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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2002
Commission file number 0-26880



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VERITY, INC.

(Exact name of registrant as specified in its charter)


|                                                                              |  |                                                
|----------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)       |  | 77-0182779
(I.R.S. Employer
Identification No.)
|                                                                             
|894 Ross Drive
Sunnyvale, California
(Address of principal executive offices) |  | 94089
(Zip code)                               

Registrants telephone number, including area code: (408) 541-1500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.001 Par Value
(Title of class)



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on July 31,
2002, as reported on Nasdaq National Market was approximately $228,084,000.
Excludes approximately 14,835,000 shares of Common Stock held collectively by
the executive officers and directors of the registrant and by each person who
owned 5% or more of the outstanding Common Stock as of such date. Exclusion of
shares held by any person should not be construed to indicate that such person
is an affiliate of the registrant.

The number of shares of the registrants Common Stock outstanding on July
31, 2002 was 35,199,316.



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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Securities Holders                                
|PART II          
|                  | Item 5. Market for the Registrants Common Stock and Related Stockholders Matters            
|                  | Item 6. Selected Consolidated Financial Data                                                 
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 10.33    
|EXHIBIT 10.34    
|EXHIBIT 10.35    
|EXHIBIT 21.1     
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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TABLE OF CONTENTS

|         |  |                                                                                       |    |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- | -- | ---- | -- | 
|         |  |                                                                                       |    | Page
|         |  |                                                                                       |    |     
|Part I   |  |                                                                                       | 1  |     
|Item 1.  |  | Business                                                                              |    |      | 1  | 
|Item 2.  |  | Properties                                                                            |    |      | 20 | 
|Item 3.  |  | Legal Proceedings                                                                     |    |      | 20 | 
|Item 4.  |  | Submission of Matters to a Vote of Securities Holders                                 |    |      | 20 | 
|        
|Part II  |  |                                                                                       | 21 |     
|Item 5.  |  | Market for the Registrants Common Stock and Related Stockholder Matters              |    |      | 21 | 
|Item 6.  |  | Selected Financial Data                                                               |    |      | 22 | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |      | 23 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |      | 33 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                           |    |      | 33 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |    |      | 33 | 
|        
|Part III |  |                                                                                       | 34 |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |    |      | 34 | 
|Item 11. |  | Executive Compensation                                                                |    |      | 34 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |    |      | 34 | 
|Item 13. |  | Certain Relationships and Related Transactions                                        |    |      | 34 | 
|        
|Part IV  |  |                                                                                       | 35 |     
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |    |      | 35 | 

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PART I




Item 1.Business

We own or have rights to trademarks or trade names that we use in
conjunction with the operation of our business. We own the Verity, Verity Logo,
Topic and Knowledge Organizer trademarks in the United States. This Annual
Report on Form 10-K also includes trademarks owned by other parties.

You should carefully read the information in this Annual Report on Form
10-K, including our consolidated financial statements and related notes
beginning on page 42 of this Annual Report on Form 10-K. Our business involves
significant risks. You should carefully consider the information under the
heading  Risk Factors below. In addition, this Annual Report contains
forward-looking statements that relate to future events or future financial
performance. See Forward-Looking Statements at the end of this Item 1
regarding information that readers should be aware of in reading these
forward-looking statements.

Overview

We are a leading provider of infrastructure software that powers corporate
portals and e-commerce sites as well as e-business applications. The
infrastructure software market is in great part the convergence of many core
markets in which we have participated for years.

We develop, market and support infrastructure products for corporate
intranets, extranets, corporate portals, business applications, online
publishers, e-commerce providers and original equipment manufacturer (OEM)
toolkits for independent software vendors (ISVs). Our comprehensive and
integrated product family enables numerous enterprise-wide functionalities, all
from the same underlying Verity information index. Our products organize and
provide simple, single-point access to information across the entire
enterprise. In doing so, our products create business portals, which leverage
the value of existing investments in Internets, intranets and business
applications.

Our software has been licensed directly to over 1,500 corporations,
government agencies, software developers, information publishers and e-commerce
vendors. We focus on several core markets, including intranet-based
applications for large corporate and government organizations, information
retrieval solutions for e-commerce merchants, Internet sites and electronic
publishers, and OEM toolkits for ISVs. We pursue sales opportunities within
organizations and government agencies through the efforts of our direct sales
force and our products are also sold indirectly through a network of value
added resellers (VARs) and system integrators, and as OEM toolkits through ISVs
that embed Verity technology in their products or services.

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. Recently, we have begun offering solutions
and technology that address the business portal market.

We were organized as a California corporation in March 1988 and
reincorporated in Delaware in September 1995. Our principal executive offices
are located at 894 Ross Drive, Sunnyvale, California 94089, and our telephone
number is (408) 541-1500. We maintain a web site on the World Wide Web at
verity.com. The reference to our web address does not constitute
incorporation by reference of the information contained at the site.

The Verity Solution

Our comprehensive and integrated product family enables enterprise-wide
document indexing, content organization, search and retrieval, organization and
navigation, viewing, personalized dissemination, document recommendation,
expert and community location, and hybrid online and CD/DVD publishing all from
the same underlying Verity information index. Our products organize and provide
simple, single-point access to information across the entire enterprise. By
doing so, our products create business portals, which leverage the value of
existing investments in intranet, Internet and network infrastructure. We
believe the functionality and flexibility of our products enable us to offer
our customers a knowledge solution that strengthens their businesses by
improving efficiency, employee productivity and communication.

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Our cross-platform knowledge retrieval product suite is scalable and is
designed to solve the knowledge retrieval problems of enterprise and commerce
sites. Our products:



| |  |  | use a combination of full text, metadata and rule-based methods to
index and retrieve information stored in a variety of formats and
systems across corporate intranets, extranets and portals, and the
Internet;                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | organize and rank the relevance of selected information, enabling
users to filter and evaluate information personalized to their specific
needs and interests;                                                                                                                                
|
| |  |  | enable user-initiated queries, and also enable the construction of
automated software agents that actively and continuously monitor
Internet and intranet information sources such as web sites, news feeds
and file systems for new information or changes in content matching user
profiles;
|
| |  |  | enable the high-speed classification of information, the organization
of information into taxonomies and the visual navigation of information;                                                                                                                                                
|
| |  |  | deliver the ability to filter most common file formats for viewing,
and to convert most common file formats to HTML (Hypertext Markup
Language) and XML (Extensible Markup Language);                                                                                                         
|
| |  |  | use the information created by individuals searching for and
retrieving documents to automatically recommend additional documents,
locate subject matter experts, and recognize communities of users with
similar interests; and                                                              
|
| |  |  | allow organizations to build hybrid online and offline information
distribution systems by publishing information on CD-ROM and DVD-ROM,
maintaining links to active web sites and enabling automatic
synchronization between the Web and a users local computer.                            

We originally developed our core search and retrieval technology for use
by large government agencies in the defense and intelligence communities. In
the past several years, we have enhanced and expanded our family of products
and markets. Today, we offer a broad range of knowledge retrieval products for
corporate intranets, extranets, corporate portals, e-commerce and publishing,
and OEM toolkits for embedded solutions.

Corporate Intranets, Extranets and Portals.We market an integrated
product suite enabling public and private organizations to index, search,
retrieve, classify, organize, navigate, disseminate and publish textual
information residing in many document formats and in web and file servers
distributed across the enterprise. Our social network technology uses the
information created by individuals searching for and retrieving documents to
automatically recommend additional documents, locate subject matter experts,
and recognize communities of users with similar interests. Verity K2 Enterprise
is designed to serve as the foundation of a well-designed corporate portal or
business application. Verity K2 Enterprise provides enhanced portal return on
investment through advanced search and accurate content organization. Verity
Portal One provides a suite of portal components that can be selected to build
custom portals. Verity Information Server creates a searchable index to
information across the enterprise. Verity Agent Server notifies users when
documents matching their personal information needs are added to this index and
sends them electronic notices via email or personal web pages. With Verity
Knowledge Organizer, data from different systems and sources can be grouped
together logically and navigated visually, reducing content management costs
and increasing the usability of corporate intangible assets. Verity Intelligent
Classifier lets users quickly and easily build, share, reuse, test and modify
the business rules Verity solutions use to automatically classify information.
For especially long or complex documents, Verity Document Navigator provides a
publishing tool, which turns long, awkward documents into rich Web publications
that users can easily search and navigate. Users can search and traverse an
automatically generated table of contents, and efficiently find valuable
information hidden within large documents. Users can create these searchable
publications from any format Verity supports, including Microsoft Word, HTML
and PDF.

Electronic Commerce and Publishing.E-commerce vendors, including online
stores and publishers, demand fast and accurate searches across large bodies of
content. Our Internet products are designed to provide e-commerce vendors and
online information publishers with an integrated solution enabling their users
to efficiently navigate product catalogs, news services and document
repositories, whether online or from a remote, disconnected location. Through
the use of our knowledge retrieval products, vendors have the ability to
convert more site visitors into buyers and more buyers into repeat customers.
Our product offerings include Verity K2 Catalog and Verity Publisher. Verity K2
Catalog is designed for scalability to support the largest commercial Internet
sites and to enable millions of products and documents to be searched and
indexed by hundreds of users simultaneously. Verity Publisher allows

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high-volume commercial and corporate publishers to use web-based
information offline or from a low cost, searchable alternative media.

OEMs and Embedded Solutions.Our toolkits enable software developers to
embed our search-and-retrieval, profiling agent, and viewing and filtering
technologies within their products. Our technology has been embedded in:
document repository systems offered by Documentum, Stellent and FileNET;
enterprise resource planning systems from SAP and PeopleSoft; and many business
applications including relational and object-oriented database products and
resume tracking, customer care and help desk systems.

Products

Our product suite enables organizations to turn corporate intranets and
extranets into a powerful knowledge base or corporate portal, making business
information accessible and reusable across the enterprise. Our comprehensive
and integrated product family enables enterprise-wide document indexing,
content organization, search and retrieval, recommendation based on social
network technology and personalized information dissemination, all from the
same underlying Verity index. Because our products are designed to work
together, customers may begin by deploying basic retrieval technology and can
later incorporate more sophisticated content organization and social network
technology as their business needs expand. Additionally, because we offer
enterprise and departmental solutions, our customers investment is preserved
by our capability to expand to support the largest document repositories and
corporate intranets and extranets.

Enterprise Business Portal Products:

Verity K2 Enterprise.Verity K2 Enterprise is infrastructure software that
indexes, searches and retrieves information located in various repositories
across an enterprise; applications include corporate intranets, portals,
extranets, research and development, executive messaging and business
intelligence systems. K2 Enterprise utilizes the Verity K2 architecture to
deliver content organization, social network technology, rapid integration,
limitless scalability, fault-tolerant operation and global support including
support for multiple languages through best-of-breed locales.

Verity K2 Catalog.Verity K2 Catalog is e-business infrastructure that
indexes, searches and retrieves information in Business-to-Customer and
Business-to-Business environments. K2 Catalog utilizes the Verity K2
architecture to deliver intelligent merchandising based on Veritys content
organization technology, social network technology, profitable site stickiness,
rapid integration, adaptive personalization, limitless scalability,
fault-tolerant operation and global support, including support for multiple
languages through best-of-breed locales.

Verity K2 Spider.Verity K2 Spider crawls, filters and indexes web and
file servers, located internally or externally, in real time, using a
distributed architecture. This enables the indexing process to be configured
with numerous crawlers and indexers that are managed by a controller, so that
performance can be optimized and the indexing process can scale infinitely. In
conjunction with Verity K2 solutions, K2 Spider provides end-to-end fault
tolerance, scalability, flexibility and accuracy.

Verity Gateways.These add-on products extend the indexing range of Verity
products. Through the use of gateways, Verity develops and markets access and
indexing for popular information products, including Documentum, Lotus Notes,
Microsoft Exchange, Web and file servers, and relational databases.

Verity Publisher.Verity Publisher is a hybrid CD-ROM/DVD-ROM-Web
information publishing system. Publisher is designed to publish the contents of
a web site on CD-ROM and DVD-ROM while maintaining links to web sites.
Publisher is designed for high-volume information publishers, customer service
organizations and others who need to use web-based information off-line.
Publisher includes Veritys standard search capabilities.

OEM and Custom Application Development Tools:

Verity K2 Developer.Verity K2 Developer is a modular developer platform
that allows independent software vendors to integrate Veritys indexing, search
and retrieval, content organization and social network technology into
commercial software applications. K2 Developer supports popular programming
interfaces to Suns Java and Microsofts COM, allowing users to rapidly build
applications or integrate K2 Developer into their existing web environment.

Verity Profiler Kit.Verity Profiler Kit enables users to develop
applications that use content and metadata to classify information
automatically and trigger business events. Profiler Kit enables developers to
build specialized applications, using Veritys patented

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technology, to disseminate information accurately to users, to notify
users about critical new information, or to classify documents into specific
categories.

Verity Export.Verity Export provides on-demand, server-side conversion of
documents to valid XML using a predefined Verity document type definition
(DTD). The resulting XML can be indexed and searched, and viewed using
cascading style sheets or extensible style language. Verity Export also
provides, on-demand, server-side conversion of documents to web-ready HTML, so
users can see any document, spreadsheet or presentation instantly through their
browsers without the use of any other application.

Verity Filter SDK.The Verity Filter SDK is designed to allow independent
software vendors to embed Veritys filtering functionality within their own
applications. This allows their applications to index and search multiple file
formats by extracting text and converting it to a data stream or ASCII text
file.

Verity KeyView SDK.The Verity KeyView Developers Kit is designed to
allow independent software vendors to embed KeyView functionality within their
own applications.

Verity KeyView Pro.Verity KeyView Pro enables users to filter and view
documents residing in hundreds of application formats and is targeted at
corporate customers. KeyView Pro provides desktop viewing and filtering, and
compression functionality.

Services

We make extensive technical support and training services available for
our customers, and provide consulting services designed to assist our customers
in utilizing Verity software to develop custom search and retrieval, content
organization and/or social network applications. As of May 31, 2002, we
employed 26 people in our technical support organization, 43 people in our
consulting group and 2 people focused on developing and coordinating training
services.

Technical Support and Maintenance.We provide post-sale customer support
directly through our own technical support engineers, who handle most support
calls by telephone and electronic mail. We offer annual maintenance contracts,
which entitle our customers to full telephone support service, software updates
and bug fixes. We also provide our customers access to technical support
services by electronic mail and over the Internet and a bulletin board system.

Consulting.We offer consulting services to our enterprise customers,
OEMs, value added resellers and system integrators to assist them in designing
and deploying Verity applications tailored to meet their particular information
search and retrieval needs. Consulting services have typically been offered on
a time and materials basis.

Training.We provide training services at our own training facilities
located in Sunnyvale, California, and London, United Kingdom, as well as at the
facilities of our customers, value added resellers and system integrators
worldwide. We also provide training through certain authorized third parties.
Courses are also delivered online. We have developed an extensive set of
courses and materials for presentation by our professional instructors. We
believe our training helps assure increased customer satisfaction while
enhancing our ability to make additional sales to our existing customer base.
Customers typically pay for training services on a per course or per day fee
basis.

Customers

Our software has been licensed directly to over 1,500 corporations,
government agencies, software developers, information publishers and e-commerce
vendors. We focus on several core markets, including intranet-based
applications for large corporate and government organizations, information
retrieval solutions for e-commerce and electronic publishers, and OEM toolkits
for ISVs. See Note 11 of Notes to Consolidated Financial Statements beginning
on page 55 of this Annual Report on Form 10-K for a discussion of our
international revenues, income from operations and long-lived assets by
geographic region.

Sales and Marketing

We seek to tailor our sales and marketing efforts to most effectively
reach customers in each of our core markets. We pursue opportunities within
organizations and government agencies through the efforts of our direct sales
force. Our products are also sold indirectly through our channel sales force,
which includes a network of OEM customers, value added resellers and system
integrators.

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Direct Sales.Our direct sales force is trained to assist customers to
acquire and utilize our suite of products to integrate information residing
within the organization in a variety of repositories, such as Lotus Notes,
Documentum, Microsoft Exchange, relational databases and web and file servers.
Our direct sales force also targets online service providers and publishers of
information stored on both the Internet and CD-ROM/DVD-ROM. We maintain direct
sales offices or personnel in a number of metropolitan areas across the United
States, including Falls Church, Burlington, Chicago, Dallas, New York, and
Sunnyvale. European direct sales operations are located in London, Utrecht (The
Netherlands), Munich and Paris. We also have direct sales offices located in
Australia and Mexico.

Channel Sales.We work with a variety of partner types, including OEM
customers, Independent Software Vendors and System Integrator Alliances.
Partner companies are chosen based upon a strong mutual value-proposition and
willingness to collaborate closely with our direct sales team. While our
partner agreements may provide for resale rights in some cases, the majority of
the time both sides sell their own products and services to satisfy mutual
customer needs. Our products are also resold through partners in North America,
Western Europe, Asia, South Africa and Australia.

Our technology is also sold as an integrated OEM feature of more than 200
software applications offered by over 100 OEM and ISV providers. Our OEM
partners are drawn from such application markets as:



| |  |  | application integration (iManage, iPlanet, Macromedia, TIBCO);          
| | - |  | ------------------------------------------------------------------------
|
| |  |  | groupware (Lotus);                                                      
|
| |  |  | document and content management (divine, Documentum, FileNET, Stellent);
|
| |  |  | enterprise resource planning systems (PeopleSoft, SAP);                 
|
| |  |  | help desk and customer care solutions (Kana, Peregrine, ServiceWare);   
|
| |  |  | e-commerce (Haht Software);                                             
|
| |  |  | personal productivity (Adobe); and                                      
|
| |  |  | storage (OTG/Legato).                                                   

Our marketing activities are targeted at building market awareness and
identifying prospective customers for enterprise, Internet and e-commerce,
online publishing, hybrid CD-ROM/DVD-ROM-Web and OEM applications. Our
marketing efforts include participation in tradeshows, conferences and industry
events, Verity seminars, industry speaking engagements, and advertising and
direct mail campaigns targeting specific markets such as corporate portal
developers, intranet web site and content managers, and online catalog
developers. Certain of our OEM contracts also provide for brand name exposure
concerning the ISVs embedding of Verity technology. We also maintain an active
public relations program targeting industry analysts and leaders in the trade
and business press, and maintain a public web site, which has been a source of
sales leads. As of May 31, 2002, our sales and marketing organizations
consisted of 161 employees.

Technology

Our core technology was originally developed by us for use by large
government agencies in the defense and intelligence communities to perform
complex, customized search and retrieval applications on stand-alone,
host-based systems. Since early fiscal 1994, we have expanded our product
offerings to support commercial client/server and web-based computing
environments. We have expanded our markets to include corporate intranets and
e-commerce vendors, ISVs and online and CD-ROM/DVD-ROM information publishers.
Our technologies address the major aspects of knowledge retrieval including
document indexing, query formulation and execution, concept-based information
retrieval, ranking and presentation of results, content organization, automated
information dissemination, information organization and navigation, document
viewing and filtering, automatic recommendation of documents and subject matter
experts, user community recognition and hybrid CD-ROM/DVD-ROM-Web publishing.

Indexing.The search technology incorporated in our server products and
OEM applications indexes documents automatically based upon
administrator-specified criteria. This index is referred to as a Verity
collection. Verity indices exploit full text, metadata and our unique
knowledge mapping system, Topics®. Collections created through the indexing
process contain the results of text

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analysis performed by our engine, as well as information about the
documents context and structure. End users with Verity-based applications or
standard web browsers can search those collections that administrators make
available to them. The Verity architecture is designed to permit real-time
indexing of new documents into a Verity collection, even while users actively
search that collection. As a result, the system provides enhanced availability,
and is designed to operate during maintenance and back up. The Verity K2
architecture enhances the availability of our applications by providing
redundant processing paths, further enhancing system availability.

Search Execution.Our search technology is designed to enable users to
formulate and refine queries using a series of information retrieval methods
including keyword, thesauri, dictionaries and concept-based retrieval. Once
formulated, queries can be used to retrieve archived information using a
standard, interactive search. Our core query formulation technology is the
Verity Query Language, which contains more than 30 operators that can be used
to formulate precise and filtered information requests. Our search engine is
designed with an open architecture, which employs multiple search techniques
and supports incorporation of additional techniques by us, by third parties or
by organizations building custom applications. This open environment enables
third-party developers to extend the functionality and capabilities of our
products and tools. Our high performance search technology employs a network of
brokers and servers to offer scalable, parallel searching across hundreds of
millions of documents. The technology is designed to scale linearly with the
growth of users, documents or queries, and to support the largest corporate
intranets and e-commerce sites.

