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 |                            | Total revenues                        |        |                  | 22,560 |      |        |        | 34,520 |   |         |        | 42,665 |   |        |        | 65,810 | 
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Costs of revenues:                               |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 | Software products          |                                       |        | 644              |        |      |        | 385    |        |   |         | 1,186  |        |   |        | 732    |       
|                                                 | Service and other          |                                       |        | 2,757            |        |      |        | 2,978  |        |   |         | 5,803  |        |   |        | 5,536  |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 |                            | Total costs of revenues               |        |                  | 3,401  |      |        |        | 3,363  |   |         |        | 6,989  |   |        |        | 6,268  | 
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Gross profit                                     |                            |                                       | 19,159 |                  |        |      | 31,157 |        |        |   | 35,676  |        |        |   | 59,542 |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Operating expenses:                              |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 | Research and development   |                                       |        | 5,955            |        |      |        | 4,827  |        |   |         | 11,891 |        |   |        | 9,412  |       
|                                                 | Marketing and sales        |                                       |        | 13,396           |        |      |        | 13,800 |        |   |         | 27,994 |        |   |        | 25,824 |       
|                                                 | General and administrative |                                       |        | 2,909            |        |      |        | 2,530  |        |   |         | 5,741  |        |   |        | 4,700  |       
|                                                 | Restructuring charge       |                                       |        | 1,563            |        |      |        |       |        |   |         | 1,563  |        |   |        |       |       
|                                                 | Charitable contribution    |                                       |        | 1,000            |        |      |        |       |        |   |         | 1,000  |        |   |        |       |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|                                                 |                            | Total operating expenses              |        |                  | 24,823 |      |        |        | 21,157 |   |         |        | 48,189 |   |        |        | 39,936 | 
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Income (loss) from operations                    |                            |                                       | (5,664 | )                |        |      | 10,000 |        |        |   | (12,513 | )      |        |   | 19,606 |       
|Other income, net                                |                            |                                       | 2,629  |                  |        |      | 2,834  |        |        |   | 5,499   |        |        |   | 5,105  |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Income (loss) before provision for income
	taxes |                            |                                       | (3,035 | )                |        |      | 12,834 |        |        |   | (7,014  | )      |        |   | 24,711 |       
|Provision for (benefit from) income taxes        |                            |                                       | (1,153 | )                |        |      | 4,684  |        |        |   | (2,665  | )      |        |   | 9,316  |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Net income (loss)                                |                            | $                                     | (1,882 | )                |        | $    | 8,150  |        |        | $ | (4,349  | )      |        | $ | 15,395 |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Net income (loss) per
	share  basic             |                            | $                                     | (0.05  | )                |        | $    | 0.24   |        |        | $ | (0.12   | )      |        | $ | 0.47   |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Net income (loss) per
	share  diluted           |                            | $                                     | (0.05  | )                |        | $    | 0.23   |        |        | $ | (0.12   | )      |        | $ | 0.42   |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Number of shares  basic                         |                            |                                       | 35,161 |                  |        |      | 33,449 |        |        |   | 35,261  |        |        |   | 32,909 |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       
|Number of shares  diluted                       |                            |                                       | 35,161 |                  |        |      | 35,846 |        |        |   | 35,261  |        |        |   | 36,381 |       
|                                                 |                            |                                       |        |                  |        |      |        |        |        |   |         |        |        |   |        |       

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

3



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##### Table of Contents



VERITY, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |          |       |        |         |  
|---------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------- | ------ | ------ | ------ | -------- | ----- | ------ | ------- | -
|                                               |                                                                                              |                                             
|                                               |                                                                                              | Six Months Ended                            
|                                               |                                                                                              | November 30,                                
|                                               |                                                                                              |                                             
|                                               |                                                                                              | 2001                                         |                                                    | 2000                                                 
|                                               |                                                                                              |                                              |                                                    |                                                      
|                                               |                                                                                              |                                             
|                                               |                                                                                              | (In thousands)                              
|                                               |                                                                                              |                                             
|                                               |                                                                                              | (Unaudited)                                 
|Cash flows from operating
	activities:         |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               | Net income (loss)                                                                            |                                              | $                                                  | (4,349                                                | )      |        | $      | 15,395   |      
|                                               | Adjustments to reconcile net income to net cash
	provided by (used in) operating activities: |                                              |                                                    |                                                       |        |        |        |          |      
|                                               |                                                                                              | Depreciation and amortization                |                                                    |                                                       | 2,265  |        |        |          | 1,183 |       
|                                               |                                                                                              | Deferred income taxes                        |                                                    |                                                       | (2,665 | )      |        |          | 8,446 |       
|                                               |                                                                                              | Provision for doubtful accounts              |                                                    |                                                       | 59     |        |        |          | 48    |       
|                                               |                                                                                              | Amortization of discount on securities       |                                                    |                                                       | (911   | )      |        |          | (765  | )     
|                                               |                                                                                              | Changes in operating assets and liabilities: |                                                    |                                                       |        |        |        |          |       |       
|                                               |                                                                                              |                                              | Trade accounts receivable                          |                                                       |        | 11,242 |        |          |       | (8,469 | )      
|                                               |                                                                                              |                                              | Prepaid and other current assets                   |                                                       |        | (266   | )      |          |       | (2,179 | )      
|                                               |                                                                                              |                                              | Accounts payable                                   |                                                       |        | (466   | )      |          |       | 1,465  |        
|                                               |                                                                                              |                                              | Accrued compensation and other accrued liabilities |                                                       |        | (3,234 | )      |          |       | 3,763  |        
|                                               |                                                                                              |                                              | Deferred revenue                                   |                                                       |        | (3,355 | )      |          |       | 1,424  |        
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               |                                                                                              |                                              |                                                    | Net cash provided by (used in) operating
	activities  |        |        | (1,680 | )        |       |        | 20,311  |  
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                              
|Cash flows from investing
	activities:         |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               | Acquisition of property and equipment                                                        |                                              |                                                    | (2,328                                                | )      |        |        | (1,769   | )    
|                                               | Purchases of marketable securities                                                           |                                              |                                                    | (278,209                                              | )      |        |        | (189,954 | )    
|                                               | Maturity of marketable securities                                                            |                                              |                                                    | 174,382                                               |        |        |        | 73,662   |      
|                                               | Proceeds from sale of marketable securities                                                  |                                              |                                                    | 111,203                                               |        |        |        | 82,349   |      
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               |                                                                                              |                                              |                                                    | Net cash provided by (used in) investing
	activities  |        |        | 5,048  |          |       |        | (35,712 | )
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                              
|Cash flows from financing
	activities:         |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               | Proceeds from the sale of common stock, net                                                  |                                              |                                                    | 6,736                                                 |        |        |        | 20,369   |      
|                                               | Repurchase of common stock                                                                   |                                              |                                                    | (9,994                                                | )      |        |        |         |      
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               |                                                                                              |                                              |                                                    | Net cash provided by (used in) financing
	activities  |        |        | (3,258 | )        |       |        | 20,369  |  
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|Effect of exchange rate changes on cash        |                                                                                              |                                              | (135                                               | )                                                     |        |        | (226   | )       
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|                                               |                                                                                              |                                              |                                                    | Net increase (decrease) in cash and cash
	equivalents |        |        | (25    | )        |       |        | 4,742   |  
|Cash and cash equivalents, beginning of period |                                                                                              |                                              | 12,210                                             |                                                       |        |        | 7,183  |         
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         
|Cash and cash equivalents, end of period       |                                                                                              | $                                            | 12,185                                             |                                                       |        | $      | 11,925 |         
|                                               |                                                                                              |                                              |                                                    |                                                       |        |        |        |         