Ranking and Results Presentation.The results obtained by matching queries
against document collections are provided with a relevance score calculated by
the Verity engine. This score may be presented, along with other available
document-attribute information desired by the user, in a customizable results
list. We have also developed functionality that enables the organization or
clustering of search results according to common themes within the retrieved
documents. We also provide automatic document summarization and query by
example, a facility allowing any document to be turned into a find more
documents like this query. Sets of documents may also be navigated as a
directory using Knowledge Organizer to organize documents into taxonomies that
can be browsed visually.

Parametric Selection.The parametric selection interface allows users to
search for information by combining structured and unstructured searches, as
well as by using semi-structured information. Users can both select specific
characteristics from structured information to narrow down the number of
possible matches, and submit queries against unstructured text against the
matches.

Federated Search. Verity federated search technology allows users to
submit a single query to multiple Verity and non-Verity information sources,
and receive the results in a merged and ranked list that has been filtered for
duplicate results.

Document Profiling.Verity Profiler is a high-speed matching engine, which
compares a stream of new documents or a collection of existing documents to a
set of Topics or other stored queries. Verity Profiler determines which queries
best match those documents, based on threshold values established by the user
or administrator. The output of Profiler is a set of metadata identifying the
queries that match individual documents. This metadata can be stored as
persistent classification information or can be used to trigger custom business
processes such as automated routing of information to users. This profiling
process is designed to address high user and data volumes such as those
associated with large corporate intranets and online applications such as news
services.

Automated Information Dissemination.Any query can be used as an active
agent deployed to watch and clip relevant information as it enters a
corporate network or public web site. Verity agents compare new information
with a database of stored queries, which are linked to user profiles. User
profiles specify the frequency and method by which users want to be notified
about subjects that they are tracking. Our agent-based technology can notify
and route information to users via email, a page, a pager or a custom process
such as automated filing of information into subject directories. Our agent
technology is targeted at organizations building executive briefing, message
handling, competitive intelligence and related systems.

Content Organization.Veritys content organization technology augments
highly accurate automatic classification using Veritys proprietary Logistic
Regression Classification technology with business rules that can be reused,
shared, modified and tested by humans. Existing taxonomies can be reused, or
documents can be classified according to metadata, pathnames, URLs or new
taxonomies created with business rules. This allows companies to organize their
information assets the same way they organize their business. When combined
with Veritys advanced search, users are equipped with the tools they need to
quickly and intuitively discover relevant information across the enterprise or
in e-business catalogs. Searches can be limited to specific directories, or
users can drill down through familiar directories and sub-directories to find
the information for which they are searching. Veritys thematic mapping
technology can analyze an entire corpus of documents to reveal unknown
patterns, trends and areas of knowledge.

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Social Networks. Veritys social network technology employs proprietary
Tensor Space Analysis to provide a number of personalization features. These
include recommending similar documents based on current queries and/or past
user behavior, locating subject matter experts within the organization,
recognizing and bringing together communities of users that share similar
interests, and using both implicit and explicit feedback to enhance result list
ranking.

Viewers and Filters.Document filtering automatically detects the kind of
document being indexed and isolates the text to be indexed from embedded
formatting information. Filters are designed to enable the indexing engine to
handle a wide variety of document types and formats. The threadsafe nature of
our filters helps assure fast and reliable access to documents for searching.
Our viewing technology is designed to provide users with the ability to view
documents in a variety of formats without the use of the application, which
generated the document. On the basis of our filtering and viewing technology,
we have developed a series of applications. These include the KeyView Pro
desktop viewing product, and Verity Export, a toolkit for building applications
that require conversion of documents into web-ready HTML or valid XML.

Hybrid CD-ROM/DVD-ROM-Web Publishing.We have developed
technology-enabling organizations to publish the contents of web sites onto
CD-ROM, DVD-ROM and other permanent storage media. Used in professional
information publishing, market data distribution and customer care
applications, Verity Publisher combines media authoring and the Verity search
engine on a CD or DVD for offline viewing of high volume information. This
technology automatically synchronizes upon connecting to the Web ensuring that
local client-based information is up-to-date.

Product Development

Our development efforts are focused on expanding our suite of products,
designing enhancements to our core technology, and addressing additional
technical challenges inherent in developing new applications for enterprise,
e-commerce and OEM markets. Our research and development is focused on
enhancing core indexing and search performance and precision, data access and
security gateways, enterprise scalability, business portal functionality,
programmable application programming interfaces, product deployability, and
information classification and social networks technology. As of May 31, 2002,
there were 157 employees on our research and development staff. Our research
and development expenditures in fiscal 2002, fiscal 2001 and fiscal 2000 were
$23.6 million, $21.6 million and $16.0 million, respectively, which represented
25.2%, 14.9% and 16.7% of total revenues, respectively. We expect that we will
continue to commit substantial resources to product development in the future.

Competition

The business portal infrastructure software market is intensely
competitive. We believe that the principal competitive factors in such market
are:



| |  |  | product quality;                       
| | - |  | ---------------------------------------
|
| |  |  | performance and price;                 
|
| |  |  | vendor and product reputation;         
|
| |  |  | product architecture;                  
|
| |  |  | strategic alliances;                   
|
| |  |  | product functionality and features; and
|
| |  |  | ease of use and quality of support.    

A number of companies offer competitive products addressing certain of our
target markets. In the enterprise market, we compete with Alta Vista, Autonomy,
Convera, Endeca, FAST, Google, Hummingbird/PC Docs/Fulcrum, Inktomi, Mercado,
Microsoft, Open Text and Thunderstone, among others. Plumtree is on occasion a
competitor, but is viewed primarily as our partner and customer. In the
Internet/publishing market, we compete with Convera, Dataware, FAST,
Hummingbird/PC Docs/Fulcrum, Infoseek, Inktomi, Lotus 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. In the future, we may encounter competition from companies that
enhance products such as:

7



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| |  |  | application servers;                                            
| | - |  | ----------------------------------------------------------------
|
| |  |  | document management systems;                                    
|
| |  |  | groupware applications;                                         
|
| |  |  | Internet products; and                                          
|
| |  |  | operating systems to include text search and retrieval features.

Many of our existing competitors have significantly greater financial,
technical and marketing resources than we do. Although we believe that our
products and technologies compete favorably with respect to the factors
outlined above, we cannot assure you that we will be able to compete
successfully against our current or future competitors or that competition will
not seriously harm our business.

One element of our strategy is to embed our technology in products offered
by our OEM customers. Many of the markets for these products are also new and
evolving and, therefore, subject to the same risks that we face in the markets
for our own products. In addition, consolidation in the industries we serve
could, and acquisition or development by any of our significant customers of
technology competitive with ours would, materially and adversely affect our
business and prospects.

Our Verity Publisher product competes primarily with Dataware, Enigma and
Nextpage.

Proprietary Rights

Our success and ability to compete is dependent in part upon our
proprietary technology. Any failure to adequately protect our proprietary
rights could result in unexpected costs and delays in shipment. While we rely
on trade secret and copyright law to protect our technology, we believe that
the following factors are more essential to establishing and maintaining a
technology leadership position:



| |  |  | the technological and creative skills of our personnel;
| | - |  | -------------------------------------------------------
|
| |  |  | new product developments;                              
|
| |  |  | frequent product enhancements;                         
|
| |  |  | name recognition; and                                  
|
| |  |  | reliable product maintenance.                          

We presently have one issued patent, relating to our search and retrieval
technology, which will expire in January 2016, and eleven patent applications
pending. We cannot assure you that other companies will not develop
technologies that are similar or superior to our technology. The source code
for our proprietary software is protected both as a trade secret and as a
copyrighted work. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently. In addition,
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. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult. We cannot assure you that the steps we take
will prevent misappropriation of our technology or that these agreements will
be enforceable. In addition, 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.

8



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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 a delay in our ability to ship these products
while we seek to implement technology offered by alternative sources. Any
required replacement licenses could prove costly. Also, any delay, to the
extent it becomes extended or occurs at or near the end of a fiscal quarter,
could 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.

Employees

As of May 31, 2002, we had a total of 432 employees, including 157 in
research and development, 134 in sales, 27 in marketing, 71 in customer support
and professional services, 38 in administration and 5 in manufacturing. Of
these employees, 262 were located in the United States, 78 in Europe, 87 in
Canada, 2 in Australia, 1 in South Africa and 2 in Mexico. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage. We consider our relations with our employees to
be good.

9



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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 discussion below and
elsewhere in this report also includes forward-looking statements, and our
actual results may differ substantially from those discussed in these
forward-looking statements as a result of the risks discussed below.

Risks Related to Our Business

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

We incurred net losses in two quarters of fiscal 2002, and although we
reported net income for fiscal 2002 we may not be able to maintain
profitability. In the future, our revenues may decline, remain flat, or grow at
a rate slower than was experienced in periods prior to the quarter ended August
31, 2001, especially in light of the recent economic slowdown. To achieve
revenue growth and maintain fiscal year profitability, we must:



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

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

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

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



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

10



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

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

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

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

Our sales cycle is lengthy and unpredictable

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

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

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

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.

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

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

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

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

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

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

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

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

Our business may suffer due to risks associated with international sales

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



| |  |  | difficulties in complying with regulatory requirements and standards;
| | - |  | ---------------------------------------------------------------------
|
| |  |  | tariffs and other trade barriers;                                    

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

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

Service and other revenues derived from foreign operations accounted for
13.9%, 6.3% and 6.7% of total revenues in fiscal years 2002, 2001, and 2000
respectively. Our export sales consist primarily of products licensed for
delivery outside of the United States. In fiscal years 2002, 2001 and 2000,
export sales accounted for 21.8%, 26.0% and 19.0% of total revenues,
respectively. We expect that revenues derived from foreign operations and
export sales will continue to account for a significant percentage of our
revenues for the foreseeable future. These revenues may fluctuate significantly
as a percentage of revenues from period to period. In addition, a portion of
these revenues was derived from sales to foreign government agencies, which may
be subject to risks similar to those described immediately below. See Note 11
of Notes to Condensed Consolidated Financial Statements beginning on page 55 of
this Annual Report on Form 10-K for a discussion of our international revenues,
income (loss) from operations and long-lived assets by geographic region.

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

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

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

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

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

13



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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Risks Related to Our Industry

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

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

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



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

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

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



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

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

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

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

Security risks expose us to additional costs and to litigation

Anyone who circumvents our security measures could misappropriate
proprietary information or cause interruptions in our services or operations.
The Internet is a public network, and data is sent over this network from many
sources. In the past, computer viruses, software programs that disable or
impair computers, have been distributed and have rapidly spread over the
Internet. We may be required to expend significant capital and other resources
to protect against the threat of security breaches or to alleviate problems
caused by breaches. To the extent that our activities may involve the storage
and transmission of proprietary information, such as

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

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

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

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



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

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

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
anticipates, believes, continue, could, estimates, expects,
intends, may, plans, potential, predicts, should or will or the
negative of such terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under  Risk Factors above, that may
cause our or our industrys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements. In addition, this Annual Report on Form 10-K
contains forward-looking statements attributed to third party industry sources
relating to their estimates regarding the growth of Internet use. You should
not place undue reliance on these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We assume no duty to update any of the forward-looking statements
after the date of this Annual Report on Form 10-K to conform such statements to
actual results, unless required by law.

EXECUTIVE OFFICERS OF THE REGISTRANT

As of June 30, 2002, our executive officers and certain other key
employees were as follows:

|                       |  |     |    |          |  |                                                                
|---------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Gary J. Sbona          |  |     | 58 |          |  | Chief Executive Officer and Chairman of the Board              
|Anthony J. Bettencourt |  |     | 41 |          |  | President and Director                                         
|Stephen W. Young       |  |     | 53 |          |  | Chief Operating Officer                                        
|Dr. Ashok K. Chandra   |  |     | 53 |          |  | Senior Vice President, Development and New Business Activities 
|Todd K. Yamami         |  |     | 35 |          |  | Vice President, Chief Financial Officer and Assistant Secretary
|Michael T. Zuckerman   |  |     | 46 |          |  | Vice President, Marketing                                      
|Sunil D. Nagdev        |  |     | 38 |          |  | Vice President, Professional Services and Technical Support    
|Michael D. Mooney      |  |     | 41 |          |  | Vice President, North American Sales & Business Development    
|Dr. Prabhakar Raghavan |  |     | 41 |          |  | Vice President and Chief Technology Officer                    
|Hugo Sluimer           |  |     | 48 |          |  | Vice President, International Sales & European Operations      
|Paul H. Cook           |  |     | 45 |          |  | Corporate Controller                                           

GARY J. SBONAhas served as our Chief Executive Officer since July 1997, a
director since May 1998 and the Chairman of our Board of Directors since March
1999. Mr. Sbona also served as our President from July 1997 to September 1999.
Mr. Sbona currently serves as Chairman and Chief Executive Officer of Auspex
Systems Inc., a provider of network attached storage solutions and Clarent
Corporation, a provider of softswitch and Voice over Internet Protocol (VoIP)
solutions for next generation networks. In addition, Mr. Sbona serves as a
director of 3D Systems Corporation, a solid imaging and mass customization
company, and as a director of Calico Commerce, Inc., a provider of interactive
selling software for organizations selling complex products or services over
the Internet. Since 1974, Mr. Sbona also serves as Chairman and Chief Executive
Officer of Regent Pacific Management Corporation, a management services firm
that is currently providing our company with management services.

ANTHONY J. BETTENCOURTjoined our company in July 1995 as Vice President
of North American sales. He was subsequently promoted to Vice President of
Worldwide Sales and Marketing and served in this position until his departure
in December 1996. Mr. Bettencourt rejoined our company in September 1997 as
Senior Vice President, Worldwide Sales and Product Marketing and was appointed
to the position of President in September 1999. Prior to initially joining our
company, Mr. Bettencourt served as vice president of sales for Versant Object
Technology from 1992 to June 1995 and as director of U.S. sales for Versant
Object Technology from July 1990 to 1992. From December 1988 to July 1990, Mr.
Bettencourt served as Vice President of Sales for Rockwell CMC. Prior to
rejoining us, Mr. Bettencourt served as an officer of OnLive! Technologies, a
private technology company. Mr. Bettencourt holds a B.A. from Santa Clara
University.

STEPHEN W. YOUNGjoined our company as part of the Regent Pacific
Management team in July 1997 and was subsequently appointed to the position of
Chief Operating Officer. Mr. Young also serves as a director and Chief
Operating Officer of Regent Pacific Management Corporation. Since 1990, Mr.
Young has served as a principal of Regent Pacific Management Corporation. Mr.
Young holds a B.S. in Industrial Administration and an M.B.A. from the
University of Illinois.

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DR. ASHOK K. CHANDRAhas served as our Senior Vice President of
Development and New Business Activities since March 2000. Prior to joining
Verity, Dr. Chandra was Director of Database Systems and Computer Science at
IBMs Almaden Research Center, a computer software and hardware research
center, and held several key management positions at IBM Corporation, an
information technology company, since 1973. Dr. Chandra holds a B. Tech in
Electrical Engineering from I.I.T. Karpur, a M.S. from University of California
at Berkeley, and a Ph.D. in Computer Science from Stanford University.

TODD K. YAMAMIjoined our company as Accounting Manager in June 1995, and
in November 1997 he was promoted to Director, Finance and Accounting. In
February 1999, Mr. Yamami was appointed to the position of Corporate Controller
and was subsequently promoted to Vice President, Corporate Controller and Chief
Accounting Officer in June 2000. In March 2001, Mr. Yamami was appointed to the
position of Vice President, Chief Financial Officer and Assistant Secretary.
Mr. Yamami holds a B.S. in Finance and an M.B.A. from Santa Clara University.

MICHAEL T. ZUCKERMANjoined Verity in June 2000 as our Vice President of
Marketing. Prior to joining our company, Mr. Zuckerman served as Vice President
of Sales and Marketing at Sensar, Inc., a provider of network security
products, since November 1998. Before Sensar, Mr. Zuckerman worked for S.C.
Bernstein & Co., an investment management firm, from December 1997 to November
1998. From January 1997 to December 1997 Mr. Zuckerman held the position of
Chief Operating Officer for LocalEyes Corporation, an Internet search and
directory service company. Prior to joining LocalEyes Corporation, Mr.
Zuckerman served as Vice President, Development Operations for File Tek, Inc.,
a software company, from January 1995 to December 1996 and held other positions
with File Tek to include Vice President, Sales and Marketing. Mr. Zuckerman
holds a B.S. in Electrical Engineering from the University of Maryland.

SUNIL D. NAGDEVjoined our company as our Director of Professional
Services in November 1997, and was subsequently appointed to Vice President,
Professional Services and Technical Support in July 1999. Prior to Verity, he
served as Director of Technical Support at Versant Object Technology, a
provider of object management for e-business applications, since 1991, and
before that, he worked at Consilium and Ask Computer Systems. Mr. Nagdev holds
a B.S. in Computer Science from Chico State University.

MICHAEL D. MOONEYjoined our company as Vice President of Business
Development in February 2000, and was subsequently appointed to the position of
Vice President, North American Sales & Business Development in November 2001.
Prior to joining Verity, Mr. Mooney served as Vice President of North American
Sales for Adaptive Media, a provider of visual collaborative commerce software
and services, since 1997. Before joining Adaptive Media, he was Vice President,
Western Operations for Versant Object Technology, a provider of object
management for e-business applications, from 1991 to 1997. Mr. Mooney also held
a variety of sales and sales management positions at both Alantec and Rockwell
CMC. Mr. Mooney holds a B.S. in Materials Engineering from California State
University Northridge.

DR. PRABHAKAR RAGHAVANjoined our company as Chief Scientist and Vice
President of Emerging Technologies in April 2000. In June 2001, Dr. Raghavan
was elected to serve as our Vice President and Chief Technology Officer. Prior
to Verity, he was the head of the Computer Science Principles department at
IBMs Almaden Research Center, a computer software and hardware research
center, since 1995 and was a Research Staff Member from 1986 to 1994 at IBM
T.J. Watson Research Center, also a computer software and hardware research
center. Dr. Raghavan is Consulting Professor of Computer Science at Stanford
University and holds an undergraduate degree in Electrical Engineering from
I.I.T. Madras and a Ph.D. in Electrical Engineering and Computer Science from
University of California at Berkeley.

HUGO SLUIMERjoined our company as Sales Manager in June 1990, and in
March 1995 he was promoted to Director of Sales. In May 1998, Mr. Sluimer was
promoted to the position of Vice President, European Operations. In November
2001, Mr. Sluimer was appointed to the position of Vice President,
International Sales & European Operations. Prior to Verity, he held management
positions at Oracle BV (The Netherlands) and Digital Equipment BV (The
Netherlands). Mr. Sluimer holds a B.S. in Computer Science.

PAUL H. COOKjoined our company in May 2001 as our Corporate Controller.
Prior to joining Verity, Mr. Cook served as Corporate Controller
for privately held Oblix,
Inc., a provider of e-business infrastructure software, from December 2000 to
February 2001. From March 2000 to November 2000, Mr. Cook served as Vice
President of Finance and Corporate Controller for Connetics
Corporation, a publicly traded biopharmaceutical company. From August 1998 to February 2000, Mr. Cook
served as Corporate Controller for the digital animation studio DreamWorks/PDI.
Prior to joining DreamWorks/PDI, Mr. Cook served in senior financial management
positions with Adobe Systems, a network publishing software company, from
January 1996 to July 1998. Before joining Adobe Systems, Mr. Cook was an audit
manager with Ernst & Youngs high tech practice in San Jose, CA. Mr. Cook holds
a BS in Business

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Administration and Accounting from California State University at Hayward
and is a certified public accountant in the State of California.




Item 2.Properties

Our principal administrative, sales, marketing and research and
development facilities occupy approximately 57,500 square feet of the 96,000
square feet buildings in Sunnyvale, California. Our operating lease agreement
for this facility commenced in June 1996 and expires in March 2005. In
addition, we also lease sales offices in Virginia, New York, Texas, Illinois,
Massachusetts, England, Netherlands, France, Germany, Australia, Mexico and a
development and technical support office in Canada, where we occupy
approximately 35,000 square feet. Our average annual lease payments of leased
properties are scheduled to be approximately $1.7 million.




Item 3.Legal Proceedings

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

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

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

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

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




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

Not Applicable.

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##### Table of Contents






PART II




Item 5.Market for the Registrants Common Stock and Related Stockholders
Matters

Our common stock is traded on the Nasdaq National Market under the symbol
VRTY.

The following table sets forth the high and low closing sales prices of
our common stock as reported by the Nasdaq National Market for the periods
indicated.

|                               |                |  |      |       |     |  |   |       | 
|------------------------------ | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                               |                |  | High |       | Low
|                               |                |  |      |       |    
|Fiscal Year ended May 31, 2002 |                |  |      |       |     |  |   |      
|                               | First Quarter  |  | $    | 24.00 |     |  | $ | 9.05  | 
|                               | Second Quarter |  |      | 15.88 |     |  |   | 8.74  | 
|                               | Third Quarter  |  |      | 21.99 |     |  |   | 11.85 | 
|                               | Fourth Quarter |  |      | 17.68 |     |  |   | 8.94  | 
|Fiscal Year ended May 31, 2001 |                |  |      |       |     |  |   |      
|                               | First Quarter  |  | $    | 45.75 |     |  | $ | 35.50 | 
|                               | Second Quarter |  |      | 46.13 |     |  |   | 14.56 | 
|                               | Third Quarter  |  |      | 31.25 |     |  |   | 13.94 | 
|                               | Fourth Quarter |  |      | 25.21 |     |  |   | 15.21 | 

As of May 31, 2002, there were approximately 150 holders of record of our
common stock and 35,775,328 shares of our common stock outstanding.

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all future earnings to finance the expansion of our
business and, therefore, do not anticipate declaring or paying any cash
dividends on our common stock in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of our board of
directors and will depend on our earnings, capital requirements, financial
condition and other relevant factors.

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##### Table of Contents






Item 6.Selected Consolidated Financial Data

The table below presents portions of our consolidated financial statements
and is not complete. You should read the following selected financial data in
conjunction with our Consolidated Financial Statements and the Notes to these
financial statements and with Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Annual Report on Form 10-K. The historical results presented below are not
necessarily indicative of the results to be expected for any future fiscal
year.

|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |        |        | 
|-------------------------------------------------------- | -------------------------- | ------------------------ | ------- | ------------------------------------- | ------ | ---- | ------- | ------- | ------- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                         |                            |                          |         | Fiscal Year Ended May 31,            
|                                                         |                            |                          |         |                                      
|                                                         |                            |                          |         | 2002                                  |        | 2001 |         | 2000    |         | 1999 |         | 1998  
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |       
|                                                         |                            |                          |         | (in thousands, except per share data)
|Consolidated Statements of Operations Data:              |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Revenues:                                                |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         | Software products          |                          | $       | 55,859                                |        |      | $       | 108,705 |         |      | $       | 69,655 |        |   | $      | 48,327 |        |   | $       | 28,658 |       
|                                                         | Service and other          |                          |         | 37,906                                |        |      |         | 36,330  |         |      |         | 26,445 |        |   |        | 16,098 |        |   |         | 10,200 |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         |                            | Total revenues           |         |                                       | 93,765 |      |         |         | 145,035 |      |         |        | 96,100 |   |        |        | 64,425 |   |         |        | 38,858 | 
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Costs of revenues:                                       |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         | Software products          |                          |         | 2,254                                 |        |      |         | 1,655   |         |      |         | 880    |        |   |        | 1,218  |        |   |         | 2,426  |       
|                                                         | Service and other          |                          |         | 10,978                                |        |      |         | 11,821  |         |      |         | 8,357  |        |   |        | 4,660  |        |   |         | 5,178  |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         |                            | Total costs of revenues  |         |                                       | 13,232 |      |         |         | 13,476  |      |         |        | 9,237  |   |        |        | 5,878  |   |         |        | 7,604  | 
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Gross profit                                             |                            |                          | 80,533  |                                       |        |      | 131,559 |         |         |      | 86,863  |        |        |   | 58,547 |        |        |   | 31,254  |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Operating expenses:                                      |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         | Research and development   |                          |         | 23,627                                |        |      |         | 21,639  |         |      |         | 16,017 |        |   |        | 13,711 |        |   |         | 15,544 |       
|                                                         | Marketing and sales        |                          |         | 50,285                                |        |      |         | 56,637  |         |      |         | 38,742 |        |   |        | 26,860 |        |   |         | 22,757 |       
|                                                         | General and administrative |                          |         | 11,654                                |        |      |         | 10,636  |         |      |         | 6,847  |        |   |        | 6,323  |        |   |         | 7,610  |       
|                                                         | Restructuring charges      |                          |         | 1,563                                 |        |      |         |        |         |      |         |       |        |   |        |       |        |   |         | 3,006  |       
|                                                         | Charitable contribution    |                          |         | 1,000                                 |        |      |         |        |         |      |         |       |        |   |        |       |        |   |         |       |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|                                                         |                            | Total operating expenses |         |                                       | 88,129 |      |         |         | 88,912  |      |         |        | 61,606 |   |        |        | 46,894 |   |         |        | 48,917 | 
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Income (loss) from operations                            |                            |                          | (7,596  | )                                     |        |      | 42,647  |         |         |      | 25,257  |        |        |   | 11,653 |        |        |   | (17,663 | )     
|Other income, net                                        |                            |                          | 9,905   |                                       |        |      | 11,343  |         |         |      | 5,623   |        |        |   | 1,085  |        |        |   | 1,553   |       
|Interest expense                                         |                            |                          | (36     | )                                     |        |      | (8      | )       |         |      | (20     | )      |        |   | (8     | )      |        |   | (100    | )     
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Income (loss) before provision for income taxes          |                            |                          | 2,273   |                                       |        |      | 53,982  |         |         |      | 30,860  |        |        |   | 12,730 |        |        |   | (16,210 | )     
|Provision for (benefit from) income taxes                |                            |                          | 864     |                                       |        |      | 20,222  |         |         |      | (2,150  | )      |        |   | 600    |        |        |   | 300     |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Net income (loss)                                        |                            | $                        | 1,409   |                                       |        | $    | 33,760  |         |         | $    | 33,010  |        |        | $ | 12,130 |        |        | $ | (16,510 | )     
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Net income (loss) per share  basic                      |                            | $                        | 0.04    |                                       |        | $    | 1.00    |         |         | $    | 1.10    |        |        | $ | 0.50   |        |        | $ | (0.74   | )     
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Net income (loss) per share  diluted                    |                            | $                        | 0.04    |                                       |        | $    | 0.92    |         |         | $    | 0.95    |        |        | $ | 0.44   |        |        | $ | (0.74   | )     
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Number of shares used in per share calculation  basic   |                            |                          | 35,404  |                                       |        |      | 33,634  |         |         |      | 30,026  |        |        |   | 24,198 |        |        |   | 22,450  |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Number of shares used in per share calculation  diluted |                            |                          | 37,169  |                                       |        |      | 36,649  |         |         |      | 34,886  |        |        |   | 27,700 |        |        |   | 22,450  |       
|                                                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Consolidated Balance Sheet Data:                         |                            |                          |         |                                       |        |      |         |         |         |      |         |        |        |   |        |        |        |   |         |       
|Cash and cash equivalents                                |                            | $                        | 23,251  |                                       |        | $    | 12,210  |         |         | $    | 7,183   |        |        | $ | 7,907  |        |        | $ | 5,505   |       
|Working capital                                          |                            |                          | 149,610 |                                       |        |      | 164,093 |         |         |      | 134,527 |        |        |   | 33,282 |        |        |   | 15,912  |       
|Total assets                                             |                            |                          | 298,150 |                                       |        |      | 303,599 |         |         |      | 213,378 |        |        |   | 65,026 |        |        |   | 41,449  |       
|Long-term obligations, net of current portion            |                            |                          |        |                                       |        |      |        |         |         |      |        |        |        |   |       |        |        |   | 2       |       
|Stockholders equity                                     |                            |                          | 264,265 |                                       |        |      | 264,144 |         |         |      | 183,634 |        |        |   | 43,419 |        |        |   | 24,055  |       

See Notes 2 and 10 of Notes to Consolidated Financial Statements beginning
on page 42 of this Annual Report on Form 10-K for an explanation of the method
used to determine the number of shares used to compute per share amounts.

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Item 7.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 elsewhere in
this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly under the heading
Item 1. Business  Risk Factors.

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 and e-commerce applications and business portal
solutions.

During the quarterly periods ended August 31, 1997 to August 31, 1999 and
February 29, 2000 to May 31, 2001, we experienced increased revenues on a
quarterly basis. In addition, during the thirteen consecutive quarterly periods
ended May 31, 2001, we experienced twelve quarters of record revenues. Due to a
delay in closing three large transactions, revenues for the quarter ended
November 30, 1999 were lower than expected. In fiscal years 1999, 2000 and
2001, we achieved net income of $12.1 million, $33.0 million and $33.8 million,
respectively. In fiscal year 2002, as a result of the slowdown in worldwide
economic conditions, we experienced a substantial decrease in revenue and net
income, which totaled $93.8 million and $1.4 million, respectively. While our
goal is to increase revenue and continue to generate net income in future
periods, we cannot assure you that our strategy will be successful, that we
will experience the rate of revenue growth we experienced from August 31, 1997
to May 31, 2001 in future periods, or that we will continue to maintain
positive cash flow or profitability.

Our revenues are derived from license fees for our software products and
fees for services complementary to our products, including software
maintenance, consulting, technical support and training. Fees for services
generally are charged separately from the license fees for our software
products. We recognize revenues in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position No. 97-2,
Software Revenue Recognition. 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.

Critical Accounting Policies and Estimates

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

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We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Revenue Recognition

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. We generally charge fees for services
separately from the license fees for our software products.

We recognize revenue in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The AICPA and its Software Revenue
Recognition Task Force continue to issue interpretations and guidance for
applying the relevant standards to a wide range of sales contract terms and
business arrangements that are prevalent in the software industry. Also, the
Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements, which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC. Future interpretations of existing accounting standards or changes
in our business practices could result in future changes in our revenue
accounting policies that could have a material adverse effect on our business,
financial condition and results of operations.

We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fees are
fixed or determinable and collection of the resulting receivable is probable.
Delivery generally occurs when the product is delivered to a common carrier. At
the time of the transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable and whether or not collection is
probable. We assess whether the fee is fixed or determinable based on the
payment terms associated with the transaction. We assess collection based on a
number of factors, including past transaction history with the customer and the
credit-worthiness of the customer.

For all sales, we use either a binding purchase order or signed license
agreement as evidence of an arrangement. Sales through our distributors are
evidenced by a master agreement governing the relationship together with
binding purchase orders on a transaction by transaction basis. Our arrangements
do not generally include acceptance clauses. However, if an arrangement
includes an acceptance provision, acceptance occurs upon the earlier of receipt
of a written customer acceptance or expiration of the acceptance period.

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 each component of the
arrangement using the residual value method and defer revenue from the
arrangement equivalent to the fair value of the undelivered elements. We base
fair values for the ongoing maintenance and support obligations on separate
sales of these items to other customers or on contractually stipulated renewal
rates. We base fair value of services, such as training and consulting, upon
separate sales of these services to other customers. We allocate any remaining
amount to the delivered elements and recognize it as revenue when the
conditions set forth above are met.

Sales Returns, Allowance for Doubtful Accounts

Our management must make estimates of potential future product returns
related to current period product revenue. Management analyzes historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns allowance.
Management judgments and estimates must be made and used in connection with
establishing the sales returns allowance in any accounting period. Similarly,
our management must make estimates of the uncollectability of our accounts
receivables. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. As of May 31,
2002, our accounts receivable balance was $21.0 million, net of allowance for
sales returns of $0.2 million and allowance for doubtful accounts of $1.4
million.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. Our income tax accounting process involves our recording the
estimated future tax effects of

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temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carryforwards. These differences result in the
recognition of deferred tax assets and liabilities.

We evaluate this tax asset at each balance sheet date to determine its
realizability, considering, without limitation, currently enacted tax laws,
expected future taxable income and origins of the specific components of the
deferred tax asset. If we determine that it is not fully realizable, we will
record a valuation allowance to reduce the asset balance to its realizable
value through a charge to income tax expense. Determining whether we will be
able to utilize the net operating loss carryforward requires that we estimate
future taxable income and make judgments regarding the timing of future tax
obligations. Actual taxable income could differ from our estimates.

As of May 31, 2002, we believe it is more likely than not that we will be
able to realize the majority of our tax asset through expected future taxable
profits, but believe that it is more probable than not that we will not be able
to recover any benefits from net operating loss carryforwards originating from
deductions for the exercise and/or disposition of stock options in recent
periods. Therefore, we recorded a valuation allowance related to this component
of the deferred tax asset. The net operating loss carryforwards originating
from deductions for the exercise and/or disposition of stock options and the
related valuation allowance has been recorded against additional paid-in
capital and did not affect net income for the period.

If we conclude that other components of the deferred tax asset require a
valuation allowance in the future, the effect on income tax expense could be
material.

Results of Operations

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

|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |      |       | 
|----------------------------------------- | -------------------------- | ------------------------ | ---- | ------------------------- | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- | 
|                                          |                            |                          |      | Fiscal Year Ended May 31,
|                                          |                            |                          |      |                          
|                                          |                            |                          |      | 2002                      |       | 2001 |      | 2000
|                                          |                            |                          |      |                           |       |      |      |     
|Revenues:                                 |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          | Software products          |                          |      | 59.6                      | %     |      |      | 75.0 | %     |  |      | 72.5 | %    
|                                          | Service and other          |                          |      | 40.4                      |       |      |      | 25.0 |       |  |      | 27.5 |      
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          |                            | Total revenues           |      |                           | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 | 
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Costs of revenues:                        |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          | Software products          |                          |      | 2.4                       |       |      |      | 1.1  |       |  |      | 0.9  |      
|                                          | Service and other          |                          |      | 11.7                      |       |      |      | 8.2  |       |  |      | 8.7  |      
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          |                            | Total costs of revenues  |      |                           | 14.1  |      |      |      | 9.3   |  |      |      | 9.6   | 
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Gross profit                              |                            |                          | 85.9 |                           |       |      | 90.7 |      |       |  | 90.4 |     
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Operating expenses:                       |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          | Research and development   |                          |      | 25.2                      |       |      |      | 14.9 |       |  |      | 16.7 |      
|                                          | Marketing and sales        |                          |      | 53.6                      |       |      |      | 39.1 |       |  |      | 40.3 |      
|                                          | General and administrative |                          |      | 12.4                      |       |      |      | 7.3  |       |  |      | 7.1  |      
|                                          | Restructuring charge       |                          |      | 1.7                       |       |      |      |     |       |  |      |     |      
|                                          | Charitable contribution    |                          |      | 1.1                       |       |      |      |     |       |  |      |     |      
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|                                          |                            | Total operating expenses |      |                           | 94.0  |      |      |      | 61.3  |  |      |      | 64.1  | 
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Income (loss) from operations             |                            |                          | (8.1 | )                         |       |      | 29.4 |      |       |  | 26.3 |     
|Other income, net                         |                            |                          | 10.5 |                           |       |      | 7.8  |      |       |  | 5.8  |     
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Income before provision for income taxes  |                            |                          | 2.4  |                           |       |      | 37.2 |      |       |  | 32.1 |     
|Provision for (benefit from) income taxes |                            |                          | 0.9  |                           |       |      | 13.9 |      |       |  | (2.2 | )   
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     
|Net income                                |                            |                          | 1.5  | %                         |       |      | 23.3 | %    |       |  | 34.3 | %   
|                                          |                            |                          |      |                           |       |      |      |      |       |  |      |     

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Years Ended May 31, 2002, 2001 and 2000

Revenues

Total revenues

|               |  |                       |      |        |  |         |       |        |  |      |       |         |  |  |      |   |  |   |      | 
|-------------- |  | --------------------- | ---- | ------ |  | ------- | ----- | ------ |  | ---- | ----- | ------- |  |  | ---- | - |  | - | ---- | 
|               |  |                       |      |        |  | Percent |       |        |  |      |       | Percent |  |  |      |  
|               |  | 2002                  |      | Change |  | 2001    |       | Change |  | 2000
|               |  |                       |      |        |  |         |       |        |  |     
|               |  | (dollars in millions)
|Total revenues |  | $                     | 93.8 |        |  |         | (35.4 | )%     |  | $    | 145.0 |         |  |  | 50.9 | % |  | $ | 96.1 | 

The decrease in total revenues from fiscal year 2001 to fiscal year 2002
was primarily due to the impact of the slowdown in worldwide economic
conditions resulting in customers canceling or delaying orders, due to their
downsizing capital spending, partly offset by increased service and other
revenue derived from our installed base. The decrease was the result of both a
decrease in the total number of customer transactions and a reduction in the
average revenue per transaction. The increase in total revenues from fiscal
year 2000 to fiscal year 2001 was due primarily to increased revenues from
sales of our business portal solutions and our enterprise application
businesses and, to a lesser extent, an increase in maintenance and consulting
revenues.

Revenues derived from foreign operations accounted for 13.9%, 6.3% and
6.7% of total revenues, respectively, in fiscal years 2002, 2001 and 2000. Our
export sales consist primarily of products licensed for delivery outside of the
United States. In fiscal years 2002, 2001 and 2000, export sales accounted for
21.8%, 26.0% and 19.0% of total revenues, respectively.

No single customer accounted for 10% or more of our revenues during fiscal
years 2002, 2001 or 2000. Revenues derived from sales to the federal government
and its agencies were 6.1%, 7.4% and 7.8% of total revenues in fiscal years
2002, 2001 and 2000, respectively. Sales to government agencies declined as a
percentage of revenues from fiscal year 2000 to fiscal year 2002, and may
continue to decline in the future.

Software product revenues

|                          |                              |   |                       |      |        |  |         |    |        |   |       |      |         |  |      |   |  |   |      |      |  
|------------------------- | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | -- | ------ | - | ----- | ---- | ------- |  | ---- | - |  | - | ---- | ---- | -
|                          |                              |   |                       |      |        |  | Percent |    |        |   |       |      | Percent |  |      |   | 
|                          |                              |   | 2002                  |      | Change |  | 2001    |    | Change |   | 2000 
|                          |                              |   |                       |      |        |  |         |    |        |   |      
|                          |                              |   | (dollars in millions)
|Software product revenues |                              | $ | 55.9                  |      |        |  | (48.6   | )% |        | $ | 108.7 |      |         |  | 56.1 | % |  | $ | 69.7 |     
|                          | Percentage of total revenues |   |                       | 59.6 | %      |  |         |    |        |   |       | 75.0 | %       |  |      |   |  |   |      | 72.5 | %

The decrease in software product revenues from fiscal year 2001 to fiscal
year 2002 was primarily a result of the continued softness in overall demand
for enterprise-wide software licenses resulting from the slowdown in the
worldwide economy and the resulting decline in information technology capital
spending. The increase in software product revenues from fiscal year 2000 to
fiscal year 2001 was due principally to increased revenues from our business
portal solutions and our enterprise applications businesses.

Service and other revenues

|                           |                              |   |                       |      |        |  |         |   |        |   |      |      |         |  |      |   |  |   |      |      |  
|-------------------------- | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | - | ------ | - | ---- | ---- | ------- |  | ---- | - |  | - | ---- | ---- | -
|                           |                              |   |                       |      |        |  | Percent |   |        |   |      |      | Percent |  |      |   | 
|                           |                              |   | 2002                  |      | Change |  | 2001    |   | Change |   | 2000
|                           |                              |   |                       |      |        |  |         |   |        |   |     
|                           |                              |   | (dollars in millions)
|Service and other revenues |                              | $ | 37.9                  |      |        |  | 4.3     | % |        | $ | 36.3 |      |         |  | 37.4 | % |  | $ | 26.4 |     
|                           | Percentage of total revenues |   |                       | 40.4 | %      |  |         |   |        |   |      | 25.0 | %       |  |      |   |  |   |      | 27.5 | %

Service and other revenues consist primarily of fees for software
maintenance, consulting and training. The increase in service and other
revenues from fiscal year 2001 to fiscal year 2002 was principally due to an
increase in maintenance revenue resulting from the renewal of existing
maintenance contracts from prior period software revenue arrangements, offset
in part by decreases in consulting revenues and, to a lesser extent, training
revenues due to decreased software product sales. The increase in service and
other revenues as a percentage of total revenues from fiscal year 2001 to
fiscal year 2002 was due to the decrease in total revenues as a result of
decreased software product revenues. The increase in service and other revenues
from fiscal year 2000 to fiscal year 2001 was due primarily to an increase in
maintenance revenues and to a lesser extent, consulting revenues resulting from
growth in our customer base.