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

4



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##### Table of Contents



VERITY, INC.






NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Information as of November 30, 2001 and
for the three and six months ended


November 30, 2000 and 2001 and thereafter
is unaudited)


1.     Interim
Financial Data

The unaudited condensed consolidated financial
statements for Verity, Inc. (the Company or
Verity) as of November 30, 2001 and for the
three and six months ended November 30, 2000 and 2001 have
been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all
material adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial
position and results of operations in accordance with generally
accepted accounting principles. Although certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, the
Company believes the disclosures made are adequate to make the
information presented not misleading. The accompanying financial
statements should be read in conjunction with the Companys
annual financial statements contained in the Companys
Annual Report on Form 10-K for the year ended May 31,
2001.

The Companys balance sheet as of
May 31, 2001 was derived from the Companys audited
financial statements, but does not include all disclosures
necessary for the presentation to be in accordance with
generally accepted accounting principles.

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

Basic earnings per share are computed using the
weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed using the
weighted average number of common and common equivalent shares
outstanding during the period. Dilutive common equivalent shares
consist of stock options. All common equivalent shares have been
excluded from the computation of diluted net loss per share for
the three months and six months ended November 30, 2001
because the effect would be anti-dilutive.

Basic and diluted net income (loss) per
share are calculated as follows for the three and six months
ended November 30, 2000 and 2001 (in thousands, except per
share data):

|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |        | 
|-------- | ------------------------------------------- | ------------------ | - | ---------------- | - | ---- | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|         |                                             |                    |   |                 
|         |                                             | Three Months Ended |   | Six Months Ended
|         |                                             | November 30,       |   | November 30,    
|         |                                             |                    |   |                 
|         |                                             | 2001               |   | 2000             |   | 2001 |   | 2000  
|         |                                             |                    |   |                  |   |      |   |       
|Basic:   |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Weighted-average shares                     |                    |   | 35,161           |   |      |   | 33,449 |  |  |   | 35,261 |   |  |   | 32,909 | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Net income (loss)                           |                    | $ | (1,882           | ) |      | $ | 8,150  |  |  | $ | (4,349 | ) |  | $ | 15,395 | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Net income (loss) per share                 |                    | $ | (0.05            | ) |      | $ | 0.24   |  |  | $ | (0.12  | ) |  | $ | 0.47   | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|Diluted: |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Weighted-average shares                     |                    |   | 35,161           |   |      |   | 33,449 |  |  |   | 35,261 |   |  |   | 32,909 | 
|         | Common equivalent shares from stock options |                    |   |                 |   |      |   | 2,397  |  |  |   |       |   |  |   | 3,472  | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Shares used in per share calculation        |                    |   | 35,161           |   |      |   | 35,846 |  |  |   | 35,261 |   |  |   | 36,381 | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Net income (loss)                           |                    | $ | (1,882           | ) |      | $ | 8,150  |  |  | $ | (4,349 | ) |  | $ | 15,395 | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       
|         | Net income (loss) per share                 |                    | $ | (0.05            | ) |      | $ | 0.23   |  |  | $ | (0.12  | ) |  | $ | 0.42   | 
|         |                                             |                    |   |                  |   |      |   |        |  |  |   |        |   |  |   |       

5



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VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Comprehensive
Income (Loss)

The Company has adopted Statement of Financial
Accounting Standards No. 130 (SFAS
No. 130), Reporting Comprehensive Income.
Comprehensive income (loss) is defined as the change in
equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from
non-owner sources. The following are the components of
comprehensive income (loss) (in thousands):

|                                                                              |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |        | 
|----------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ------ | 
|                                                                              |  |                    |        |                 
|                                                                              |  | Three Months Ended |        | Six Months Ended
|                                                                              |  | November 30,       |        | November 30,    
|                                                                              |  |                    |        |                 
|                                                                              |  | 2001               |        | 2000             |  | 2001 |       | 2000
|                                                                              |  |                    |        |                  |  |      |       |     
|Net income (loss)                                                             |  | $                  | (1,882 | )                |  | $    | 8,150 |      |  | $ | (4,349 | ) |  | $ | 15,395 | 
|Unrealized gains on available-for-sale
        investments or securities, net |  |                    | 836    |                  |  |      | 170   |      |  |   | 1,546  |   |  |   | 467    | 
|                                                                              |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |        | 
|Comprehensive income (loss)                                                   |  | $                  | (1,046 | )                |  | $    | 8,320 |      |  | $ | (2,803 | ) |  | $ | 15,862 | 
|                                                                              |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |        | 

4.     Business
Segment

The Company has sales and marketing operations
located outside the United States in the Netherlands, United
Kingdom, France, Germany, Sweden, South Africa, Mexico,
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 is being allocated based on foreign
branch and subsidiary location.