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Costs of Revenues

Costs of software products

|                           |                                         |   |                       |     |        |  |         |   |        |   |      |     |         |  |      |   |  |   |     |     |  
|-------------------------- | --------------------------------------- | - | --------------------- | --- | ------ |  | ------- | - | ------ | - | ---- | --- | ------- |  | ---- | - |  | - | --- | --- | -
|                           |                                         |   |                       |     |        |  | Percent |   |        |   |      |     | Percent |  |      |   | 
|                           |                                         |   | 2002                  |     | Change |  | 2001    |   | Change |   | 2000
|                           |                                         |   |                       |     |        |  |         |   |        |   |     
|                           |                                         |   | (dollars in millions)
|Costs of software products |                                         | $ | 2.3                   |     |        |  | 36.2    | % |        | $ | 1.7  |     |         |  | 88.1 | % |  | $ | 0.9 |    
|                           | Percentage of software product
revenues |   |                       | 4.0 | %      |  |         |   |        |   |      | 1.5 | %       |  |      |   |  |   |     | 1.3 | %

Costs of software products consist primarily of product media,
duplication, manuals, packaging materials, shipping expenses, employee
compensation expenses, royalties paid to third-party vendors, and in certain
instances, licensing of third-party software incorporated in our products. The
increase in costs of software products in absolute dollars and as a percentage
of software revenues from fiscal year 2001 to fiscal year 2002 was primarily
attributable to increasing costs of third-party software components. The
increase in costs of software products in absolute dollars and as a percentage
of software revenues from fiscal year 2000 to fiscal year 2001 was primarily
attributable to increasing costs of third-party software components and costs
associated with the introduction of our portal suite of products. In fiscal
years 2002, 2001 and 2000, we did not capitalize any software development costs
since such costs were not material.

Costs of service and other

|                           |                                          |   |                       |      |        |  |         |    |        |   |      |      |         |  |      |   |  |   |     |      |  
|-------------------------- | ---------------------------------------- | - | --------------------- | ---- | ------ |  | ------- | -- | ------ | - | ---- | ---- | ------- |  | ---- | - |  | - | --- | ---- | -
|                           |                                          |   |                       |      |        |  | Percent |    |        |   |      |      | Percent |  |      |   | 
|                           |                                          |   | 2002                  |      | Change |  | 2001    |    | Change |   | 2000
|                           |                                          |   |                       |      |        |  |         |    |        |   |     
|                           |                                          |   | (dollars in millions)
|Costs of service and other |                                          | $ | 11.0                  |      |        |  | (7.1    | )% |        | $ | 11.8 |      |         |  | 41.5 | % |  | $ | 8.4 |     
|                           | Percentage of service and
other revenues |   |                       | 29.0 | %      |  |         |    |        |   |      | 32.5 | %       |  |      |   |  |   |     | 31.6 | %

Costs of service and other consists of costs incurred in providing
consulting services, customer training, telephone support and product upgrades
to customers. Significant cost components include personnel-related and
third-party contractor costs, facilities costs, travel expenses associated with
training and consulting implementation services and depreciation expense. The
decrease in costs of service and other in absolute dollars from fiscal year
2001 to fiscal year 2002 was principally due to reduced headcount in our
professional services organization resulting from our workforce restructuring
in the quarter-ended November 30, 2001. This action more closely sized our
professional services organization with our reduced level of professional
services revenues. The decrease in costs of service and other as a percentage
of service and other revenue was primarily due to the decrease in absolute
dollars from reduced staffing combined with an increase in service and other
revenues for the period. The increase in costs of service and other in absolute
dollars and as a percentage of service and other revenue from fiscal year 2000
to fiscal year 2001 was primarily related to an increase in the staffing of our
technical support and professional services organizations, and to a lesser
extent, an increase in training services.

Operating Expenses

Research and development

|                         |                              |   |                       |      |        |  |         |   |        |   |      |      |         |  |      |   |  |   |      |      |  
|------------------------ | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | - | ------ | - | ---- | ---- | ------- |  | ---- | - |  | - | ---- | ---- | -
|                         |                              |   |                       |      |        |  | Percent |   |        |   |      |      | Percent |  |      |   | 
|                         |                              |   | 2002                  |      | Change |  | 2001    |   | Change |   | 2000
|                         |                              |   |                       |      |        |  |         |   |        |   |     
|                         |                              |   | (dollars in millions)
|Research and development |                              | $ | 23.6                  |      |        |  | 9.2     | % |        | $ | 21.6 |      |         |  | 35.1 | % |  | $ | 16.0 |     
|                         | Percentage of total revenues |   |                       | 25.2 | %      |  |         |   |        |   |      | 14.9 | %       |  |      |   |  |   |      | 16.7 | %

Research and development expenses consist primarily of employee
compensation, payments to outside contractors, depreciation on equipment used
for development and corporate overhead allocations. We believe that research
and development expenses will continue to increase in absolute dollars in the
future primarily due to the introduction of new products and other anticipated
product development efforts. Our future research and development expenses may
vary as a percentage of total revenues.

The increase in research and development expenses in absolute dollars from
fiscal year 2000 through fiscal year 2002 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 from fiscal year 2001 to fiscal year 2002 was due
to the increase in absolute dollars combined with a decrease in total revenues
for the period. The decrease in research and development expenses as a
percentage of total revenues from fiscal year 2000 to fiscal year 2001 was
principally related to the increased total revenues for the period.

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Marketing and sales

|                    |                              |   |                       |      |        |  |         |    |        |   |      |      |         |  |      |   |  |   |      |      |  
|------------------- | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | -- | ------ | - | ---- | ---- | ------- |  | ---- | - |  | - | ---- | ---- | -
|                    |                              |   |                       |      |        |  | Percent |    |        |   |      |      | Percent |  |      |   | 
|                    |                              |   | 2002                  |      | Change |  | 2001    |    | Change |   | 2000
|                    |                              |   |                       |      |        |  |         |    |        |   |     
|                    |                              |   | (dollars in millions)
|Marketing and sales |                              | $ | 50.3                  |      |        |  | (11.2   | )% |        | $ | 56.6 |      |         |  | 46.2 | % |  | $ | 38.7 |     
|                    | Percentage of total revenues |   |                       | 53.6 | %      |  |         |    |        |   |      | 39.1 | %       |  |      |   |  |   |      | 40.3 | %

Marketing and sales expenses consist primarily of employee compensation,
tradeshows, outbound marketing and other lead generation activities, public
relations, travel expenses associated with our sales staff and corporate
overhead allocations. We anticipate that we will continue to make significant
investments in marketing and sales and that our quarterly marketing and sales
expenses will increase in absolute dollars over our quarter ended May 31, 2002
spending levels.

The decrease in marketing and sales expenses in absolute dollars from
fiscal year 2001 to fiscal year 2002 was primarily related to a reduction in
sales personnel resulting from our workforce restructuring in the quarter-ended
November 30, 2001, to a decrease in sales commissions resulting from the
decrease in software product revenues and to decreased spending on all
marketing programs. The increase in marketing and sales expenses as a
percentage of total revenues from fiscal year 2001 to fiscal year 2002 was
principally related to decreased total revenues for the period. The increase in
marketing and sales expenses in absolute dollars from fiscal year 2000 to
fiscal year 2001 was primarily related to the expansion of our marketing and
sales organizations, to higher commission expenses relating to the increase in
total revenues, to the development of our sales distribution channels in the
United States and Europe, and to outbound marketing activities associated with
the branding and advertising of our company. The decrease in marketing and
sales expenses as a percentage of total revenues from fiscal year 2000 to
fiscal year 2001 was primarily due to the increased total revenues during the
period.

General and administrative

|                           |                              |   |                       |      |        |  |         |   |        |   |      |     |         |  |      |   |  |   |     |     |  
|-------------------------- | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | - | ------ | - | ---- | --- | ------- |  | ---- | - |  | - | --- | --- | -
|                           |                              |   |                       |      |        |  | Percent |   |        |   |      |     | Percent |  |      |   | 
|                           |                              |   | 2002                  |      | Change |  | 2001    |   | Change |   | 2000
|                           |                              |   |                       |      |        |  |         |   |        |   |     
|                           |                              |   | (dollars in millions)
|General and administrative |                              | $ | 11.7                  |      |        |  | 9.6     | % |        | $ | 10.6 |     |         |  | 55.3 | % |  | $ | 6.8 |    
|                           | Percentage of total revenues |   |                       | 12.4 | %      |  |         |   |        |   |      | 7.3 | %       |  |      |   |  |   |     | 7.1 | %

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

The increase in general and administrative expenses in absolute dollars
from fiscal year 2000 through fiscal year 2002 was principally due to increased
expenses for legal services, insurance premiums, various tax studies and other
outside professional services. The increase in general and administrative
expenses as a percentage of total revenues from fiscal 2001 year to fiscal year
2002 was due to the decrease in total revenues for the period. The increase in
general and administrative expenses as a percentage of total revenues from
fiscal year 2000 to fiscal year 2001 was generally related to the increased
costs of external professional advisors, in particular for services rendered
for various tax studies.

Restructuring charge

|                     |                              |   |      |     |        |  |                       |  |        |  |      |   |         |  |   |  |  |  |   |   | 
|-------------------- | ---------------------------- | - | ---- | --- | ------ |  | --------------------- |  | ------ |  | ---- | - | ------- |  | - |  |  |  | - | - | 
|                     |                              |   |      |     |        |  | Percent               |  |        |  |      |   | Percent |  |   |  | 
|                     |                              |   | 2002 |     | Change |  | 2001                  |  | Change |  | 2000
|                     |                              |   |      |     |        |  |                       |  |        |  |     
|                     |                              |   |      |     |        |  | (dollars in millions) |  |        |  |     
|Restructuring charge |                              | $ | 1.6  |     |        |  |                      |  |        |  |     |   |         |  |  |  |  |  |  |  
|                     | Percentage of total revenues |   |      | 1.7 | %      |  |                       |  |        |  |      |  |         |  |   |  |  |  |   |  | 

During the second quarter of fiscal 2002 ended November 30, 2001, we
implemented a worldwide restructuring of our corporate structure to focus on
reducing expenses and improving efficiency. This action was taken as a result
of deteriorating macro-economic and capital spending issues affecting the
software industry. In connection with the restructuring, we recorded a $1.6
million restructuring charge, of which approximately $1.2 million was related
to severance costs associated with the reduction in the worldwide workforce by
65 employees, approximately $0.3 million to legal and other outside services in
connection with the restructuring, and approximately $0.1 million to other
costs associated with the restructuring. The restructuring impacted operations
in the U.S., Canada, the U.K., Germany, France, the Netherlands, Sweden and
South Africa.

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Charitable contribution

|                        |                              |   |      |     |        |  |                       |  |        |  |      |   |         |  |   |  |  |  |   |   | 
|----------------------- | ---------------------------- | - | ---- | --- | ------ |  | --------------------- |  | ------ |  | ---- | - | ------- |  | - |  |  |  | - | - | 
|                        |                              |   |      |     |        |  | Percent               |  |        |  |      |   | Percent |  |   |  | 
|                        |                              |   | 2002 |     | Change |  | 2001                  |  | Change |  | 2000
|                        |                              |   |      |     |        |  |                       |  |        |  |     
|                        |                              |   |      |     |        |  | (dollars in millions) |  |        |  |     
|Charitable contribution |                              | $ | 1.0  |     |        |  |                      |  |        |  |     |   |         |  |  |  |  |  |  |  
|                        | Percentage of total revenues |   |      | 1.1 | %      |  |                       |  |        |  |      |  |         |  |   |  |  |  |   |  | 

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

Other income, net

|                  |                              |   |                       |      |        |  |         |    |        |   |      |     |         |  |       |   |  |   |     |     |  
|----------------- | ---------------------------- | - | --------------------- | ---- | ------ |  | ------- | -- | ------ | - | ---- | --- | ------- |  | ----- | - |  | - | --- | --- | -
|                  |                              |   |                       |      |        |  | Percent |    |        |   |      |     | Percent |  |       |   | 
|                  |                              |   | 2002                  |      | Change |  | 2001    |    | Change |   | 2000
|                  |                              |   |                       |      |        |  |         |    |        |   |     
|                  |                              |   | (dollars in millions)
|Other income, net |                              | $ | 9.9                   |      |        |  | (12.9   | )% |        | $ | 11.3 |     |         |  | 101.7 | % |  | $ | 5.6 |    
|                  | Percentage of total revenues |   |                       | 10.5 | %      |  |         |    |        |   |      | 7.8 | %       |  |       |   |  |   |     | 5.8 | %

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

The decrease in other income in absolute dollars from fiscal year 2001 to
fiscal year 2002 was primarily due to decreasing overall yields on our
portfolio of marketable securities caused by the decreasing interest rate
environment partially offset by higher cash balances when compared with the
prior year. The increase in other income in absolute dollars from fiscal year
2000 to fiscal year 2001 was primarily due to the higher balance of marketable
securities.

Income tax provision (benefit)

|                               |                              |   |                       |     |        |  |         |    |        |   |      |      |         |                |  |   |      |   |      |      |   
|------------------------------ | ---------------------------- | - | --------------------- | --- | ------ |  | ------- | -- | ------ | - | ---- | ---- | ------- | -------------- |  | - | ---- | - | ---- | ---- | --
|                               |                              |   |                       |     |        |  | Percent |    |        |   |      |      | Percent |                |  |   |     
|                               |                              |   | 2002                  |     | Change |  | 2001    |    | Change |   | 2000
|                               |                              |   |                       |     |        |  |         |    |        |   |     
|                               |                              |   | (dollars in millions)
|Income tax provision (benefit) |                              | $ | 0.9                   |     |        |  | (95.7   | )% |        | $ | 20.2 |      |         | not meaningful |  | $ | (2.2 | )
|                               | Percentage of total revenues |   |                       | 0.9 | %      |  |         |    |        |   |      | 13.9 | %       |                |  |   |      |   |      | (2.2 | )%
|Effective tax rate             |                              |   | 38.0                  | %   |        |  |         |    |        |   | 37.5 | %    |         |                |  |   |      |   | (6.9 | )%  

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

During the year ended May 31, 2002, 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 year ended May 31, 2002. We will continually reassess the impact of our
research and development expenses on our effective tax rate in future periods.

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##### Table of Contents



Quarterly Results of Operations

The following table sets forth certain unaudited consolidated statements
of operations data, both in dollar amount and as a percentage of total
revenues, for each of the eight quarters in the period ended May 31, 2002. In
our opinion, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this Annual
Report on Form 10-K, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with
the audited consolidated financial statements and related notes thereto. The
operating results for any quarter should not be relied upon as necessarily
indicative of results for any future period. We expect our quarterly operating
results to fluctuate in future periods due to a variety of reasons, including
those specifically discussed in Item 1. Business  Risk Factors.