|                   |              |                    |       |                  |  |      |       |        |  |  |   |        |  |  |   |        | 
|------------------ | ------------ | ------------------ | ----- | ---------------- |  | ---- | ----- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                   |              |                    |       |                 
|                   |              | Three Months Ended |       | Six Months Ended
|                   |              | November 30,       |       | November 30,    
|                   |              |                    |       |                 
|                   |              | 2001               |       | 2000             |  | 2001 |       | 2000  
|                   |              |                    |       |                  |  |      |       |       
|Revenues:          |              |                    |       |                  |  |      |       |        |  |  |   |        |  |  |   |       
|                   | USA          |                    | $     | 19,562           |  |      | $     | 32,562 |  |  | $ | 36,743 |  |  | $ | 62,021 | 
|                   | Europe       |                    |       | 2,684            |  |      |       | 1,958  |  |  |   | 5,417  |  |  |   | 3,789  | 
|                   | ROW          |                    |       | 314              |  |      |       |       |  |  |   | 505    |  |  |   |       | 
|                   |              |                    |       |                  |  |      |       |        |  |  |   |        |  |  |   |       
|                   | Consolidated |                    | $     | 22,560           |  |      | $     | 34,520 |  |  | $ | 42,665 |  |  | $ | 65,810 | 
|                   |              |                    |       |                  |  |      |       |        |  |  |   |        |  |  |   |       
|                  
|                   |              | November 30,       |       | May 31,         
|                   |              | 2001               |       | 2001            
|                   |              |                    |       |                 
|Long-lived assets: |              |                    |       |                  |  |      |       |       
|                   | USA          | $                  | 5,492 |                  |  | $    | 5,211 |       
|                   | Europe       |                    | 919   |                  |  |      | 951   |       
|                   | ROW          |                    | 1,455 |                  |  |      | 1,642 |       
|                   |              |                    |       |                  |  |      |      
|                   | Consolidated | $                  | 7,866 |                  |  | $    | 7,804 |       
|                   |              |                    |       |                  |  |      |      

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 six months ended
November 30, 2000 and the three and six months ended
November 30, 2001. For the three months ended
November 30, 2000, revenues derived from sales to one
customer accounted for approximately 15% of the Companys
total revenue. Revenues derived from sales to the United States
government and its agencies were 6.3% and 6.3% of the
Companys total revenues for the three months ended
November 30, 2000 and 2001, respectively, and 6.4% and 6.3%
of total revenues for the six months ended November 30,
2000 and 2001, respectively.

6



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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     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 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 complaint, 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.

The action is currently in the discovery phase. A
trial date has been set for March 10, 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 associated with the resolution of these
contingencies.

6.     Restructuring
Charge

During the quarter ended November 30, 2001,
the Company implemented a worldwide restructuring of its
corporate structure to reduce expenses due to macro-economic and
capital spending issues affecting the software industry. In
connection with the restructuring, the Company recorded in the
quarter ended November 30, 2001, 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.

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##### Table of Contents



VERITY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Of the total $1.6 million restructuring
charge, approximately $0.5 million remains unpaid at
November 30, 2001. Of the $0.5 million, approximately
$0.2 million relates to severance costs to be paid in
future quarters, approximately $0.2 million to legal and
other outside services, and approximately $0.1 million to
other costs associated with the restructuring.

7.     Stock
Repurchase Program

Through October 24, 2001, Verity repurchased
and retired 920,300 shares of its common stock through open
market transactions, valued at approximately $10.0 million,
pursuant to a repurchase program announced on September 12,
2001. Pursuant to this program, the Company may repurchase
shares of its common stock from time to time up to a total value
of $50.0 million. The program will terminate at the end of
the current fiscal year unless extended or shortened by the
Board of Directors.

8.     Recent
Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 133 (SFAS
No. 133) Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments
and for hedging activities. This statement becomes effective for
all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 (SFAS
No. 137) Accounting for Derivative Instruments
 Deferral of the Effect Date of SFAS Statement
No. 133. SFAS No. 137 defers the effective date
of SFAS No. 133 until June 15, 2000. The adoption of
SFAS No. 133 did not affect results of operations or
financial position.

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

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS
No. 142), Goodwill and Other Intangible
Assets. This standard eliminates the amortization of
goodwill and requires goodwill to be reviewed at least annually
for impairment, the useful lives of previously recognized
intangible assets to be reassessed and the remaining
amortization periods to be adjusted accordingly. This standard
is effective for fiscal years beginning after December 15,
2001. The implementation of this standard is not expected to
have a significant impact on the Companys financial
position or results of operations.

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 (SFAS
No. 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, which supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of and the
accounting and reporting provisions of APB No. 30,
Reporting Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and is effective for fiscal years beginning
after December 15, 2001 as well as interim periods within
those fiscal years. The Company is currently reviewing this
statement to determine its effect on its Companys
financial position and results of operation.

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##### Table of Contents






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

The following discussion should be read in
conjunction with the consolidated financial statements and
related notes, which appear in our Annual Report on
Form 10-K for the fiscal year ended May 31, 2001. 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

From 1988 to 1994, we derived substantially all
of our revenues from the license of custom search and retrieval
applications and consulting and other services related to such
applications. In 1995, we began refining and enhancing our core
technology to add functionality and facilitate incorporation of
our technology in a variety of markets. We now offer solutions
and technology that address the business portal market. The
business portal market includes corporate portals used for
sharing information within an enterprise, e-commerce portals for
online selling and market exchange portals for
business-to-business activities. Business portals provide
personalized information to employees, partners, customers and
suppliers. We expect that for the foreseeable future we will
continue to derive the largest portion of our revenues from
licensing our technology for enterprise applications and
business portal solutions.

On July 31, 1997 we retained Mr. Gary
J. Sbona as our president and chief executive officer, and we
entered into an agreement with Regent Pacific Management
Corporation, a management firm of which Mr. Sbona is the
chairman and chief executive officer. Pursuant to this
agreement, Regent Pacific has provided management services for
Verity, including the services of Mr. Sbona as chief
executive officer and other Regent Pacific personnel as part of
our management team.

There has been a general downturn in the economy,
which increased during the first half of fiscal 2002. This has
caused an increasing number of prospective customers to cancel,
delay or downsize capital spending related business projects,
due to budgetary and worldwide economic pressures within their
businesses. This downturn has negatively impacted our
year-to-date results for fiscal 2002 revenues. As a result, we
reported a net loss for the first and second quarters of fiscal
2002.

As a result of the economic uncertainty, further
fueled by the acts of terrorism on September 11, 2001, we
have undertaken cost-cutting measures. On October 29, 2001,
we announced that we would reduce our workforce by 65 employees,
or approximately 13 percent of our work force, during the
fiscal quarter ending November 30, 2001. These reductions
have been completed.

Our revenues are derived from license fees for
our software products and fees for services complementary to our
products, including software maintenance, consulting and
training. Fees for services generally are charged separately
from the license fees for our software products. Effective for
contracts entered into starting June 1, 1998, we recognize
revenues in accordance with the provisions of American Institute
of Certified Public Accountants Statement of Position
No. 97-2, Software Revenue Recognition. In
December 1998, AcSEC released provisions of SOP 98-9 that
extend the deferral of certain paragraphs of SOP 97-2.
These paragraphs of SOP 97-2 and SOP 98-9 became
effective for transactions that are entered into fiscal years
beginning after March 15, 1999. We recognize maintenance
revenues from ongoing customer support and product upgrades
ratably over the term of the applicable maintenance agreement,
which is typically twelve months. Generally, we receive payments
for maintenance fees in advance and they are nonrefundable. We
recognize revenues for consulting and training generally when
the services are performed.

For agreements with multiple elements, such as
license, maintenance, training and consulting services, we
allocate revenue to all undelivered elements, usually
maintenance and other services, based on objective evidence of
its fair value, which is specific to us. Any remaining amount is
allocated to the delivered elements and recognized as revenue
when the conditions set forth above are met. We recognize
revenue allocated to maintenance fees for ongoing customer
support and product updates ratably over the period of the
maintenance contract, which is typically twelve months. Payments
for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to training and consulting
services, we recognize revenue as the related services are
performed.

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##### Table of Contents



Results of Operations

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

|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |      |       | 
|------------------------------------------------ | -------------------------- | ------------------------ | ----- | ------------ | ----- | ---- | ---- | ---- | ----- |  | ----- | ---- | ----- |  | ---- | ---- | ----- | 
|                                                 |                            |                          |       |             
|                                                 |                            | Three Months             |       | Six Months  
|                                                 |                            | Ended                    |       | Ended       
|                                                 |                            | November 30,             |       | November 30,
|                                                 |                            |                          |       |             
|                                                 |                            | 2001                     |       | 2000         |       | 2001 |      | 2000
|                                                 |                            |                          |       |              |       |      |      |     
|                                                 |                            |                          |       |             
|                                                 |                            | (Unaudited)              |       | (Unaudited) 
|Revenues:                                        |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 | Software products          |                          |       | 58.8         | %     |      |      | 74.0 | %     |  |       | 55.2 | %     |  |      | 73.5 | %    
|                                                 | Service and other          |                          |       | 41.2         |       |      |      | 26.0 |       |  |       | 44.8 |       |  |      | 26.5 |      
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 |                            | Total revenues           |       |              | 100.0 |      |      |      | 100.0 |  |       |      | 100.0 |  |      |      | 100.0 | 
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Costs of revenues:                               |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 | Software products          |                          |       | 2.9          |       |      |      | 1.1  |       |  |       | 2.8  |       |  |      | 1.1  |      
|                                                 | Service and other          |                          |       | 12.2         |       |      |      | 8.6  |       |  |       | 13.6 |       |  |      | 8.4  |      
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 |                            | Total costs of revenues  |       |              | 15.1  |      |      |      | 9.7   |  |       |      | 16.4  |  |      |      | 9.5   | 
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Gross profit                                     |                            |                          | 84.9  |              |       |      | 90.3 |      |       |  | 83.6  |      |       |  | 90.5 |     
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Operating expenses:                              |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 | Research and development   |                          |       | 26.4         |       |      |      | 14.0 |       |  |       | 27.9 |       |  |      | 14.3 |      
|                                                 | Marketing and sales        |                          |       | 59.4         |       |      |      | 40.0 |       |  |       | 65.6 |       |  |      | 39.2 |      
|                                                 | General and administrative |                          |       | 12.9         |       |      |      | 7.3  |       |  |       | 13.5 |       |  |      | 7.2  |      
|                                                 | Restructuring charge       |                          |       | 6.9          |       |      |      |     |       |  |       | 3.7  |       |  |      |     |      
|                                                 | Charitable contribution    |                          |       | 4.4          |       |      |      |     |       |  |       | 2.3  |       |  |      |     |      
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|                                                 |                            | Total operating expenses |       |              | 110.0 |      |      |      | 61.3  |  |       |      | 113.0 |  |      |      | 60.7  | 
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Income (loss) from operations                    |                            |                          | (25.1 | )            |       |      | 29.0 |      |       |  | (29.4 | )    |       |  | 29.8 |     
|Other income, net                                |                            |                          | 11.7  |              |       |      | 8.2  |      |       |  | 12.9  |      |       |  | 7.7  |     
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Income (loss) before provision for income
	taxes |                            |                          | (13.4 | )            |       |      | 37.2 |      |       |  | (16.5 | )    |       |  | 37.5 |     
|Provision for (benefit from) income taxes        |                            |                          | (5.1  | )            |       |      | 13.6 |      |       |  | (6.3  | )    |       |  | 14.1 |     
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     
|Net income (loss)                                |                            |                          | (8.3  | )%           |       |      | 23.6 | %    |       |  | (10.2 | )%   |       |  | 23.4 | %   
|                                                 |                            |                          |       |              |       |      |      |      |       |  |       |      |       |  |      |     



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

Our total revenues decreased 35.2% from
$65.8 million for the six months ended November 30,
2000, to $42.7 million for the six months ended
November 30, 2001, and 34.6% from $34.5 million for
the three months ended November 30, 2000 to
$22.6 million for the three months ended November 30,
2001. The decreases for the six-month and three-month periods
ended November 30, 2001 are attributable to the impact of
the slowdown in worldwide economic conditions resulting in
customers canceling, delaying and downsizing capital spending,
partly offset by increased service and other revenue derived
from our installed base.

Software product revenues.Software product revenues decreased
51.3% from $48.4 million for the six months ended
November 30, 2000 to $23.5 million for the six months
ended November 30, 2001. For the three months ended
November 30, 2001, software product revenues decreased
48.1% to $13.3 million from $25.6 million for the three
months ended November 30, 2000. The decreases for the six
and three months ended November 30, 2001 in comparison to
the same periods in fiscal 2001 were primarily a result of the
slowdown in the economy and the resulting decline in information
technology capital spending.

10



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##### Table of Contents



Service and other revenues.Our service and other revenues consist
primarily of fees for software maintenance, consulting and
training. Service and other revenues increased 9.6% from
$17.5 million for the six months ended November 30,
2000 to $19.1 million for the six months ended
November 30, 2001. For the three months ended
November 30, 2001, service and other revenues increased
3.6% to $9.3 million from $9.0 million for the three
months ended November 30, 2000. The increase in service and
other revenues for the comparable periods was primarily due to
an increase in maintenance revenue resulting from the renewal of
existing maintenance contracts from prior period software
revenue arrangements.