|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        | 
|-------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ------------------------------------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | ------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                         |                            |                          |        | Quarter Ended                        
|                                                         |                            |                          |        |                                      
|                                                         |                            |                          |        | May 31,                               |        | Feb. 28, |        | Nov. 30, |        | Aug. 31, |        | May 31, |        | Feb. 28, |        | Nov. 30, |        | Aug. 31,
|                                                         |                            |                          |        | 2002                                  |        | 2002     |        | 2001     |        | 2001     |        | 2001    |        | 2001     |        | 2000     |        | 2000    
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |         
|                                                         |                            |                          |        | (in thousands, except per share data)
|Consolidated Statements of Operations Data:              |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Revenues:                                                |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Software products          |                          | $      | 16,350                                |        |          | $      | 15,968   |        |          | $      | 13,274  |        |          | $      | 10,267   |        |          | $      | 31,627 |        |   | $      | 28,722 |        |   | $      | 25,558 |        |   | $      | 22,798 |       
|                                                         | Service and other          |                          |        | 9,705                                 |        |          |        | 9,077    |        |          |        | 9,286   |        |          |        | 9,838    |        |          |        | 9,583  |        |   |        | 9,293  |        |   |        | 8,962  |        |   |        | 8,492  |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total revenues           |        |                                       | 26,055 |          |        |          | 25,045 |          |        |         | 22,560 |          |        |          | 20,105 |          |        |        | 41,210 |   |        |        | 38,015 |   |        |        | 34,520 |   |        |        | 31,290 | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Costs of revenues:                                       |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Software products          |                          |        | 409                                   |        |          |        | 659      |        |          |        | 644     |        |          |        | 542      |        |          |        | 545    |        |   |        | 378    |        |   |        | 385    |        |   |        | 347    |       
|                                                         | Service and other          |                          |        | 2,569                                 |        |          |        | 2,606    |        |          |        | 2,757   |        |          |        | 3,046    |        |          |        | 3,211  |        |   |        | 3,074  |        |   |        | 2,978  |        |   |        | 2,558  |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total costs of revenues  |        |                                       | 2,978  |          |        |          | 3,265  |          |        |         | 3,401  |          |        |          | 3,588  |          |        |        | 3,756  |   |        |        | 3,452  |   |        |        | 3,363  |   |        |        | 2,905  | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Gross profit                                             |                            |                          | 23,077 |                                       |        |          | 21,780 |          |        |          | 19,159 |         |        |          | 16,517 |          |        |          | 37,454 |        |        |   | 34,563 |        |        |   | 31,157 |        |        |   | 28,385 |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Operating expenses:                                      |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Research and development   |                          |        | 5,917                                 |        |          |        | 5,819    |        |          |        | 5,955   |        |          |        | 5,936    |        |          |        | 6,378  |        |   |        | 5,849  |        |   |        | 4,827  |        |   |        | 4,585  |       
|                                                         | Marketing and sales        |                          |        | 10,830                                |        |          |        | 11,461   |        |          |        | 13,396  |        |          |        | 14,598   |        |          |        | 16,080 |        |   |        | 14,733 |        |   |        | 13,800 |        |   |        | 12,024 |       
|                                                         | General and administrative |                          |        | 2,861                                 |        |          |        | 3,052    |        |          |        | 2,909   |        |          |        | 2,832    |        |          |        | 2,987  |        |   |        | 2,949  |        |   |        | 2,530  |        |   |        | 2,170  |       
|                                                         | Restructuring charge       |                          |        |                                      |        |          |        |         |        |          |        | 1,563   |        |          |        |         |        |          |        |       |        |   |        |       |        |   |        |       |        |   |        |       |       
|                                                         | Charitable contribution    |                          |        |                                      |        |          |        |         |        |          |        | 1,000   |        |          |        |         |        |          |        |       |        |   |        |       |        |   |        |       |        |   |        |       |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total operating expenses |        |                                       | 19,608 |          |        |          | 20,332 |          |        |         | 24,823 |          |        |          | 23,366 |          |        |        | 25,445 |   |        |        | 23,531 |   |        |        | 21,157 |   |        |        | 18,779 | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Income (loss) from operations                            |                            |                          | 3,469  |                                       |        |          | 1,448  |          |        |          | (5,664 | )       |        |          | (6,849 | )        |        |          | 12,009 |        |        |   | 11,032 |        |        |   | 10,000 |        |        |   | 9,606  |       
|Other income, net                                        |                            |                          | 2,115  |                                       |        |          | 2,255  |          |        |          | 2,629  |         |        |          | 2,870  |          |        |          | 2,813  |        |        |   | 3,417  |        |        |   | 2,834  |        |        |   | 2,271  |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Income (loss) before provision for income taxes          |                            |                          | 5,584  |                                       |        |          | 3,703  |          |        |          | (3,035 | )       |        |          | (3,979 | )        |        |          | 14,822 |        |        |   | 14,449 |        |        |   | 12,834 |        |        |   | 11,877 |       
|Provision for (benefit from) income taxes                |                            |                          | 2,122  |                                       |        |          | 1,407  |          |        |          | (1,153 | )       |        |          | (1,512 | )        |        |          | 5,632  |        |        |   | 5,274  |        |        |   | 4,684  |        |        |   | 4,632  |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Net income (loss)                                        |                            | $                        | 3,462  |                                       |        | $        | 2,296  |          |        | $        | (1,882 | )       |        | $        | (2,467 | )        |        | $        | 9,190  |        |        | $ | 9,175  |        |        | $ | 8,150  |        |        | $ | 7,245  |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Net income (loss) per share  basic                      |                            | $                        | 0.10   |                                       |        | $        | 0.06   |          |        | $        | (0.05  | )       |        | $        | (0.07  | )        |        | $        | 0.26   |        |        | $ | 0.27   |        |        | $ | 0.24   |        |        | $ | 0.22   |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Net income (loss) per share  diluted                    |                            | $                        | 0.09   |                                       |        | $        | 0.06   |          |        | $        | (0.05  | )       |        | $        | (0.07  | )        |        | $        | 0.25   |        |        | $ | 0.25   |        |        | $ | 0.23   |        |        | $ | 0.20   |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Number of shares used in per share calculation  basic   |                            |                          | 35,717 |                                       |        |          | 35,378 |          |        |          | 35,161 |         |        |          | 35,362 |          |        |          | 34,769 |        |        |   | 33,948 |        |        |   | 33,449 |        |        |   | 32,369 |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Number of shares used in per share calculation  diluted |                            |                          | 37,408 |                                       |        |          | 38,277 |          |        |          | 35,161 |         |        |          | 35,362 |          |        |          | 36,833 |        |        |   | 37,000 |        |        |   | 35,846 |        |        |   | 36,916 |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                        
|                                                         |                            |                          |        | As a Percentage of Total Revenues    
|                                                         |                            |                          |        |                                      
|Revenues:                                                |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Software products          |                          |        | 62.8                                  | %      |          |        | 63.8     | %      |          |        | 58.8    | %      |          |        | 51.1     | %      |          |        | 76.7   | %      |   |        | 75.6   | %      |   |        | 74.0   | %      |   |        | 72.9   | %     
|                                                         | Service and other          |                          |        | 37.2                                  |        |          |        | 36.2     |        |          |        | 41.2    |        |          |        | 48.9     |        |          |        | 23.3   |        |   |        | 24.4   |        |   |        | 26.0   |        |   |        | 27.1   |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total revenues           |        |                                       | 100.0  |          |        |          | 100.0  |          |        |         | 100.0  |          |        |          | 100.0  |          |        |        | 100.0  |   |        |        | 100.0  |   |        |        | 100.0  |   |        |        | 100.0  | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Costs of revenues:                                       |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Software products          |                          |        | 1.6                                   |        |          |        | 2.6      |        |          |        | 2.9     |        |          |        | 2.7      |        |          |        | 1.3    |        |   |        | 1.0    |        |   |        | 1.1    |        |   |        | 1.1    |       
|                                                         | Service and other          |                          |        | 9.8                                   |        |          |        | 10.4     |        |          |        | 12.2    |        |          |        | 15.1     |        |          |        | 7.8    |        |   |        | 8.1    |        |   |        | 8.6    |        |   |        | 8.2    |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total costs of revenues  |        |                                       | 11.4   |          |        |          | 13.0   |          |        |         | 15.1   |          |        |          | 17.8   |          |        |        | 9.1    |   |        |        | 9.1    |   |        |        | 9.7    |   |        |        | 9.3    | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Gross profit                                             |                            |                          | 88.6   |                                       |        |          | 87.0   |          |        |          | 84.9   |         |        |          | 82.2   |          |        |          | 90.9   |        |        |   | 90.9   |        |        |   | 90.3   |        |        |   | 90.7   |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Operating expenses:                                      |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         | Research and development   |                          |        | 22.7                                  |        |          |        | 23.2     |        |          |        | 26.4    |        |          |        | 29.5     |        |          |        | 15.5   |        |   |        | 15.4   |        |   |        | 14.0   |        |   |        | 14.7   |       
|                                                         | Marketing and sales        |                          |        | 41.6                                  |        |          |        | 45.8     |        |          |        | 59.4    |        |          |        | 72.6     |        |          |        | 39.0   |        |   |        | 38.8   |        |   |        | 40.0   |        |   |        | 38.4   |       
|                                                         | General and administrative |                          |        | 11.0                                  |        |          |        | 12.2     |        |          |        | 12.9    |        |          |        | 14.1     |        |          |        | 7.2    |        |   |        | 7.7    |        |   |        | 7.3    |        |   |        | 6.9    |       
|                                                         | Restructuring charge       |                          |        |                                      |        |          |        |         |        |          |        | 6.9     |        |          |        |         |        |          |        |       |        |   |        |       |        |   |        |       |        |   |        |       |       
|                                                         | Charitable contribution    |                          |        |                                      |        |          |        |         |        |          |        | 4.4     |        |          |        |         |        |          |        |       |        |   |        |       |        |   |        |       |        |   |        |       |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                         |                            | Total operating expenses |        |                                       | 75.3   |          |        |          | 81.2   |          |        |         | 110.0  |          |        |          | 116.2  |          |        |        | 61.7   |   |        |        | 61.9   |   |        |        | 61.3   |   |        |        | 60.0   | 
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Income (loss) from operations                            |                            |                          | 13.3   |                                       |        |          | 5.8    |          |        |          | (25.1  | )       |        |          | (34.0  | )        |        |          | 29.2   |        |        |   | 29.0   |        |        |   | 29.0   |        |        |   | 30.7   |       
|Other income, net                                        |                            |                          | 8.1    |                                       |        |          | 9.0    |          |        |          | 11.7   |         |        |          | 14.2   |          |        |          | 6.8    |        |        |   | 9.0    |        |        |   | 8.2    |        |        |   | 7.3    |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Income (loss) before provision for income taxes          |                            |                          | 21.4   |                                       |        |          | 14.8   |          |        |          | (13.4  | )       |        |          | (19.8  | )        |        |          | 36.0   |        |        |   | 38.0   |        |        |   | 37.2   |        |        |   | 38.0   |       
|Provision for (benefit from) income taxes                |                            |                          | 8.1    |                                       |        |          | 5.6    |          |        |          | (5.1   | )       |        |          | (7.5   | )        |        |          | 13.7   |        |        |   | 13.9   |        |        |   | 13.6   |        |        |   | 14.8   |       
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|Net income (loss)                                        |                            |                          | 13.3   | %                                     |        |          | 9.2    | %        |        |          | (8.3   | )%      |        |          | (12.3  | )%       |        |          | 22.3   | %      |        |   | 24.1   | %      |        |   | 23.6   | %      |        |   | 23.2   | %     
|                                                         |                            |                          |        |                                       |        |          |        |          |        |          |        |         |        |          |        |          |        |          |        |        |        |   |        |        |        |   |        |        |        |   |        |       

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Liquidity and Capital Resources

|                                                 |  |                       |      |      |  |      |       |   |  |   |        |  
|------------------------------------------------ |  | --------------------- | ---- | ---- |  | ---- | ----- | - |  | - | ------ | -
|Fiscal period ended May 31,                      |  | 2002                  |      | 2001 |  | 2000
|                                                 |  |                       |      |      |  |     
|                                                 |  | (dollars in millions)
|Net cash provided by operating activities        |  | $                     | 18.9 |      |  | $    | 47.7  |   |  | $ | 8.2    |  
|Net cash used in investing activities            |  |                       | (5.9 | )    |  |      | (76.9 | ) |  |   | (116.5 | )
|Net cash provided (used) by financing
activities |  | $                     | (2.6 | )    |  | $    | 34.2  |   |  | $ | 107.6  |  

As of May 31, 2002, we had $245.4 million in cash and cash equivalents and
available-for-sale securities compared to $231.1 million at May 31, 2001. At
May 31, 2002, our principal sources of liquidity were our cash and cash
equivalents and short-term investments of $153.9 million. As of May 31, 2002,
we had no outstanding debt obligations.

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

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

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

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Within one year                    |  | $ | 130,672 | 
|After one year through three years |  |   | 91,433  | 
|                                   |  |   |         | 
|                                   |  | $ | 222,105 | 
|                                   |  |   |         | 

As of May 31, 2001, available-for-sale securities consist of the following
(in thousands):

|                                        |                   |   |           |         |            |   |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | - | --------- | ------- | ---------- | - | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |   |           |         |            |   | Gross |       |  |   |        
|                                        |                   |   | Amortized |         | Unrealized |   | Fair 
|                                        |                   |   | Cost      |         | Gains      |   | Value
|                                        |                   |   |           |         |            |   |      
|Corporate commercial paper  short-term |                   | $ | 126,085   |         |            | $ | 602   |       |  | $ | 126,687 |        
|Corporate commercial paper  long-term  |                   |   | 91,687    |         |            |   | 561   |       |  |   | 92,248  |        
|                                        |                   |   |           |         |            |   |       |       |  |   |         |        
|                                        | Total investments |   | $         | 217,772 |            |   | $     | 1,163 |  |   | $       | 218,935 | 
|                                        |                   |   |           |         |            |   |       |       |  |   |         |        

Cash provided by operating activities in fiscal year 2002 was primarily
from a $15.8 million decrease in accounts receivable, net income of $1.4
million plus depreciation expense of $4.3 million, and a $1.3 million decrease
in prepaid and other current assets, partially offset by a $2.4 million
decrease in accrued compensation and other liabilities and a $2.1 million
decrease in deferred revenue. Cash provided by operating activities in fiscal
year 2001 was primarily from net income of $33.8 million, a $19.3 million
decrease in deferred income taxes, a $5.4 million increase in accrued
compensation and other liabilities and a $4.4 million increase in deferred
revenue, partially offset by a $16.0 million increase in accounts receivable.
Cash provided by operating activities in fiscal year 2000 was primarily from
net income of $33.0 million, a $3.6 million increase in deferred revenue,
depreciation expense of $2.8 million and a $2.8 million increase in accounts
payable, partially offset by a $26.8 million increase in deferred income taxes
and a $7.1 million increase in accounts receivable.

Cash used in investing activities consists primarily of the purchases of
marketable securities partially offset by the sale and maturity of marketable
securities.

Cash used by financing activities in fiscal year 2002 was primarily due to
$20.0 million in repurchases of our common stock through our stock repurchase
program, partially offset by $17.4 million in proceeds from the sale of common
stock as a result of stock option exercises and from the issuance of common
stock in connection with our Employee Stock Purchase Plan. Cash provided by
financing activities in fiscal years 2001 and 2000 was due to the sale of
common stock as a result of stock option exercises and from the issuance of
common stock in connection with our Employee Stock Purchase Plan.

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Capital expenditures, including capital leases, were approximately $3.1
million, $6.2 million, and $1.9 million in fiscal 2002, 2001 and 2000,
respectively. These expenditures consisted principally of purchases of property
and equipment, primarily for computer hardware and software. Under our
operating leases, we have minimum rental payments as follows:

|                           |  |          |        | 
|-------------------------- |  | -------- | ------ | 
|                           |  | Rental  
|Fiscal Year Ending May 31, |  | Payments
|                           |  |         
|2003                       |  | $        | 3,121  | 
|2004                       |  |          | 2,815  | 
|2005                       |  |          | 2,334  | 
|2006                       |  |          | 1,064  | 
|2007 and thereafter        |  |          | 2,460  | 
|                           |  |          |        | 
|                           |  | $        | 11,794 | 
|                           |  |          |        | 

On June 20, 2002, we announced an extension of the stock repurchase
program we initiated on September 12, 2001. The program calls for the
repurchase of outstanding shares of our common stock up to an aggregate value
of $50.0 million. Through May 31, 2002, we repurchased and retired 1,502,200
shares of our common stock through open market transactions, valued at
approximately $20.0 million. The program will terminate at the end of the
current fiscal year ending May 31, 2003 unless extended or shortened by the
Board of Directors.

We believe that our current cash and cash equivalents, interest income and
cash generated from operations, if any, will provide adequate liquidity to meet
our working capital and operating resource expenditure requirements through at
least fiscal 2003. If the global economy weakens further, our cash, cash
equivalents and investments balances may decline. As a result, or if our
spending plans materially change, we may find it necessary to seek to obtain
additional sources of financing to support our capital needs, but we cannot
assure you that a financing will be available on commercially reasonable terms,
or at all.

Recent Pronouncements

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

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

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

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

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effective for exit or disposal activities that are initiated after
December 31, 2002. We do not expect an impact on our financial position and
results of operations from the adoption of SFAS 146.

Related Party Transactions

Regent Pacific Management Corporation, a management services firm of which
Mr. Sbona, our Chairman and Chief Executive Officer, is the Chairman and Chief
Executive Officer, and Mr. Young, our Chief Operating Officer, is a director
and Chief Operating Officer, provides us with management services at a fee of
$50,000 per week. We may cancel our agreement with Regent Pacific without
payment to Regent Pacific only after February 28, 2003. The agreement also
provides us with an option to extend the term of the agreement through August
31, 2003. In addition, the amended agreement requires that we indemnify Regent
Pacific and Mr. Sbona for certain liabilities arising out of the performance of
services under the amended agreement.




Item 7A.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 May 31, 2002, approximately 63% 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 May 31, 2002:

|                       |  |                |         |        |  |        |        |       |  |            |        |   |  |   |         |  |  |   |         | 
|---------------------- |  | -------------- | ------- | ------ |  | ------ | ------ | ----- |  | ---------- | ------ | - |  | - | ------- |  |  | - | ------- | 
|                       |  | FY2003         |         | FY2004 |  | FY2005 |        | Total |  | Fair Value
|                       |  |                |         |        |  |        |        |       |  |           
|                       |  | (in thousands)
|Cash equivalents       |  | $              | 23,251  |        |  |        |       |       |  |            |       |   |  | $ | 23,251  |  |  | $ | 23,251  | 
|Average interest rate  |  |                | 0.7     | %      |  |        |        |       |  |            |        |   |  |   |         |  |  |   |         | 
|Short-term investments |  | $              | 130,672 |        |  |        |       |       |  |            |       |   |  | $ | 130,672 |  |  | $ | 130,672 | 
|Average interest rate  |  |                | 3.4     | %      |  |        |        |       |  |            |        |   |  |   |         |  |  |   |         | 
|Long-term investments  |  |                |        |        |  | $      | 77,342 |       |  | $          | 14,091 |   |  | $ | 91,433  |  |  | $ | 91,433  | 
|Average interest rates |  |                |         |        |  |        | 4.6    | %     |  |            | 4.8    | % |  |   |         |  |  |   |         | 

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




Item 8.Financial Statements and Supplementary Data

Our Consolidated Financial Statements and Notes thereto, and related
Financial Schedule, begin on page 37 of this Annual Report on Form 10-K and are
incorporated by reference herein. Supplementary financial information for the
eight quarters ended May 31, 2002 is set forth under Item 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Quarterly Results of Operations and is incorporated by reference herein.




Item 9.Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

Information relating to our executive officers required by this item is
set forth in Part I  Item 1 of this report under the caption Executive
Officers of the Registrant and is incorporated herein by reference. The other
information required by this Item is incorporated by reference from the
definitive proxy statement for our 2002 annual meeting of stockholders to be
filed with the Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this Form (the Proxy Statement)
under the captions Proposal 1, Election Of Directors and Section 16(A)
Beneficial Ownership Reporting Compliance.




Item 11.Executive Compensation

The information required by this Item is incorporated by reference from
the Proxy Statement under the caption Executive Compensation, Employment,
Severance and Change of Control Agreements and Compensation Committee
Interlocks and Insider Participation.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference from
the Proxy Statement under the captions Security Ownership Of Certain
Beneficial Owners And Management, and Equity Compensation Plan Information.




Item 13.Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference from
the Proxy Statement under the captions Certain Relationships And Related
Transactions.

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##### Table of Contents






PART IV




Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  The following documents are filed as a part of this Form:

|   |  |                                                                                                                                                                     |  |       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------
|   |  |                                                                                                                                                                     |  | Page  
|   |  |                                                                                                                                                                     |  | Number
|   |  |                                                                                                                                                                     |  |       
|  
|1. |  | Financial Statements:                                                                                                                                               |  |       
|  
|   |  | Report of Independent Accountants                                                                                                                                   |  | 36    
|  
|   |  | Consolidated Balance Sheets  As of May 31, 2002 and 2001                                                                                                           |  | 37    
|  
|   |  | Consolidated Statements of Operations  For the Years Ended May 31, 2002, 2001 and 2000                                                                             |  | 38    
|  
|   |  | Consolidated Statements of Changes in Stockholders Equity  For the Years Ended May 31, 2002, 2001
and 2000                                                        |  | 39    
|  
|   |  | Consolidated Statements of Cash Flows  For the Years Ended May 31, 2002, 2001 and 2000                                                                             |  | 40    
|  
|   |  | Consolidated Statements of Comprehensive Income  For the Years Ended May 31, 2002, 2001 and 2000                                                                   |  | 41    
|  
|   |  | Notes to Consolidated Financial Statements                                                                                                                          |  | 42    
|  
|2. |  | Financial Statement Schedules  For the Years Ended May 31, 2002, 2001 and 2000:                                                                                    |  |       
|  
|   |  | Schedule II  Valuation and Qualifying Accounts                                                                                                                     |  | 57    
|  
|   |  | All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto      |  |       
|  
|3. |  | Exhibits: See Index to Exhibits on page 59. The Exhibits listed in the accompanying Index to Exhibits
are filed or incorporated by reference as part of this report |  |       

(b) Reports on Form 8-K:

None.

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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders
Verity, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 35 present fairly, in all material
respects, the financial position of Verity, Inc. and its subsidiaries at May
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended May 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) on page 35 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

PricewaterhouseCoopers LLP

San Jose, California
June 17, 2002

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VERITY, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

ASSETS

|                                       |                                                                                                                      |                            |                                            |         |         |         |         |         |         |         | 
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                       |                                                                                                                      |                            |                                            |         | May 31,
|                                       |                                                                                                                      |                            |                                            |         |        
|                                       |                                                                                                                      |                            |                                            |         | 2002    |         | 2001   
|                                       |                                                                                                                      |                            |                                            |         |         |         |        
|Current assets:                        |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       | Cash and cash equivalents                                                                                            |                            | $                                          | 23,251  |         |         | $       | 12,210  |        
|                                       | Short-term investments                                                                                               |                            |                                            | 130,672 |         |         |         | 126,687 |        
|                                       | Trade accounts receivable, net                                                                                       |                            |                                            | 20,961  |         |         |         | 37,741  |        
|                                       | Deferred tax assets                                                                                                  |                            |                                            | 3,114   |         |         |         | 20,121  |        
|                                       | Prepaid and other                                                                                                    |                            |                                            | 5,497   |         |         |         | 6,788   |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       |                                                                                                                      | Total current assets       |                                            |         | 183,495 |         |         |         | 203,547 |        
|Property and equipment, net            |                                                                                                                      |                            | 6,625                                      |         |         |         | 7,804   |        
|Long-term investments                  |                                                                                                                      |                            | 91,433                                     |         |         |         | 92,248  |        
|Deferred tax assets                    |                                                                                                                      |                            | 16,597                                     |         |         |         |        |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       |                                                                                                                      |                            | Total assets                               |         | $       | 298,150 |         |         | $       | 303,599 | 
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                      
|LIABILITIES AND STOCKHOLDERS EQUITY  
|                                      
|Current liabilities:                   |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       | Accounts payable                                                                                                     |                            | $                                          | 5,749   |         |         | $       | 6,790   |        
|                                       | Accrued compensation                                                                                                 |                            |                                            | 10,376  |         |         |         | 11,799  |        
|                                       | Other accrued liabilities                                                                                            |                            |                                            | 2,779   |         |         |         | 3,793   |        
|                                       | Deferred revenue                                                                                                     |                            |                                            | 14,981  |         |         |         | 17,073  |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       |                                                                                                                      | Total current liabilities  |                                            |         | 33,885  |         |         |         | 39,455  |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|Commitments and contingencies (Note 5) |                                                                                                                      |                            |                                            |         |         |         |         |        
|Stockholders equity:                  |                                                                                                                      |                            |                                            |         |         |         |         |        
|Preferred stock, $0.001 par value:     |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       | Authorized:
2,000 shares in 2002 and 2001                                                                            |                            |                                            |         |         |         |         |         |        
|                                       | Issued and outstanding: none                                                                                         |                            |                                            |         |         |         |         |         |        
|Common stock, $0.001 par value:        |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       | Authorized: 200,000 shares in 2002 and 2001; issued and
outstanding: 35,775 shares in 2002 and 35,158 shares in 2001 |                            |                                            | 36      |         |         |         | 35      |        
|Additional paid-in capital             |                                                                                                                      |                            | 250,133                                    |         |         |         | 252,733 |        
|Other comprehensive income             |                                                                                                                      |                            | 1,963                                      |         |         |         | 652     |        
|Retained earnings                      |                                                                                                                      |                            | 12,133                                     |         |         |         | 10,724  |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       |                                                                                                                      | Total stockholders equity |                                            |         | 264,265 |         |         |         | 264,144 |        
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        
|                                       |                                                                                                                      |                            | Total liabilities and stockholders equity |         | $       | 298,150 |         |         | $       | 303,599 | 
|                                       |                                                                                                                      |                            |                                            |         |         |         |         |        