Service and other revenues from foreign
operations accounted for 5.8% and 15.7% of total revenues for
the six months ended November 30, 2000 and 2001,
respectively. For the three months ended November 30, 2000
and 2001, service and other revenues from foreign operations
accounted for 5.7% and 15.1% of total revenues, respectively.
Our export sales consist primarily of products licensed for
delivery outside of the United States. For the six months ended
November 30, 2000 and 2001, export sales accounted for
28.1% and 19.8% of total revenues, respectively. For the three
months ended November 30, 2000 and 2001, export sales
accounted for 34.4% and 18.2% of total revenues, respectively.
We expect that revenues derived from foreign operations and
export sales will continue to vary in future periods as a
percentage of total revenues.



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

Costs of software products.The cost of our software products
consists primarily of product media, duplication, manuals,
packaging materials, shipping expenses and royalties, and in
certain instances, licensing of third-party software
incorporated in our products. Costs of software products
increased 62.0% from $0.7 million for the six months ended
November 30, 2000 to $1.2 million for the same period
in fiscal 2002, representing 1.5% and 5.0%, respectively, of the
software product revenues. Cost of software products increased
67.3% from $0.4 million for the three months ended
November 30, 2000 to $0.6 million for the three months
ended November 30, 2001, representing 1.5% and 4.9%,
respectively, of the software product revenues during these
periods. The increase in absolute dollars of costs of software
product revenues for the six and three months ended
November 30, 2001 was primarily attributable to increasing
costs of third party software components and certain start-up
costs associated with our new fulfillment facility in the
Netherlands. The increase in costs as a percentage of software
product revenues for the six and three months ended
November 30, 2001 was primarily attributable to these
increased costs in absolute dollars, further influenced by
decreased software product revenues. We are currently
re-negotiating third party software contracts. If these
re-negotiations are not completed in a timely and successful
manner, our cost of software products will continue to remain
higher than historical levels. In addition, during fiscal 2001
and 2002, we did not capitalize any software development costs
since such costs were not material.

Costs of service and other.Our costs of service and other
revenues consist of costs incurred in providing consulting
services, customer training, telephone support and product
upgrades to customers. Costs of service and other revenues
increased 4.8% from $5.5 million for the six months ended
November 30, 2000 to $5.8 million for the comparable
period in fiscal 2002, representing 31.7% and 30.3%,
respectively, of service and other revenues for these periods.
Costs of service and other revenue decreased 7.4% from
$3.0 million for the three months ended November 30,
2000 to $2.8 million for the three months ended
November 30, 2001, representing 33.2% and 29.7%,
respectively, of service and other revenues for these periods.
The increase in absolute dollars of costs of service and other
revenues for the six months ended November 30, 2001 was due
to an increase in the staffing of our professional services
organization to support an increase in customer base. The
decrease in absolute dollars of costs of service and other
revenues for the three months ended November 30, 2001 was
due to reduced travel immediately following the terrorist acts
of September 11, 2001 and to a reduced staff as a result of
the workforce reduction. The decrease in costs as a percentage
of service and other revenues for the six months ended
November 30, 2001 was primarily related to an increase in
service and other revenues for this period. The decrease in
costs as a percentage of service and other revenues for the
three months ended November 30, 2001 was primarily related
to reduced travel immediately following the terrorist acts of
September 11, 2001 and to a reduced staff as a result of
the workforce reduction.

11



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

Research and development.Research and development expenses
increased 26.3% from $9.4 million for the six months ended
November 30, 2000 to $11.9 million for the six months ended
November 30, 2001, representing 14.3% and 27.9%,
respectively, of total revenues for these periods. Research and
development expenses increased 23.4% from $4.8 million for
the three months ended November 30, 2000 to
$6.0 million for the three months ended November 30,
2001, representing 14.0% and 26.4%, respectively, of total
revenues for these periods. The increase in absolute dollars for
the six and three months ended November 30, 2001 was
primarily due to an increase in research and development
personnel and outside consulting services to focus on
enhancement of existing products and development of new products
addressing the business portal market. The increase in research
and development expenses as a percentage of total revenues for
the six and three-month periods ended November 30, 2001,
was primarily due to a decrease in revenues for the periods,
further influenced by an increase in research and development
expenses in absolute dollars. We anticipate that we will
continue to make significant investments in research and
development

Marketing and sales.Marketing and sales expenses increased
8.4% from $25.8 million for the six months ended
November 30, 2000 to $28.0 million for the six months
ended November 30, 2001, representing 39.2% and 65.5%,
respectively, of total revenues during these periods. Marketing
and sales expenses decreased 2.9% from $13.8 million for
the three-month period ended November 30, 2000 to
$13.4 million for the three-month period ended November 30,
2001, representing 40.0% and 59.4%, respectively, of total
revenues for these periods. The increase in absolute dollars for
the six months ended November 30, 2001, was primarily
related to the continued development of our sales distribution
channels in the United States and Europe. The decrease in
absolute dollars for the three months ended November 30,
2001, was primarily related to decreased travel and marketing
activities following the terrorist acts of September 11,
2001, and to savings associated with the workforce reduction.
The increase in costs as a percentage of total revenues for the
six and three months ended November 30, 2001 was primarily
due to a decrease in revenues for the periods, and for the six
months ended November 30, 2001 was further influenced by an
increase in marketing and sales expenses in absolute dollars. We
anticipate that we will continue to make significant investments
in marketing and sales.

General and administrative.General and administrative expenses
increased 22.2% from $4.7 million for the six months ended
November 30, 2000 to $5.7 million for the six months
ended November 30, 2001, representing 7.2% and 13.5%,
respectively, of total revenues during these periods. For the
three months ended November 30, 2001, general and
administrative expenses increased 15.0% from $2.5 million
for the three months ended November 30, 2000 to
$2.9 million, representing 7.3% and 12.9%, respectively, of
total revenues for the comparable periods. The increase in
absolute dollars for the six and three months ended
November 30, 2001 was primarily related to increased
expenses for professional legal services, various tax studies,
and other outside services. The increase in costs as a
percentage of total revenues for the six and three months ended
November 30, 2001 was due to a decrease in revenues for the
periods and an increase in general and administrative expenses
in absolute dollars.

Restructuring charge.During the quarter ended
November 30, 2001, we implemented a worldwide restructuring
of our corporate structure to focus on reducing expenses and
improving efficiency due to macro-economic and capital spending
issues affecting the software industry. In connection with the
restructuring, we recorded in the quarter ended
November 30, 2001, 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. Of the total
$1.6 million restructuring charge, approximately
$0.5 million remains unpaid at November 30, 2001. Of
the $0.5 million, approximately $0.2 million relates
to severance costs to be paid in future quarters, approximately
$0.2 million to legal and other outside services, and
approximately $0.1 million to other costs associated with
the restructuring.

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Charitable contribution.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.



| |             
| | ------------
| | Income Taxes

Income tax expense 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.

During the quarter ended November 30, 2001,
we assessed the qualification of our research and development
expenses for state and federal research and development tax
credits. We expect the tax savings for fiscal 2002 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 result of our quarter ended
November 30, 2001. We will continually reassess the impact
of our research and development expenses on our effective tax
rate in future periods.

Liquidity and Capital Resources

As of November 30, 2001, we had
$226.3 million in cash and cash equivalents and
available-for-sale securities compared to $231.1 million at
May 31, 2001.

Our operating activities provided cash of
$20.3 million, and used cash of $1.7 million, for the
six months ended November 30, 2000 and 2001, respectively.
Cash provided by operating activities for the six months ended
November 30, 2000 was primarily due to our net income, an
increase in liabilities and deferred revenues, offset in part by
an increase in accounts receivable and other current assets.
Cash used in connection with operating activities in the six
months ended November 30, 2001 was primarily due to our net
loss and a decrease of accrued compensation and deferred revenue
offset in part by a decrease in accounts receivable.

Our investing activities used cash of
$35.7 million, and provided cash of $5.0 million, for
the six months ended November 30, 2000 and 2001,
respectively. For the six months ended November 30, 2000,
cash used by investing activities consisted primarily of
purchases of marketable securities partially offset by proceeds
from the sale and maturity of marketable securities. For the six
months ended November 30, 2001, cash provided by investing
activities consisted primarily of net sales of marketable
securities.

Our financing activities provided cash of
$20.4 million and used cash of $3.3 million for the
six months ended November 30, 2000 and 2001, respectively.
In the six months ended November 30, 2000, financing
activities consisted primarily of proceeds from the sale of
common stock as a result of stock options exercised. In the six
months ended November 30, 2001, cash used by financing
activities consisted primarily of purchases of common stock
through our stock repurchase program offset in part by proceeds
from the sale of common stock as a result of stock options
exercised and from the issuance of common stock in connection
with our Employee Stock Purchase Plan.

At November 30, 2001, our principal sources
of liquidity were our cash and cash equivalents and short-term
investments of $119.7 million. As of November 30,
2001, we had no outstanding debt obligations.

Capital expenditures were approximately
$1.8 million and $2.3 million for the six months ended
November 30, 2000 and 2001, respectively. For the six
months ended November 30, 2000 and 2001, these expenditures
consisted principally of purchases of property and equipment,
primarily for computer hardware and software.

We believe that our current cash and cash
equivalents and our funds generated from operations, if any,
will provide adequate liquidity to meet our capital and
operating requirements through at least fiscal 2003. Thereafter,
or if our spending plans 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 such financing will
be available on commercially reasonable terms, or at all.

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Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard No. 133 (SFAS No. 133)
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. This statement becomes effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 (SFAS No. 137)
Accounting for Derivative Instruments  Deferral
of the Effect Date of SFAS Statement No. 133. SFAS
No. 137 defers the effective date of SFAS No. 133
until June 15, 2000. The adoption of SFAS No. 133 did
not affect our results of operations or financial position.

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

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS
No. 142), Goodwill and Other Intangible
Assets. This standard eliminates the amortization of
goodwill and requires goodwill to be reviewed at least annually
for impairment, the useful lives of previously recognized
intangible assets to be reassessed and the remaining
amortization periods to be adjusted accordingly. This standard
is effective for fiscal years beginning after December 15,
2001. We do not expect the implementation of this standard to
have a significant impact on our financial position or results
of operations.

In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 (SFAS
No. 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, which supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of and the
accounting and reporting provisions of APB No. 30,
Reporting Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and is effective for fiscal years beginning
after December 15, 2001 as well as interim periods within
those fiscal years. We are currently reviewing this statement to
determine its effect on our financial position and results of
operation.

Impact of European Monetary
Conversion

We are aware of the issues associated with the
changes in Europe resulting from the formation of a European
economic and monetary union. One change resulting from this
union required EMU member states to irrevocably fix their
respective currencies to a new currency, the Euro, as of
January 1, 1999, at which date the Euro became a functional
legal currency of these countries. Until December 31, 2001,
business in the EMU member states will be conducted in both the
existing national currencies, such as the French franc or the
Deutsche mark, and the Euro. As a result, companies operating or
conducting business in EMU member states will need to ensure
that their financial and other software systems are capable of
processing transactions and properly handling these currencies,
including the Euro. The adoption of Euro by EMU member states
has had no material impact on our operations or financial
results.

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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 presently 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 risks discussed below
also include forward-looking statements and our actual results
may differ substantially from those discussed in these
forward-looking statements.

Risks Related to Our Business



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | We have recently sustained a loss and we
	may not be able to return to profitability

We sustained a loss for the three months and six
months ended November 30, 2001. In the future, our revenues
may decline, remain flat, or grow at a rate slower than was
experienced in periods prior to quarter ended August 31,
2001, especially in light of the recent economic slowdown. To
achieve revenue growth, we must:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | increase market acceptance of our products;                                                           
|
| |  | respond effectively to competitive developments;                                                      
|
| |  | attract, retain and motivate qualified personnel;
	and                                                
|
| |  | upgrade our technologies and commercialize our
	products and services incorporating such 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
profitability.



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

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



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

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| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | changes in general economic 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 have a material adverse impact on
our operations and financial results, and consequently our stock
price.



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

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



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

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



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

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



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | We must successfully introduce new products
	or our customers will purchase our competitors products and our
	business will be adversely affected

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, the Internet and on CD-ROM. In order for our strategy
to succeed and to remain competitive, we must leverage our core
technology to develop new product offerings by us and by our
original equipment manufacturer, or OEM, customers that address
the needs of these new markets. These development efforts are
expensive. If these products do not generate substantial
revenues, our business and

16



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results of operations will be adversely affected.
We cannot assure you that such products will be successfully
completed on a timely basis or at all, will achieve market
acceptance or will generate significant revenues.