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

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VERITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |        |        | 
|-------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ------------------ | ------ | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                                         |                            |                          |        | Year Ended May 31,
|                                                         |                            |                          |        |                   
|                                                         |                            |                          |        | 2002               |        | 2001 |         | 2000   
|                                                         |                            |                          |        |                    |        |      |         |        
|Revenues:                                                |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         | Software products          |                          | $      | 55,859             |        |      | $       | 108,705 |         |   | $      | 69,655 |       
|                                                         | Service and other          |                          |        | 37,906             |        |      |         | 36,330  |         |   |        | 26,445 |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         |                            | Total revenues           |        |                    | 93,765 |      |         |         | 145,035 |   |        |        | 96,100 | 
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Costs of revenues:                                       |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         | Software products          |                          |        | 2,254              |        |      |         | 1,655   |         |   |        | 880    |       
|                                                         | Service and other          |                          |        | 10,978             |        |      |         | 11,821  |         |   |        | 8,357  |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         |                            | Total costs of revenues  |        |                    | 13,232 |      |         |         | 13,476  |   |        |        | 9,237  | 
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Gross profit                                             |                            |                          | 80,533 |                    |        |      | 131,559 |         |         |   | 86,863 |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Operating expenses:                                      |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         | Research and development   |                          |        | 23,627             |        |      |         | 21,639  |         |   |        | 16,017 |       
|                                                         | Marketing and sales        |                          |        | 50,285             |        |      |         | 56,637  |         |   |        | 38,742 |       
|                                                         | General and administrative |                          |        | 11,654             |        |      |         | 10,636  |         |   |        | 6,847  |       
|                                                         | Restructuring charge       |                          |        | 1,563              |        |      |         |        |         |   |        |       |       
|                                                         | Charitable contribution    |                          |        | 1,000              |        |      |         |        |         |   |        |       |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|                                                         |                            | Total operating expenses |        |                    | 88,129 |      |         |         | 88,912  |   |        |        | 61,606 | 
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Income (loss) from operations                            |                            |                          | (7,596 | )                  |        |      | 42,647  |         |         |   | 25,257 |       
|Other income, net                                        |                            |                          | 9,905  |                    |        |      | 11,343  |         |         |   | 5,623  |       
|Interest expense                                         |                            |                          | (36    | )                  |        |      | (8      | )       |         |   | (20    | )     
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Income before provision for income taxes                 |                            |                          | 2,273  |                    |        |      | 53,982  |         |         |   | 30,860 |       
|Provision for (benefit from) income taxes                |                            |                          | 864    |                    |        |      | 20,222  |         |         |   | (2,150 | )     
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Net income                                               |                            | $                        | 1,409  |                    |        | $    | 33,760  |         |         | $ | 33,010 |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Net income per share  basic                             |                            | $                        | 0.04   |                    |        | $    | 1.00    |         |         | $ | 1.10   |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Net income per share  diluted                           |                            | $                        | 0.04   |                    |        | $    | 0.92    |         |         | $ | 0.95   |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Number of shares used in per share calculation  basic   |                            |                          | 35,404 |                    |        |      | 33,634  |         |         |   | 30,026 |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       
|Number of shares used in per share calculation  diluted |                            |                          | 37,169 |                    |        |      | 36,649  |         |         |   | 34,886 |       
|                                                         |                            |                          |        |                    |        |      |         |         |         |   |        |       

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

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VERITY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the years ended May 31, 2002, 2001 and 2000 (in thousands)

|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |         |  
|----------------------------------------------------------------- | ---------------------------------- |  | ------------ | ------ | ---------- | - | ------------- | -- | ------------ | - | ------------- | ------- | ------ | - | ----- | - | -------- | - | ------- | - |  | - | ------- | ------- | -
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   | Other |   | Retained |   |         |   | 
|                                                                  |                                    |  | Common Stock |        | Additional |   | Comprehensive |    | Earnings     |   | Total        
|                                                                  |                                    |  |              |        | Paid-In    |   | Income        |    | (Accumulated |   | Stockholders'
|                                                                  |                                    |  | Shares       |        | Amount     |   | Capital       |    | (Loss)       |   | Deficit)      |         | Equity
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |       
|Balances, May 31, 1999                                            |                                    |  | 25,612       |        |            | $ | 26            |    |              | $ | 99,412        |         |        | $ | 27    |   |          | $ | (56,046 | ) |  | $ | 43,419  |        
|Issuance of common stock:                                         |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|                                                                  | Upon exercise of stock options     |  |              | 2,293  |            |   |               | 2  |              |   |               | 10,577  |        |   |       |  |          |   |         |  |  |   |         | 10,579  |  
|                                                                  | Under employee stock purchase plan |  |              | 402    |            |   |               |   |              |   |               | 3,074   |        |   |       |  |          |   |         |  |  |   |         | 3,074   |  
|                                                                  | Secondary offering                 |  |              | 3,279  |            |   |               | 3  |              |   |               | 69,309  |        |   |       |  |          |   |         |  |  |   |         | 69,312  |  
|Deferred tax benefit from disqualified
dispositions               |                                    |  | 20           |        |            |   |              |    |              |   | 24,668        |         |        |   |      |   |          |   |        |   |  |   | 24,668  |        
|Unrealized loss on investments                                    |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   | (428  | ) |          |   |        |   |  |   | (428    | )      
|Net income                                                        |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   |      |   |          |   | 33,010  |   |  |   | 33,010  |        
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|Balances, May 31, 2000                                            |                                    |  | 31,606       |        |            |   | 31            |    |              |   | 207,040       |         |        |   | (401  | ) |          |   | (23,036 | ) |  |   | 183,634 |        
|Issuance of common stock:                                         |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|                                                                  | Upon exercise of stock options     |  |              | 3,394  |            |   |               | 4  |              |   |               | 30,364  |        |   |       |  |          |   |         |  |  |   |         | 30,368  |  
|                                                                  | Under employee stock purchase plan |  |              | 158    |            |   |               |   |              |   |               | 3,733   |        |   |       |  |          |   |         |  |  |   |         | 3,733   |  
|                                                                  | Secondary offering                 |  |              |       |            |   |               |   |              |   |               | 20      |        |   |       |  |          |   |         |  |  |   |         | 20      |  
|Deferred tax benefit from disqualified
dispositions               |                                    |  |             |        |            |   |              |    |              |   | 24,459        |         |        |   |      |   |          |   |        |   |  |   | 24,459  |        
|Allowance for deferred tax benefit from
Disqualified dispositions |                                    |  |             |        |            |   |              |    |              |   | (12,883       | )       |        |   |      |   |          |   |        |   |  |   | (12,883 | )      
|Unrealized gain on investments                                    |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   | 1,053 |   |          |   |        |   |  |   | 1,053   |        
|Net income                                                        |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   |      |   |          |   | 33,760  |   |  |   | 33,760  |        
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|Balances, May 31, 2001                                            |                                    |  | 35,158       |        |            |   | 35            |    |              |   | 252,733       |         |        |   | 652   |   |          |   | 10,724  |   |  |   | 264,144 |        
|Issuance of common stock:                                         |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|                                                                  | Upon exercise of stock options     |  |              | 1,769  |            |   |               | 2  |              |   |               | 14,533  |        |   |       |  |          |   |         |  |  |   |         | 14,535  |  
|                                                                  | Under employee stock purchase plan |  |              | 350    |            |   |               |   |              |   |               | 2,852   |        |   |       |  |          |   |         |  |  |   |         | 2,852   |  
|Deferred tax benefit from disqualified
dispositions               |                                    |  |             |        |            |   |              |    |              |   | 5,821         |         |        |   |      |   |          |   |        |   |  |   | 5,821   |        
|Allowance for deferred tax benefit from
disqualified dispositions |                                    |  |             |        |            |   |              |    |              |   | (5,821        | )       |        |   |      |   |          |   |        |   |  |   | (5,821  | )      
|                                                                  | Repurchase of common stock         |  |              | (1,502 | )          |   |               | (1 | )            |   |               | (19,985 | )      |   |       |   |          |   |         |   |  |   |         | (19,986 | )
|Unrealized gain on investments                                    |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   | 1,311 |   |          |   |        |   |  |   | 1,311   |        
|Net income                                                        |                                    |  |             |        |            |   |              |    |              |   |              |         |        |   |      |   |          |   | 1,409   |   |  |   | 1,409   |        
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        
|Balances, May 31, 2002                                            |                                    |  | 35,775       |        |            | $ | 36            |    |              | $ | 250,133       |         |        | $ | 1,963 |   |          | $ | 12,133  |   |  | $ | 264,265 |        
|                                                                  |                                    |  |              |        |            |   |               |    |              |   |               |         |        |   |       |   |          |   |         |   |  |   |         |        

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

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VERITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |          |         |          |  
|------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------- | -------- | ------------------ | ------ | ------ | -------- | ------- | ------- | ----- | -------- | ------- | -------- | -
|                                                  |                                                                                   |                                                       |                                                      |          | Year Ended May 31,
|                                                  |                                                                                   |                                                       |                                                      |          |                   
|                                                  |                                                                                   |                                                       |                                                      |          | 2002               |        | 2001   |          | 2000   
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |        
|Cash flows from operating activities:             |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  | Net income                                                                        |                                                       | $                                                    | 1,409    |                    |        | $      | 33,760   |         |         | $     | 33,010   |        
|                                                  | Adjustments to reconcile net income to net cash provided
by operating activities: |                                                       |                                                      |          |                    |        |        |          |         |         |       |          |        
|                                                  |                                                                                   | Depreciation                                          |                                                      |          | 4,251              |        |        |          | 3,185   |         |       |          | 2,797   |         
|                                                  |                                                                                   | Noncash restructuring charges                         |                                                      |          | (6                 | )      |        |          |        |         |       |          | (229    | )       
|                                                  |                                                                                   | Provision for doubtful accounts                       |                                                      |          | 993                |        |        |          | 1,163   |         |       |          | 621     |         
|                                                  |                                                                                   | Deferred income taxes                                 |                                                      |          | 409                |        |        |          | 19,336  |         |       |          | (26,772 | )       
|                                                  |                                                                                   | Amortization of premium/(discount) on securities, net |                                                      |          | 352                |        |        |          | (1,030  | )       |       |          | (286    | )       
|                                                  | Changes in operating assets and liabilities:                                      |                                                       |                                                      |          |                    |        |        |          |         |         |       |          |        
|                                                  |                                                                                   | Trade accounts receivable                             |                                                      |          | 15,787             |        |        |          | (15,966 | )       |       |          | (7,062  | )       
|                                                  |                                                                                   | Prepaid and other current assets                      |                                                      |          | 1,292              |        |        |          | (2,887  | )       |       |          | (2,565  | )       
|                                                  |                                                                                   | Accounts payable                                      |                                                      |          | (1,047             | )      |        |          | 381     |         |       |          | 2,757   |         
|                                                  |                                                                                   | Accrued compensation and other accrued liabilities    |                                                      |          | (2,431             | )      |        |          | 5,438   |         |       |          | 2,383   |         
|                                                  |                                                                                   | Deferred revenue                                      |                                                      |          | (2,091             | )      |        |          | 4,350   |         |       |          | 3,556   |         
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  |                                                                                   |                                                       | Net cash provided by operating activities            |          |                    | 18,918 |        |          |         | 47,730  |       |          |         | 8,210    |  
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|Cash flows from investing activities:             |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  | Acquisition of equipment and leasehold improvements                               |                                                       |                                                      | (3,073   | )                  |        |        | (6,184   | )       |         |       | (1,873   | )      
|                                                  | Purchases of marketable securities                                                |                                                       |                                                      | (512,409 | )                  |        |        | (640,872 | )       |         |       | (465,554 | )      
|                                                  | Maturity of marketable securities                                                 |                                                       |                                                      | 305,908  |                    |        |        | 323,692  |         |         |       | 219,531  |        
|                                                  | Proceeds from sale of marketable securities                                       |                                                       |                                                      | 203,628  |                    |        |        | 246,438  |         |         |       | 131,408  |        
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  |                                                                                   |                                                       | Net cash used in investing activities                |          |                    | (5,946 | )      |          |         | (76,926 | )     |          |         | (116,488 | )
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|Cash flows from financing activities:             |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  | Proceeds from the sale of common stock net of issuance costs                      |                                                       |                                                      | 17,387   |                    |        |        | 34,155   |         |         |       | 107,633  |        
|                                                  | Repurchase of common stock                                                        |                                                       |                                                      | (19,986  | )                  |        |        |         |         |         |       |         |        
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  |                                                                                   |                                                       | Net cash provided (used) by financing activities     |          |                    | (2,599 | )      |          |         | 34,155  |       |          |         | 107,633  |  
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|Effect of exchange rate changes on cash           |                                                                                   |                                                       | 668                                                  |          |                    |        | 68     |          |         |         | (79   | )       
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  |                                                                                   |                                                       | Net increase (decrease) in cash and cash equivalents |          |                    | 11,041 |        |          |         | 5,027   |       |          |         | (724     | )
|Cash and cash equivalents, beginning of period    |                                                                                   |                                                       | 12,210                                               |          |                    |        | 7,183  |          |         |         | 7,907 |         
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|Cash and cash equivalents, end of period          |                                                                                   | $                                                     | 23,251                                               |          |                    | $      | 12,210 |          |         | $       | 7,183 |         
|                                                  |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|Supplemental disclosure of cash flow information: |                                                                                   |                                                       |                                                      |          |                    |        |        |          |         |         |       |         
|                                                  | Cash paid during the period for interest                                          |                                                       | $                                                    | 17       |                    |        | $      | 4        |         |         | $     | 20       |        
|                                                  | Cash paid during the period for income taxes                                      |                                                       | $                                                    | 375      |                    |        | $      | 286      |         |         | $     | 237      |        

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

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VERITY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

|                                                                               |  |                    |       |      |  |      |        |  |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------ | ----- | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                                                               |  | Year Ended May 31,
|                                                                               |  |                   
|                                                                               |  | 2002               |       | 2001 |  | 2000
|                                                                               |  |                    |       |      |  |     
|Net income                                                                     |  | $                  | 1,409 |      |  | $    | 33,760 |  |  | $ | 33,010 |  
|Unrealized gains (losses) on available-for-sale investments or securities, net |  |                    | 1,311 |      |  |      | 1,053  |  |  |   | (428   | )
|                                                                               |  |                    |       |      |  |      |        |  |  |   |        |  
|Comprehensive income                                                           |  | $                  | 2,720 |      |  | $    | 34,813 |  |  | $ | 32,582 |  
|                                                                               |  |                    |       |      |  |      |        |  |  |   |        |  

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VERITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Verity, Inc. (the Company) develops, markets and supports products for
corporate intranets, extranets, corporate portals, online publishers and
e-commerce providers, and original equipment manufacturer (OEM) toolkits for
independent software vendors (ISVs). Veritys comprehensive and integrated
product family enables enterprise-wide document indexing, classification,
search and retrieval, organization and navigation, viewing, personalized
dissemination, and hybrid online and CD/DVD publishing all from the same
underlying Verity information index. The Company markets and sells its software
and services to commercial end users across many industries and government
entities through multiple distribution channels, including direct sales,
primarily in the United States and Europe and a worldwide network of value
added resellers and system integrators.

2. Summary of Significant Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Our estimates, judgements and
assumptions are continually evaluated based on available information and
experience, however actual amounts could differ from those estimates.

Basis of consolidation

The consolidated financial statements include the accounts of Verity, Inc.
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

Cash and cash equivalents

Cash and cash equivalents consist of highly liquid investments with an
original or remaining maturity of 90 days or less as of the date of purchase.
Cash equivalents are stated at amortized cost plus accrued interest, which
approximates fair value. Cash equivalents consist primarily of money market
instruments and certificates of deposit, which amounted to $23.3 million and
$12.2 million at May 31, 2002 and 2001, respectively.

Investments

The Company has classified its investments as available-for-sale. Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of stockholders equity, net of
tax, until realized. Interest income is recorded using an effective interest
rate with the associated premium or discount amortized to interest income. The
cost of securities sold is based upon the specific identification method. As of
the balance sheet date, investments with maturity dates of one year or less are
classified as current, and those with maturity dates of greater than one year
are classified as long-term.

Equipment and leasehold improvements

Equipment and leasehold improvements are stated at cost less accumulated
depreciation. Equipment is depreciated on a straight-line basis over the
estimated useful lives of the related assets; computers are depreciated over
three years, software is depreciated up to two years, and furniture and
fixtures are depreciated over five years. Leasehold improvements and leased
assets are amortized on a straight-line basis over the lesser of their
estimated useful life or the lease term. Gains and losses upon asset disposal
are taken into income in the year of disposition.

The Company periodically evaluates the carrying value of equipment and
leasehold improvements to be held and used when events and circumstances
warrant such a review. The carrying value of equipment and leasehold
improvements is considered impaired when the anticipated undiscounted cash
flows from the asset is separately identifiable and is less than the assets
carrying value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the asset. Fair value is

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determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the
cost to dispose.

Impairment of long-lived assets

The Company evaluates the recoverability of long-lived assets and
recognize impairment charges in the event the net book value of such assets
exceeds the future undiscounted cash flows attributed to such assets.
Long-lived assets include property and equipment.

Research and development costs

Costs related to research, design and development of products are charged
to research and development expense as incurred. Software development costs are
capitalized beginning when a products technological feasibility has been
established and ending when a product is available for general release to
customers. Such costs are amortized using the greater of the amount computed
using the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product, or on a
straight line basis over 12 to 18 months. The Company regularly evaluates
estimated net realizable value of costs and records write-downs for any product
for which the net book value is in excess of discounted cashflows. In fiscal
2002, 2001 and 2000, the Company did not capitalize any software development
costs since such costs were not significant.

Revenue Recognition

The Companys revenues are derived from license fees for software products
and fees for services complementary to its products, including software
maintenance, consulting and training. The Company generally charges fees for
services separately from the license fees for its software products.

The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The AICPA and its Software Revenue
Recognition Task Force continue to issue interpretations and guidance for
applying the relevant standards to a wide range of sales contract terms and
business arrangements that are prevalent in the software industry. Also, the
Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements, which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC. Future interpretations of existing accounting standards or changes
in the Companys business practices could result in future changes in its
revenue accounting policies that could have a material adverse effect on its
business, financial condition and results of operations.

The Company recognizes revenue from the sale of software licenses when
persuasive evidence of an arrangement exists, the product has been delivered,
the fees are fixed or determinable and collection of the resulting receivable
is probable. Delivery generally occurs when the product is delivered to a
common carrier. At the time of the transaction, the Company assesses whether
the fee associated with its revenue transactions is fixed or determinable and
whether or not collection is probable. The Company assesses whether the fee is
fixed or determinable based on the payment terms associated with the
transaction. The Company assesses collection based on a number of factors,
including past transaction history with the customer and the credit-worthiness
of the customer.

For all sales, the Company uses either a binding purchase order or signed
license agreement as evidence of an arrangement. Sales through the Companys
distributors are evidenced by a master agreement governing the relationship
together with binding purchase orders on a transaction by transaction basis.
The Companys arrangements do not generally include acceptance clauses.
However, if an arrangement includes an acceptance provision, acceptance occurs
upon the earlier of receipt of a written customer acceptance or expiration of
the acceptance period.

The Company recognizes maintenance revenues from ongoing customer support
and product upgrades ratably over the term of the applicable maintenance
agreement, which is typically twelve months. Generally, the Company receives
payments for maintenance fees in advance and they are nonrefundable. The
Company recognizes revenues for consulting and training generally when the
services are performed.

For agreements with multiple elements, such as license, maintenance,
training and consulting services, the Company allocates revenue to each
component of the arrangement using the residual value method and defers revenue
from the arrangement equivalent to the fair value of the undelivered elements.
The Company bases fair values for the ongoing maintenance and support
obligations on separate sales of these items to other customers or on
contractually stipulated renewal rates. The Company bases fair value of
services,

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such as training and consulting, upon separate sales of these services to
other customers. The Company allocates any remaining amount to the delivered
elements and recognizes it as revenue when the conditions set forth above are
met.