Our development efforts are focused on expanding
our suite of products, designing enhancements to our core
technology and addressing additional technical challenges
inherent in integrating our products with those of our strategic
partners and developing new applications for enterprise,
e-commerce, OEM and sophisticated CD-ROM publishing markets. We
plan to undertake development of further enhancements of the
search performance, scalability, functionality and deployability
of our products. We cannot assure you that these products will
be developed and released on a timely basis, or that these
products will achieve market acceptance.

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



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

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

In the future, we may encounter competition from
a number of companies. Many of our existing competitors as well
as a number of other potential new competitors, have
significantly greater financial, technical and marketing
resources than we do. Because the success of our strategy is
dependent in part on the success of our strategic partners,
competition between our strategic partners and the strategic
partners of our competitors, or failure of our strategic
partners to achieve or maintain market acceptance could have a
material adverse effect on 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 have a material adverse
effect on our results of operations and financial condition.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 is chief executive
officer, provides management services for our company. The
management services provided under our agreement with Regent
Pacific include the services of Mr. Sbona, as chairman of
the board and chief executive officer and other Regent Pacific
personnel as part of Veritys management team. Gary J.
Sbona is also deemed an employee of our company under common
law. On March 12, 2001 we extended our agreement with
Regent Pacific Management Corporation through August 31,
2002. This is the fourth amendment to the retainer agreement
between Regent Pacific Management Corporation and Verity, Inc.
since the original agreement dated July 31, 1997. Under
this amended agreement, Regent Pacific continues to provide the
services of Gary J. Sbona as Chairman and Chief Executive
Officer of Verity, and continues to provide additional Regent
Pacific management services to our company. The agreement
provides us with an option to further extend the term of this
agreement through February 2003. This agreement may be cancelled
at the option of the board after February 2003. If the agreement
with Regent Pacific were canceled or not renewed, the loss of
the Regent Pacific personnel could have a material adverse
effect on our operations, especially

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during the transition phase to a new management.
Similarly, if any adverse change in Veritys relationship
with Regent Pacific occurs, it could hinder managements
ability to direct our business and materially and adversely
affect our results of operations and financial condition.




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

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



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

We currently engage in only limited hedging
activities to protect against the risk of currency fluctuations.
Fluctuations in currency exchange rates could cause sales
denominated in U.S. dollars to become relatively more expensive
to customers in a particular country, leading to a reduction in
sales or profitability in that country. Also, these fluctuations
could cause sales denominated in foreign currencies to affect a
reduction in the current U.S. dollar revenues derived from sales
in a particular country. Furthermore, future international
activity may result in increased foreign currency denominated
sales and, in such event, gains and losses on the conversion to
U.S. dollars of accounts receivable and accounts payable arising
from international operations may contribute significantly to
fluctuations in our results of operations. The financial
stability of foreign markets could also affect our international
sales. In addition, revenues earned in various countries where
we do business may be subject to taxation by more than one
jurisdiction, thereby adversely affecting our earnings. We
cannot assure you that such 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 6.4%, 6.7%, 6.3%, and 15.7% of total
revenues, respectively, in fiscal 1999, 2000, 2001, and the six
months ended November 30, 2001, respectively. Our export
sales consist primarily of products licensed for delivery
outside of the United States. In fiscal years 1999, 2000, 2001,
and the six months ended November 30, 2001, export sales
accounted for 27.1%, 19.0%, 26.0%, and 19.8% 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. See Note 4 of Notes to
Condensed Consolidated Financial Statements under Part 1,
Item 1 of this Quarterly Report on Form 10-Q for a
discussion of our international revenues, income from operations
and long-lived assets by geographic region.



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A significant 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 8.1%, 7.8%, 7.4%, and
6.3% of total revenues in fiscal years 1999, 2000, 2001, and the
six months ended November 30, 2001, respectively. Future
reductions in United States spending on information technologies
could have a material adverse effect on our operating results.
Sales to government agencies declined as a percentage of
revenues during these periods, and may decline in the future. In
recent years, budgets of many government

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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 such a cancellation will not occur in the
future, and any termination would adversely affect our operating
results.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to enhance our existing
	products and develop new products to respond to our rapidly
	changing markets, our products may become obsolete

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

The life cycles of our products are difficult to
estimate. Our future success will depend upon our ability to
enhance existing products and to develop new products on a
timely basis. In addition, our products must 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
Hypertext Markup Language, or HTML, and Extensible Markup
Language, or 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 such
compatibility. Any failure by us to anticipate or respond
adequately to technology or market developments could result in
a loss of competitiveness or revenue. For instance, to date we
have focused our efforts on integration with the Adobe PDF and
Lotus Notes environments and, more recently, the Microsoft
Exchange environment. Should any of these products or
technologies lose or fail to achieve acceptance in the
marketplace or be replaced by other products or technologies,
our business could be materially and adversely affected.

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

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

We believe that hiring and retaining qualified
individuals at all levels is essential to our success, and we
cannot assure you that we will be successful in attracting and
retaining the necessary personnel. In addition, we are highly
dependent on our direct sales force for sales of our products as
we have limited distribution channels. Continuity of technical
personnel is an important factor in the successful completion of
development projects, and any turnover of our research and
development personnel could materially and adversely impact 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 have a material
adverse effect upon our business, operating results and
financial condition.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 have a
material adverse effect on our business, operating results and
financial condition regardless of the outcome of the litigation.

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



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

Third parties may assert that our products
infringe their proprietary rights, or may assert claims for
indemnification resulting from infringement claims against us.
Any such claims may cause us to delay or cancel shipment of our
products, which could materially adversely affect our business,
financial condition and results of operations. In addition,
irrespective of the validity or the successful assertion of such
claims, we could incur significant costs in defending against
such claims.



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

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

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##### Table of Contents



fiscal quarter, could result in a material
adverse effect on 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.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 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 will address the need to develop new products
is through acquisitions of complementary businesses and
technologies. From time to time, we consider and evaluate
potential business combinations both involving our acquisition
of another company and transactions involving the sale of Verity
through, among other things, a possible merger or consolidation
of our business into that of another entity. Acquisitions
involve numerous risks, including the following:



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

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

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 and
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 and extranets and
portals are subject to a high level of uncertainty, and there
exist few proven services and products.