Sales Returns, Allowance for Doubtful Accounts

The Companys management must make estimates of potential future product
returns related to current period product revenue. Management analyzes
historical returns, current economic trends, and changes in customer demand and
acceptance of its products when evaluating the adequacy of the sales returns
allowance. Management judgments and estimates must be made and used in
connection with establishing the sales returns allowance in any accounting
period. Similarly, management must make estimates of the uncollectability of
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. As
of May 31, 2002, the Companys accounts receivable balance was $21.0 million,
net of provision for sales returns allowance of $0.2 million and allowance for
doubtful accounts of $1.4 million. On May 31, 2001, the Companys accounts
receivable balance was $37.7 million, net of provision for sales returns
allowance of $0.1 million and allowance for doubtful accounts of $1.4 million.

Stock-based compensation

The Company accounts for stock-based employee compensation arrangements
based on the difference, if any, on the date of grant, between the fair value
of Veritys stock and the exercise price. The Company accounts for stock-based
arrangements issued to non-employees based on the fair value of the stock
granted using the Black-Scholes option pricing model at the date of grant.

Deferred stock-based compensation is being amortized using the graded
vesting method over the vesting period of each respective option, which is
generally four years. Under the graded vesting method, each option grant is
separated into portions based on its vesting terms, which results in
acceleration of amortization expense for the overall award.

Accounting for Income Taxes

As part of the process of preparing its consolidated financial statements
the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. The Companys income tax accounting process
involves it recording the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, as well as operating loss and tax
credit carryforwards. These differences result in the recognition of deferred
tax assets and liabilities.

The Company evaluates this tax asset at each balance sheet date to
determine its realizability, considering, without limitation, currently enacted
tax laws, expected future taxable income and origins of the specific components
of the deferred tax asset. If the Company determines that it is not fully
realizable, it will record a valuation allowance to reduce the asset balance to
its realizable value through a charge to income tax expense. Determining
whether it will be able to utilize the net operating loss carryforward requires
that the Company estimate future taxable income and make judgments regarding
the timing of future tax obligations. Actual taxable income could differ from
the Companys estimates.

As of May 31, 2002, we believe it is more likely than not that we will be
able to realize the majority of our tax asset through expected future taxable
profits, but believe that it is more probable than not that we will not be able
to recover any benefits from net operating loss carryforwards originating from
deductions for the exercise and/or disposition of stock options in recent
periods. Therefore, we recorded a valuation allowance related to this component
of the deferred tax asset. The net operating loss carryforwards originating
from deductions for the exercise and/or disposition of stock options and the
related valuation allowance has been recorded against additional paid-in
capital and did not affect net income for the period.

If we conclude that other components of the deferred tax asset require a
valuation allowance in the future, the effect on income tax expense could be
material

Certain risks and concentrations

The Companys products are concentrated in the electronic information
search and retrieval software industry, which is highly competitive and rapidly
changing. A number of companies offer competitive products addressing certain
of the Companys target

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markets and act as direct competitors of the Company. The Company is
dependent on the success of its strategic partners to obtain its competitive
edge.

Revenue is mainly derived from relatively large sales to a limited number
of customers, representing significant exposure to the loss of a major customer
or any reduction in orders by such customers, significant technological changes
in the industry, and the infringement or expropriation of proprietary
intellectual property rights or patents. In addition, a significant portion of
the Companys revenue is derived from international sales, and therefore
exposes the Company to fluctuation of the U.S. dollar against foreign
currencies or local economic conditions.

Financial instruments, which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents,
investments and accounts receivable. The Company maintains the majority of its
cash and cash equivalents in demand accounts with two major financial
institutions.

The Company maintains cash balances in excess of its operating
requirements in commercial paper securities issued by various corporate
institutions, and debt securities backed by the United States government. The
Company has not experienced any material losses in any of the instruments it
has used for excess cash balances.

The Company sells products to companies in North America, Europe, Asia,
South Africa, South America and Australia. The Company performs ongoing credit
evaluations of its customers financial condition and, generally, requires no
collateral from its customers. The Company also performs an analysis of the
expected collectibility of accounts receivable and records an allowance for
doubtful accounts receivable when necessary. The Company maintains allowances
for potential losses and such losses have been within managements
expectations. For the fiscal year ended May 31 2002, no customer accounted for
more than 10% of the total accounts receivable balance. One customer accounted
for 14.1% of the total accounts receivable balance at May 31, 2001. No customer
accounted for more than 10% of the total revenue in any period reported.

Foreign currency translation

The Company translates the accounts of its foreign branches and
subsidiaries using historical rates for nonmonetary assets and current rates
for monetary assets. Remeasurement gains and losses from the translation of
these branches and those that arise from exchange rate changes on transactions
denominated in a currency other than the local currency are included in the
statements of operations. The Companys foreign branches and subsidiaries use
the U.S. dollar as their functional currency as the U.S. parent exclusively
funds the branches and subsidiaries operations with U.S. dollars and has
substantive control over local operations. The net gain (loss) on foreign
currency remeasurement and exchange rate changes for fiscal years 2002, 2001
and 2000, which is included in other income (expense) net on the accompanying
statements of operations, was ($149,000), ($772,000), and ($440,000),
respectively.

Fair value of financial instruments

Carrying amounts of certain of the Companys financial instruments,
including cash and cash equivalents, investments, accounts receivable and
accounts payable approximate fair value due to their short maturities. The fair
value of the Companys investments is set forth in Note 3.

Computation of net income 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 shares of common stock and common
stock equivalent shares outstanding during the period. Dilutive common stock
equivalent shares consist of stock options.

Comprehensive income

The Company has adopted Statement of Financial Accounting Standards No.
130 (SFAS 130.) Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. Other comprehensive
income for all periods presented consists of unrealized gains and losses on
available-for-sale securities.

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Reclassification

The Company has reclassified certain amounts in the prior years financial
statements to conform to the current years presentation.

Recent accounting pronouncements

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

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

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

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

3. Investments

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

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

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

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Within one year                    |  | $ | 130,672 | 
|After one year through three years |  |   | 91,433  | 
|                                   |  |   |         | 
|                                   |  | $ | 222,105 | 
|                                   |  |   |         | 

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As of May 31, 2001, available-for-sale securities consist of the following
(in thousands):

|                                        |                   |   |           |         |            |   |       |       |  |   |         |         | 
|--------------------------------------- | ----------------- | - | --------- | ------- | ---------- | - | ----- | ----- |  | - | ------- | ------- | 
|                                        |                   |   |           |         |            |   | Gross |       |  |   |        
|                                        |                   |   | Amortized |         | Unrealized |   | Fair 
|                                        |                   |   | Cost      |         | Gains      |   | Value
|                                        |                   |   |           |         |            |   |      
|Corporate commercial paper  short-term |                   | $ | 126,085   |         |            | $ | 602   |       |  | $ | 126,687 |        
|Corporate commercial paper  long-term  |                   |   | 91,687    |         |            |   | 561   |       |  |   | 92,248  |        
|                                        |                   |   |           |         |            |   |       |       |  |   |         |        
|                                        | Total investments |   | $         | 217,772 |            |   | $     | 1,163 |  |   | $       | 218,935 | 
|                                        |                   |   |           |         |            |   |       |       |  |   |         |        

4. Balance Sheet Detail

Trade receivables

As of May 31, 2002 and 2001, the balance of trade receivables is as
follows (in thousands):

|                                |  |         |        |      |  |   |        |  
|------------------------------- |  | ------- | ------ | ---- |  | - | ------ | -
|                                |  | May 31,
|                                |  |        
|                                |  | 2002    |        | 2001
|                                |  |         |        |     
|Trade receivables               |  | $       | 22,389 |      |  | $ | 39,091 |  
|Allowance for doubtful accounts |  |         | (1,428 | )    |  |   | (1,350 | )
|                                |  |         |        |      |  |   |        |  
|                                |  | $       | 20,961 |      |  | $ | 37,741 |  
|                                |  |         |        |      |  |   |        |  

Write-offs against the allowance for doubtful accounts were $915,000,
$713,000 and $621,000 in the fiscal years ended May 31, 2002, 2001 and 2000,
respectively.

Property and equipment

As of May 31, 2002 and 2001, property and equipment consist of the
following (in thousands):

|                              |  |         |         |      |  |   |         |  
|----------------------------- |  | ------- | ------- | ---- |  | - | ------- | -
|                              |  | May 31,
|                              |  |        
|                              |  | 2002    |         | 2001
|                              |  |         |         |     
|Computer equipment            |  | $       | 16,781  |      |  | $ | 15,090  |  
|Furniture and fixtures        |  |         | 5,787   |      |  |   | 5,321   |  
|Leasehold improvements        |  |         | 5,759   |      |  |   | 5,310   |  
|                              |  |         |         |      |  |   |         |  
|                              |  |         | 28,327  |      |  |   | 25,721  |  
|Less accumulated depreciation |  |         | (21,702 | )    |  |   | (17,917 | )
|                              |  |         |         |      |  |   |         |  
|                              |  | $       | 6,625   |      |  | $ | 7,804   |  
|                              |  |         |         |      |  |   |         |  

Depreciation expense for fiscal years 2002, 2001 and 2000 was $4,251,000,
$3,185,000 and $2,797,000, respectively.

At May 31, 2002 and 2001, there were no assets under capital leases.

5. Commitments and Contingencies

Commitments

The Company leases various facilities and vehicles under noncancelable
operating leases expiring through May 2009. Under the terms of the leases, the
Company is responsible for taxes, insurance and normal maintenance costs. Under
its primary operating facility lease, the Company may extend the lease term for
an additional five years by providing written notice of its exercise of this
option no later than six months before the expiration of the lease term. The
Company has subleased certain of its space to other companies for various
periods through October 2004.

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At May 31, 2002, future minimum rental payments and receipts under the
operating leases are as follows (in thousands):

|                           |  |          |        |          |  |   |     | 
|-------------------------- |  | -------- | ------ | -------- |  | - | --- | 
|                           |  | Rental   |        | Sublease
|Fiscal Year Ending May 31, |  | Payments |        | Income  
|                           |  |          |        |         
|2003                       |  | $        | 3,121  |          |  | $ | 740 | 
|2004                       |  |          | 2,815  |          |  |   | 115 | 
|2005                       |  |          | 2,334  |          |  |   | 48  | 
|2006                       |  |          | 1,064  |          |  |   |    | 
|2007 and thereafter        |  |          | 2,460  |          |  |   |    | 
|                           |  |          |        |          |  |   |     | 
|                           |  | $        | 11,794 |          |  | $ | 903 | 
|                           |  |          |        |          |  |   |     | 

Worldwide rent expense, excluding sublease income, for fiscal years 2002,
2001 and 2000 was $3,936,000, $2,890,000 and $2,134,000, respectively.

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 counterclaim, among other things, damages according to
proof, a declaration that BroadVision has not breached the parties license and
attorneys fees.

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

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

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

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6. Stockholders Equity

1995 Stock Option Plan

In July 1995, the Company adopted the Amended and Restated 1995 Stock
Option Plan, which amended and restated the 1988 Stock Option Plan. In
September 1999 and September 2000, the Companys stockholders approved an
increase to the number of shares reserved under the 1995 Stock Option Plan to a
total of 10,122,000 and 12,122,000 shares, respectively.

Under the terms of the Plan, options may be granted at prices not lower
than the fair market value at the date of grant as determined by the Board of
Directors. Incentive and non-statutory options, which are granted to
stockholders who own more than 10% of the total combined voting power of all
classes of Companys stock are granted at not less than 110% of the fair market
value of the shares at the date of grant. The term of options granted to the
stockholders who own more than 10% of the total combined voting power of all
classes of stock of the Company is five years from the date of grant or shorter
term as provided in the written option agreement. All other option grants from
this plan may have a term of eight years or shorter as provided in the written
option agreement.

Common shares purchased under the Plan are subject to the Companys right
of repurchase, which generally lapses as to 12.5% of the shares six months from
the grant date and thereafter ratably over the remainder of a 3 1/2 year period
at the holders original purchase price. Thereafter, the Company has the right
of first refusal to purchase such shares. At May 31, 2002, 2001 and 2000, the
Company had 0, 84, and 9,793 shares, respectively, subject to the Companys
right to repurchase. As of May 31, 2002, 422,000 shares of common stock were
available for grant under the 1995 Stock Option Plan.

Outside Directors Plan

In July 1995, the Companys Board of Directors approved the 1995 Outside
Directors Plan and reserved 400,000 shares of common stock for issuance to
directors of the Company who are not employees of the Company. The Outside
Directors Plan provides for the automatic granting of nonqualified stock
options to directors of the Company who are not employees of the Company.

At the initiation of the Plan, each current outside director was
automatically granted an option to purchase 40,000 shares of common stock at
the following annual meeting of stockholders. Each new outside director is
automatically granted an option to purchase shares of the Companys common
stock at the time of annual meeting following their appointment. Thereafter, at
each annual meeting of the stockholders, outside directors who have previously
received options will receive a new option to purchase 40,000 shares of the
Companys common stock. The exercise price of the options in all cases will be
equal to the fair market value of the Companys common stock at the date of
grant. Options granted under the Directors Plan are immediately exercisable,
but vest over four years and generally must be exercised within ten years. In
September 1999, the Companys stockholders approved an increase to the number
of shares reserved under the Outside Directors Plan to a total of 1,000,000
shares. As of May 31, 2002, 380,000 shares of common stock were available for
grant under this plan.

1996 Nonstatutory Stock Option Plan

In February 1996, the Companys Board of Directors approved the 1996
Nonstatutory Stock Option Plan. The terms of the 1996 Nonstatutory Stock Option
Plan are substantially the same as those of the 1995 Stock Option Plan with the
exception of the type of options available, the option exercise price and the
maximum option term. Nonqualified options may be granted at prices not lower
than 85% of fair market value at the date of grant as determined by the Board
of Directors. The option may have a term of ten years or shorter as provided in
the written option agreement.

In fiscal years 2002, 2001 and 2000, the Company increased the number of
shares reserved under the Plan to 24,700,000, 12,700,000 and 8,420,000 shares
of common stock, respectively, for issuance to certain employees and
consultants of the Company. As of May 31, 2002, 8,363,000 shares of common
stock were available for grant under the 1996 Nonstatutory Stock Option Plan.

1997 Stock Option Plan for Verity Canada

In May 1997, the Companys Board of Directors authorized the adoption of
the 1997 Stock Option Plan for Verity Canada. The terms of the 1997 Stock
Option Plan for Verity Canada are substantially the same as those of the 1995
Stock Option Plan with the exception of option type and term.

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In May and October 1999, the Company increased the number of shares
reserved under the 1997 Plan to a total of 1,180,000 and 1,480,000 shares,
respectively. In June and December 2000, the Company increased the number of
shares reserved under the 1997 Plan to a total of 1,980,000 and 2,250,000
shares, respectively. As of May 31, 2002, 221,000 shares of common stock were
available for grant under the 1997 Stock Option Plan for Verity Canada.

Equity Compensation Plan Information

The following table gives information about our Company Stock that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of May 31, 2002, including Veritys
Restated 1995 Stock Option Plan, 1996 Nonstatutory Stock Option Plan, Outside
Directors Plan, and the 1997 Stock Option Plan (together, the Option Plans):

|                                                       |  |                                      |            |                   |  |                         |       |                      |  |  |           | 
|------------------------------------------------------ |  | ------------------------------------ | ---------- | ----------------- |  | ----------------------- | ----- | -------------------- |  |  | --------- | 
|                                                       |  | Equity Compensation Plan Information
|                                                       |  |                                     
|                                                       |  | (a)                                  |            | (b)               |  | (c)                    
|                                                       |  | Number of                            |            |                   |  |                         |       | Number of securities
|                                                       |  | securities to be                     |            |                   |  |                         |       | remaining available 
|                                                       |  | issued upon                          |            | Weighted average  |  | for future issuance    
|                                                       |  | exercise of                          |            | exercise price of |  | under equity           
|                                                       |  | outstanding                          |            | outstanding       |  | compensation plans     
|                                                       |  | options, warrants                    |            | options, warrants |  | (excluding securities  
|Plan Category                                          |  | and rights                           |            | and rights        |  | reflected in column(a))
|                                                       |  |                                      |            |                   |  |                        
|Equity compensation
plans approved by
stockholders     |  |                                      | 5,630,000  |                   |  | $                       | 23.31 |                      |  |  | 802,000   | 
|Equity compensation
plans not approved
by stockholders |  |                                      | 13,655,000 | (1)               |  |                         | 18.64 |                      |  |  | 8,584,000 | 
|                                                       |  |                                      |            |                   |  |                         |       |                      |  |  |           | 
|TOTAL                                                  |  |                                      | 19,285,000 |                   |  | $                       | 20.00 |                      |  |  | 9,386,000 | 
|                                                       |  |                                      |            |                   |  |                         |       |                      |  |  |           | 



---

|(1) |  | Issued under our 1996 Nonstatutory Stock Option Plan and our 1997
Stock Option Plan for Verity Canada, both of which do not require the
approval of and has not been approved by our stockholders. See the
description above of the 1996 Nonstatutory Stock Option Plan and the
1997 Stock Option Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Activity under stock option plans

Activity under the above stock option plans is set forth below:

|                       |                             |  |           |            |        |  |                     |            |           |   |          |       |  |   |             |             |  
|---------------------- | --------------------------- |  | --------- | ---------- | ------ |  | ------------------- | ---------- | --------- | - | -------- | ----- |  | - | ----------- | ----------- | -
|                       |                             |  |           |            |        |  | Options Outstanding
|                       |                             |  |           |            |        |  |                    
|                       |                             |  |           |            |        |  |                     |            |           |   | Weighted |       |  |   |            
|                       |                             |  |           |            |        |  |                     |            |           |   | Average  |       |  |   |            
|                       |                             |  | Shares    |            |        |  |                     |            | Price Per |   |          |       | 
|                       |                             |  | Available |            | Shares |  | Share               |            | Total    
|                       |                             |  |           |            |        |  |                     |            |          
|Balances, May 31, 1999 |                             |  | 2,382,000 |            |        |  | 9,094,000           |            |           | $ | 7.09     |       |  | $ | 64,469,000  |            
|                       | Shares reserved under plans |  |           | 5,600,000  |        |  |                     |           |           |   |          |      |  |   |             |            |  
|                       | Options granted             |  |           | (6,567,000 | )      |  |                     | 6,567,000  |           |   |          | 31.99 |  |   |             | 210,075,000 |  
|                       | Options canceled            |  |           | 648,000    |        |  |                     | (648,000   | )         |   |          | 12.34 |  |   |             | (7,999,000  | )
|                       | Options exercised           |  |           |           |        |  |                     | (2,293,000 | )         |   |          | 4.61  |  |   |             | (10,577,000 | )
|                       |                             |  |           |            |        |  |                     |            |           |   |          |       |  |   |             |            
|Balance, May 31, 2000  |                             |  | 2,063,000 |            |        |  | 12,720,000          |            |           |   | 20.12    |       |  |   | 255,968,000 |            
|                       | Shares reserved under plans |  |           | 7,051,000  |        |  |                     |           |           |   |          |      |  |   |             |            |  
|                       | Options granted             |  |           | (8,418,000 | )      |  |                     | 8,418,000  |           |   |          | 23.69 |  |   |             | 199,341,000 |  
|                       | Options canceled            |  |           | 1,467,000  |        |  |                     | (1,467,000 | )         |   |          | 24.41 |  |   |             | (35,806,000 | )
|                       | Options exercised           |  |           |           |        |  |                     | (3,394,000 | )         |   |          | 8.95  |  |   |             | (30,366,000 | )
|                       |                             |  |           |            |        |  |                     |            |           |   |          |       |  |   |             |            
|Balances, May 31, 2001 |                             |  | 2,163,000 |            |        |  | 16,277,000          |            |           |   | 23.91    |       |  |   | 389,137,000 |            
|                       | Shares reserved under plans |  |           | 12,000,000 |        |  |                     |           |           |   |          |      |  |   |             |            |  
|                       | Options granted             |  |           | (7,164,000 | )      |  |                     | 7,164,000  |           |   |          | 9.47  |  |   |             | 67,818,000  |  
|                       | Options canceled            |  |           | 2,387,000  |        |  |                     | (2,387,000 | )         |   |          | 23.71 |  |   |             | (56,602,000 | )
|                       | Options exercised           |  |           |           |        |  |                     | (1,769,000 | )         |   |          | 8.22  |  |   |             | (14,535,000 | )
|                       |                             |  |           |            |        |  |                     |            |           |   |          |       |  |   |             |            
|Balances, May 31, 2002 |                             |  | 9,386,000 |            |        |  | 19,285,000          |            |           | $ | 20.00    |       |  | $ | 385,818,000 |            
|                       |                             |  |           |            |        |  |                     |            |           |   |          |       |  |   |             |            

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Common stock option plans

The following table summarizes information with respect to stock options
outstanding at May 31, 2002:

|                |  |                     |            |                          |  |          |      |           |  |          |       |  |  |          |            |  |  |   |       | 
|--------------- |  | ------------------- | ---------- | ------------------------ |  | -------- | ---- | --------- |  | -------- | ----- |  |  | -------- | ---------- |  |  | - | ----- | 
|                |  | Options Outstanding |            | Options Not Subject to  
|                |  |                     |            | Repurchase Upon Exercise
|                |  |                     |            |                          |  | Weighted |      |           |  |          |       | 
|                |  |                     |            |                          |  | Average  |      | Weighted  |  |          |       |  |  | Weighted
|                |  | Number at           |            | Remaining                |  | Average  |      | Number at |  | Average 
|Range of        |  | May 31,             |            | Contractual              |  | Exercise |      | May 31,   |  | Exercise
|Exercise Price  |  | 2002                |            | Life (Years)             |  | Price    |      | 2002      |  | Price   
|                |  |                     |            |                          |  |          |      |           |  |         
|$1.00 - $4.99   |  |                     | 822,000    |                          |  |          | 3.95 |           |  | $        | 3.39  |  |  |          | 749,000    |  |  | $ | 3.35  | 
|$5.00 - $16.49  |  |                     | 10,042,000 |                          |  |          | 6.80 |           |  |          | 11.28 |  |  |          | 5,699,000  |  |  |   | 11.99 | 
|$16.50 - $29.99 |  |                     | 1,860,000  |                          |  |          | 6.30 |           |  |          | 23.41 |  |  |          | 1,042,000  |  |  |   | 24.44 | 
|$30.00 - $53.00 |  |                     | 6,561,000  |                          |  |          | 5.81 |           |  |          | 34.48 |  |  |          | 4,726,000  |  |  |   | 34.20 | 
|                |  |                     |            |                          |  |          |      |           |  |          |       |  |  |          |            |  |  |   |       | 
|                |  |                     | 19,285,000 |                          |  |          | 6.29 |           |  | $        | 20.00 |  |  |          | 12,216,000 |  |  | $ | 21.11 | 
|                |  |                     |            |                          |  |          |      |           |  |          |       |  |  |          |            |  |  |   |       | 

At May 31, 2001 options to purchase 7,611,000 shares of common stock were
not subject to rights of repurchase upon exercise at an average exercise price
of $19.56.