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



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

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



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

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



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

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



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

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



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

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

Risks Related to Ownership of Our Common
Stock



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

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



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

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

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



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

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



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishment of a classified board of directors
	such that not all members of the board may be elected at one
	time;                                                                               
|
| |  | the ability of the board of directors to issue
	without stockholder approval up to 2,000,000 shares of preferred
	stock to increase the number of outstanding shares and thwart a
	takeover attempt;
|
| |  | no provision for cumulative voting in the
	election of directors, which would otherwise allow less than a
	majority of stockholders to elect director candidates;                                   
|
| |  | limitations on who may call special meetings of
	stockholders;                                                                                                                                      
|
| |  | prohibiting stockholder action by written
	consent, thereby requiring all stockholder actions to be taken
	at a meeting of our stockholders; and                                                    
|
| |  | establishing advance notice requirements for
	nominations for election to the board of directors or for
	proposing matters that can be acted upon by stockholders at
	stockholder meetings.         

In September 1996, our board of directors adopted
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.

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Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

Interest Rate Risk.The primary objective of our
investment activities is to preserve the principal while at the
same time maximizing yields without significantly increasing the
risk. To achieve this objective, we maintain our portfolio of
cash equivalents and investments in a variety of securities,
including both government and corporate obligations and money
market funds. As of November 30, 2001, approximately 50% of
our portfolio matures in one year or less, with the remainder
maturing in less than three years. We do not use derivative
financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy,
limit the amount of credit exposure to any one issuer.

The following table presents the amounts of our
cash equivalents and investments that are subject to interest
rate risk by year of expected maturity and average interest
rates as of November 30, 2001:

|                       |  |                |        |        |  |        |        |        |  |       |        |            |  |   |       |   |  |   |         |  |  |   |         | 
|---------------------- |  | -------------- | ------ | ------ |  | ------ | ------ | ------ |  | ----- | ------ | ---------- |  | - | ----- | - |  | - | ------- |  |  | - | ------- | 
|                       |  | FY2002         |        | FY2003 |  | FY2004 |        | FY2005 |  | Total |        | Fair Value
|                       |  |                |        |        |  |        |        |        |  |       |        |           
|                       |  |               
|                       |  | (In thousands)
|Cash equivalents       |  | $              | 12,185 |        |  |        |       |        |  |       |       |            |  |   |      |   |  | $ | 12,185  |  |  | $ | 12,185  | 
|Average interest rate  |  |                | 1.7    | %      |  |        |       |        |  |       |       |            |  |   |      |   |  |   |         |  |  |   |         | 
|Short-term investments |  | $              | 88,240 |        |  | $      | 19,231 |        |  |       |       |            |  |   |      |   |  | $ | 107,471 |  |  | $ | 107,471 | 
|Average interest rate  |  |                | 3.8    | %      |  |        | 5.4    | %      |  |       |       |            |  |   |      |   |  |   |         |  |  |   |         | 
|Long-term investments  |  |                |       |        |  | $      | 54,799 |        |  | $     | 46,735 |            |  | $ | 5,145 |   |  | $ | 106,679 |  |  | $ | 106,679 | 
|Average interest rates |  |                |       |        |  |        | 5.0    | %      |  |       | 5.6    | %          |  |   | 5.3   | % |  |   |         |  |  |   |         | 

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

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##### Table of Contents






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 complaint, 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.

The action is currently in the discovery stage. A
trial date has been set for March 10, 2003.




Item 2.     Changes
in Securities and Use of Proceeds

Not Applicable.




Item 3.     Defaults
upon Senior Securities

Not Applicable.

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

The Companys Annual Meeting of Stockholders
was held on October 10, 2001. Proxies for the meeting were
solicited pursuant to Regulation 14A. At the meeting,
managements nominees for two director positions and one
other proposal were submitted to the stockholders of the
Company. Managements nominees for director were elected by
the following vote:

|               |  |            |            |          |  |  |         | 
|-------------- |  | ---------- | ---------- | -------- |  |  | ------- | 
|               |  |           
|               |  | Shares    
|               |  |           
|Nominee        |  | Voting For |            | Withheld
|               |  |            |            |         
|Gary J. Sbona  |  |            | 32,873,072 |          |  |  | 168,534 | 
|Karl C. Powell |  |            | 32,867,820 |          |  |  | 173,786 | 

Gary J. Sbona, Steven M. Krausz, Charles P.
Waite, Jr., Stephen A. MacDonald, Karl C. Powell and
Anthony J. Bettencourt continued to serve as directors of
the Company after the annual meeting. Mr. Krausz and
Mr. Waite will continue to serve until the Annual Meeting
of Stockholders to be held in 2002. Mr. Bettencourt and
Mr. MacDonald will serve until the Annual Meeting of
Stockholders to be held in 2003. Mr. Sbona will continue to
serve as the Chairman of the Board and Mr. Powell will
continue to serve as a director until the Annual Meeting of
Stockholders to be held in 2004.

A second proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent auditors of the
Company for its fiscal year ending May 31, 2002 was also
submitted to a vote of the stockholders of the Company. The
proposal was approved by the following vote:

|                 |            |                      |  |             |        |                  |  |  |        |  |  |  |     | 
|---------------- | ---------- | -------------------- |  | ----------- | ------ | ---------------- |  |  | ------ |  |  |  | --- | 
|For the Proposal |            | Against the Proposal |  | Abstentions |        | Broker Non-Votes
|                 |            |                      |  |             |        |                 
|                 | 32,933,433 |                      |  |             | 96,777 |                  |  |  | 11,396 |  |  |  | N/A | 




Item 5.     Other
Information

Not Applicable.




Item 6.     Exhibits
and Reports on Form 8-K

A.     Exhibits See
Exhibit Index

B.     Reports on
Form 8-K

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

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SIGNATURE

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



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



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

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

Dated: December 20, 2001

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INDEX TO EXHIBITS

|        |     |                         |  |                                                                                                                     
|------- | --- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------
|Exhibit |     |                        
|Number  |     | Description of Document
|        |     |                        
|        | 3.1 |                         |  | Restated Certificate of Incorporation of the
        Company.(1)                                                    
|        | 3.2 |                         |  | By-Laws.(1)                                                                                                         
|        | 4.1 |                         |  | Amended and Restated Rights Agreement dated
        August 1, 1995, as amended.(2)                                  
|        | 4.2 |                         |  | Form of Rights Agreement between Verity, Inc. and
        First National Bank of Boston dated September 18, 1996.(3)
|        | 4.3 |                         |  | First Amendment to Rights Agreement dated as of
        July 23, 1999 among Verity, Inc. and BankBoston, N.A.(4)    



---



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

28