Employee stock purchase plan

In July 1995, the Companys Board of Directors approved the 1995 Employee
Stock Purchase Plan and reserved 500,000 shares of common stock for issuance to
eligible employees. In September 1999, the Companys stockholders approved an
increase to 4,000,000 shares of common stock. The Employee Stock Purchase Plan
permits eligible employees to purchase shares of the Companys common stock at
85% of the lesser of fair market value of the common stock on the first day of
the 12 month offering period or the last day of the six month purchase period
within the offering period. During the fiscal years ended May 31, 2002, 2001
and 2000, employees purchased 350,321, 159,293 and 401,861 shares at average
prices of $8.20, $23.44 and $7.65 per share, respectively. As of May 31, 2002,
2,862,000 shares of the Companys common stock have been issued under the plan
and 1,138,000 shares remained available for purchase.

Pro forma stock-based compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123,) Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been recognized
for the Companys stock option plans or Employee Stock Purchase Plan. Had
compensation cost for the Companys stock option plans and Employee Stock
Purchase Plan been determined based on the fair value at the grant date for
awards in fiscal years 2002, 2001 and 2000 consistent with the provisions of
SFAS No. 123, the Companys net income and net income per share for fiscal
years 2002, 2001 and 2000 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):

|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                             |  | Fiscal Years
|                                             |  |             
|                                             |  | 2002         |         | 2001 |  | 2000
|                                             |  |              |         |      |  |     
|Net income  as reported                     |  | $            | 1,409   |      |  | $    | 33,760  |   |  | $ | 33,010  |  
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Net loss  pro forma                         |  | $            | (77,474 | )    |  | $    | (67,098 | ) |  | $ | (25,148 | )
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Net income per share  basic  as reported   |  | $            | 0.04    |      |  | $    | 1.00    |   |  | $ | 1.10    |  
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Net income per share  diluted  as reported |  | $            | 0.04    |      |  | $    | 0.92    |   |  | $ | 0.95    |  
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Net loss per share  basic  pro forma       |  | $            | (2.19   | )    |  | $    | (1.99   | ) |  | $ | (0.84   | )
|                                             |  |              |         |      |  |      |         |   |  |   |         |  
|Net loss per share  diluted  pro forma     |  | $            | (2.19   | )    |  | $    | (1.99   | ) |  | $ | (0.84   | )
|                                             |  |              |         |      |  |      |         |   |  |   |         |  

The above pro forma disclosures are not necessarily representative of the
effects on reported net income (loss) for future years.

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The aggregate fair value and weighted average fair value of each option
granted in fiscal years 2002, 2001 and 2000 were $45.9 million, $140.2 million
and $145.9 million, and $6.41, $16.65 and $21.13, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
Option Pricing Model with the following weighted average assumptions for fiscal
years 2002, 2001 and 2000:

|                        |  |           |           |           |  |         |     |   |  |  |     |  
|----------------------- |  | --------- | --------- | --------- |  | ------- | --- | - |  |  | --- | -
|                        |  | 2002      |           | 2001      |  | 2000   
|                        |  |           |           |           |  |        
|Expected volatility     |  |           | 100       | %         |  |         | 100 | % |  |  | 100 | %
|Risk-free interest rate |  |           | 3.14-4.35 | %         |  |         | 5.4 | % |  |  | 6.8 | %
|Expected life           |  | 3.5 years |           | 3.5 years |  | 3 years
|Expected dividend yield |  |           | 0.0       | %         |  |         | 0.0 | % |  |  | 0.0 | %

The Company has also estimated the fair value for the purchase rights
under the Employee Stock Purchase Plan using the Black-Scholes Model with the
following assumptions for fiscal years 2002, 2001 and 2000:

|                        |  |                |           |                |  |                |     |   |  |  |     |  
|----------------------- |  | -------------- | --------- | -------------- |  | -------------- | --- | - |  |  | --- | -
|                        |  | 2002           |           | 2001           |  | 2000          
|                        |  |                |           |                |  |               
|Expected volatility     |  |                | 100       | %              |  |                | 100 | % |  |  | 100 | %
|Risk-free interest rate |  |                | 1.98-2.33 | %              |  |                | 5.4 | % |  |  | 6.8 | %
|Expected life           |  | .50-1.00 years |           | .50-1.00 years |  | .50-1.00 years
|Expected dividend yield |  |                | 0.0       | %              |  |                | 0.0 | % |  |  | 0.0 | %

Preferred stock purchase rights plan

In September 1996, the Companys Board of Directors adopted a Preferred
Stock Purchase Rights Plan designed to enable all Verity stockholders to
realize the full value of their investment and to provide for fair and equal
treatment for all Verity stockholders in the event that an unsolicited attempt
is made to acquire Verity. Under the Plan, stockholders will receive one Right
to purchase one one-hundredth of a share of a new series of Preferred Stock for
each outstanding share of Verity common stock held at the close of business on
October 2, 1996. The Rights expire on September 17, 2006.

Preferred stock and common stock

The Company is authorized to issue two classes of shares to be designated
respectively Preferred Stock, having a par value of $0.001 per share, and
Common Stock, having a par value of $0.001 per share. The total number of
shares of Preferred Stock the Company has the authority to issue is 1,999,995,
and the total number of shares of Common Stock the Company has authority to
issue is 200,000,000. None of the shares outstanding are subject to repurchase
as of May 31, 2002.

7. Income Taxes

Income tax expense includes U.S. and international 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.

Income before taxes consist of the following (in thousands):

|         |  |              |       |      |  |      |        |  |  |   |        | 
|-------- |  | ------------ | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|         |  | Fiscal Years
|         |  |             
|         |  | 2002         |       | 2001 |  | 2000
|         |  |              |       |      |  |     
|Domestic |  | $            | 1,056 |      |  | $    | 52,689 |  |  | $ | 28,669 | 
|Foreign  |  |              | 1,219 |      |  |      | 1,293  |  |  |   | 2,191  | 
|         |  |              |       |      |  |      |        |  |  |   |        | 
|         |  | $            | 2,275 |      |  | $    | 53,982 |  |  | $ | 30,860 | 
|         |  |              |       |      |  |      |        |  |  |   |        | 

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##### Table of Contents



Details of the income tax provision (benefit) for fiscal years 2002, 2001
and 2000 consist of the following (in thousands):

|          |         |   |         |        |      |   |        |        |  |   |        |        |  
|--------- | ------- | - | ------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|          |         |   | May 31,
|          |         |   |        
|          |         |   | 2002    |        | 2001 |   | 2000  
|          |         |   |         |        |      |   |       
|Current:  |         |   |         |        |      |   |        |        |  |   |        |       
|          | Federal |   | $       | 1,262  |      |   | $      | 14,095 |  |   |        |       |  
|          | State   |   |         | 126    |      |   |        | 1,476  |  |   | $      | 20     |  
|          | Foreign |   |         | 502    |      |   |        | 598    |  |   |        | 600    |  
|          |         |   |         |        |      |   |        |        |  |   |        |       
|          |         |   | 1,890   |        |      |   | 16,169 |        |  |   | 620    |       
|          |         |   |         |        |      |   |        |        |  |   |        |       
|Deferred: |         |   |         |        |      |   |        |        |  |   |        |       
|          | Federal |   |         | (1,066 | )    |   |        | 3,650  |  |   |        | (2,392 | )
|          | State   |   |         | 40     |      |   |        | 403    |  |   |        | (346   | )
|          | Foreign |   |         |       |      |   |        |       |  |   |        | (32    | )
|          |         |   |         |        |      |   |        |        |  |   |        |       
|          |         |   | (1,026  | )      |      |   | 4,053  |        |  |   | (2,770 | )     
|          |         |   |         |        |      |   |        |        |  |   |        |       
|          |         | $ | 864     |        |      | $ | 20,222 |        |  | $ | (2,150 | )     
|          |         |   |         |        |      |   |        |        |  |   |        |       

The Companys effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:

|                                             |  |              |       |      |  |      |      |   |  |  |       |   
|-------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ---- | - |  |  | ----- | --
|                                             |  | Fiscal Years
|                                             |  |             
|                                             |  | 2002         |       | 2001 |  | 2000
|                                             |  |              |       |      |  |     
|Income tax benefit at statutory rates        |  |              | 35.0  | %    |  |      | 35.0 | % |  |  | 35.0  | % 
|State income taxes net of federal benefit    |  |              | (18.3 | )    |  |      | 3.5  |   |  |  | 3.2   |   
|Non-deductible expenses                      |  |              | 33.0  |      |  |      | 2.6  |   |  |  | 0.6   |   
|Foreign taxes                                |  |              | 28.2  |      |  |      | 0.1  |   |  |  | 2.5   |   
|Release of valuation allowance               |  |              |      |      |  |      |     |   |  |  | (44.5 | ) 
|Research and development credit              |  |              | (39.9 | )    |  |      | (5.2 | ) |  |  | (3.7  | ) 
|Net operating loss (benefited) not benefited |  |              |      |      |  |      | 1.5  |   |  |  |      |   
|                                             |  |              |       |      |  |      |      |   |  |  |       |   
|Effective tax rate                           |  |              | 38.0  | %    |  |      | 37.5 | % |  |  | (6.9  | )%
|                                             |  |              |       |      |  |      |      |   |  |  |       |   

The components of the net deferred tax asset are (in thousands):

|                          |                                                    |                         |         |         |        |      |         |        |        | 
|------------------------- | -------------------------------------------------- | ----------------------- | ------- | ------- | ------ | ---- | ------- | ------ | ------ | 
|                          |                                                    |                         |         | May 31,
|                          |                                                    |                         |         |        
|                          |                                                    |                         |         | 2002    |        | 2001
|                          |                                                    |                         |         |         |        |     
|Deferred tax assets:      |                                                    |                         |         |         |        |      |         |       
|                          | Accumulated depreciation                           |                         | $       | 2,073   |        |      | $       | 2,272  |       
|                          | Accrued compensation                               |                         |         | 940     |        |      |         | 1,831  |       
|                          | Other accruals and allowance for doubtful accounts |                         |         | 1,656   |        |      |         | 1,532  |       
|                          | Research and development credits                   |                         |         | 10,223  |        |      |         | 8,338  |       
|                          | Net operating loss carryforwards                   |                         |         | 23,936  |        |      |         | 19,542 |       
|                          |                                                    |                         |         |         |        |      |         |       
|                          |                                                    |                         | 38,828  |         |        |      | 33,515  |       
|Deferred tax liability:   |                                                    |                         |         |         |        |      |         |       
|                          | Appreciated investments  FAS 115                  |                         |         | (413    | )      |      |         | (511   | )     
|                          |                                                    |                         |         |         |        |      |         |       
|Gross deferred tax assets |                                                    |                         | 38,415  |         |        |      | 33,004  |       
|Valuation allowance       |                                                    |                         | (18,704 | )       |        |      | (12,883 | )     
|                          |                                                    |                         |         |         |        |      |         |       
|                          |                                                    | Net deferred tax assets |         | $       | 19,712 |      |         | $      | 20,121 | 
|                          |                                                    |                         |         |         |        |      |         |       

As of May 31, 2002, the Company had approximately $66,426,000 and
$16,372,000 of net operating loss carryforwards for federal and California
purposes, respectively, to offset future taxable income. The tax benefits
associated with these net operating loss carry forwards have been or (will be)
recorded to the additional paid-in-capital account as they arose from the
exercise and/or disposition of stock options. The Company also has federal and
state research and development tax credit carryforwards of approximately
$6,942,000 and $3,281,000, respectively, at May 31, 2002. These carryforwards
expire in the years 2003 to 2022 if not utilized. State research and
development tax credit carryforwards can be utilized indefinitely.

Under the Tax Reform Act of 1986, the amounts of benefits from net
operating loss and credit carryforwards may be impaired or limited in the
future if the Company has incurred a cumulative ownership change of more than
50%, as defined, over a three year period.

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Based on managements assessment, we recorded a valuation allowance for a
portion of the deferred tax asset related to the net operating loss
carryforwards, which have arisen from deductions for the exercise and/or
disposition of stock options, due to an uncertainty as to whether these
benefits will be realized through future earnings. Any tax benefits realized
from the reduction of this valuation allowance will be recorded to
additional-paid-in-capital.

8. Related Party Transactions

On July 31, 1997, Mr. Gary J. Sbona was appointed as the Companys
President and Chief Executive Officer, and the Company entered into an
agreement with Regent Pacific Management Corporation, a management services
firm of which Mr. Sbona is the Chairman and Chief Executive Officer. Pursuant
to the original agreement, Regent Pacific agreed to provide management services
to the Company, at a fee of $50,000 per week, including the services of Mr.
Sbona as Chief Executive Officer and President and other Regent Pacific
personnel as part of the Companys management team. The agreement had a
one-year term and could be canceled by the Company after expiration of the
initial 26-week period, with a minimum compensation to Regent Pacific of $1.3
million for that initial period.

The agreement required that the Company indemnify Regent Pacific and Mr.
Sbona for certain liabilities arising out of the performance of services under
the agreement. Mr. Sbona became an employee of the Company effective February
16, 1998. On April 13, 1998, the Company and Regent Pacific agreed to amend the
agreement to provide that Regent Pacific personnel continued to serve as part
of the Companys management team. The amendment also served to extend the term
of the agreement until August 31, 1999, and to extend the noncancelable period
of the agreement until February 28, 1999.

In connection with Mr. Sbonas service as President and CEO, an employee
of the Company, the Compensation Committee of the Companys Board also granted
to him an option to purchase 700,000 shares of the Companys common stock, at
an exercise price of $2.563 per share. In October 1998, the Companys Board
granted Mr. Sbona another option to purchase additional 520,000 shares of the
Companys common stock, at an exercise price of $3.813 per share. In May 1999,
the Companys Board granted Mr. Sbona another option to purchase additional
420,000 shares of the Companys common stock, at an exercise price of $16.250
per share. In October 1999 and January 2000, the Companys Board granted Mr.
Sbona options to purchase 606,000 and 394,000 of the Companys common stock, at
an exercise price of $30.75 and $31.75 per share, respectively. In July and
December 2000, the Companys Board granted Mr. Sbona options to purchase
407,000 and 400,000 of the Companys common stock, at an exercise price of
$36.38 and $13.94 per share, respectively. In September 2001, the Companys
Board granted Mr. Sbona an option to purchase 1,000,000 shares of the Companys
common stock, at an exercise price of $8.74 per share. The shares subject to
such options will vest entirely upon certain change of control transactions or
upon a termination of Mr. Sbona without cause. The options will also remain
exercisable for one year following the termination of Mr. Sbonas services.

On March 12, 1999, the Company extended its agreement with Regent Pacific
Management Corporation until August 31, 2000. This is the second 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 continued to provide certain services to the
Company at a fee of $50,000 per week. The new agreement provided Verity with an
option to further extend the term of this agreement through February 2001.
Furthermore, on March 12, 1999, Mr. Sbona was appointed as the Chairman of the
Board of Directors of the Company. Mr. Sbona was Veritys President from July
1997 to September 1999 and has been Veritys Chief Executive Officer since July
1997 and has been a Board member since May 1998.

On February 10, 2000, the Company extended its agreement with Regent
Pacific Management Corporation through August 31, 2001. This is the third
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 continued to provide management
services to the Company. The agreement provided Verity with an option to
further extend the term of this agreement through February 2002.

On March 12, 2001, the Company extended its agreement with Regent Pacific
Management Corporation until 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 continued to provide management services to
the Company. The agreement provided Verity with an option to further extend the
term of this agreement through February 2003.

On June 17, 2002, the Company extended its agreement with Regent Pacific
Management Corporation through August 31, 2003. This is the fifth 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 management services to
the Company. The agreement provides Verity with an option to further extend the
term of this agreement through February 2004.

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The Company paid fees to Regent Pacific Management Corporation totaling
$2,600,000 for each of the fiscal years ended May 31, 2002, 2001 and 2000. As
of May 31, 2002, there is no balance payable to Regent Pacific Management.

9. Employee Benefit Plan

The Verity, Inc. 401(k) Plan, as allowed under Section 401(k) of the
Internal Revenue Code, provides tax deferred salary deductions for eligible
employees. Employees are eligible to enroll in the plan during the first
enrollment period after hire. Enrollments are held quarterly on a calendar year
basis.

Participants may make voluntary contributions to the plan up to 50% of
their compensation. The plan does not provide for Company contributions.

10. Computation of Net Income Per Share

Basic and diluted net income per share are calculated as follows for
fiscal years 2002, 2001 and 2000 (in thousands, except per share amounts):

|         |                                                      |  |              |        |      |  |      |        |  |  |   |        | 
|-------- | ---------------------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|         |                                                      |  | Fiscal Years
|         |                                                      |  |             
|         |                                                      |  | 2002         |        | 2001 |  | 2000
|         |                                                      |  |              |        |      |  |     
|Basic:   |                                                      |  |              |        |      |  |      |        |  |  |   |       
|         | Weighted average common shares outstanding (basic)   |  |              | 35,404 |      |  |      | 33,634 |  |  |   | 30,026 | 
|         | Net income applicable to common stockholders         |  | $            | 1,409  |      |  | $    | 33,760 |  |  | $ | 33,010 | 
|         | Net income per share                                 |  | $            | 0.04   |      |  | $    | 1.00   |  |  | $ | 1.10   | 
|Diluted: |                                                      |  |              |        |      |  |      |        |  |  |   |       
|         | Weighted average common shares outstanding (basic)   |  |              | 35,404 |      |  |      | 33,634 |  |  |   | 30,026 | 
|         | Dilutive effect of common stock equivalent shares    |  |              | 1,765  |      |  |      | 3,015  |  |  |   | 4,860  | 
|         |                                                      |  |              |        |      |  |      |        |  |  |   |       
|         | Weighted average common shares outstanding (diluted) |  |              | 37,169 |      |  |      | 36,649 |  |  |   | 34,886 | 
|         |                                                      |  |              |        |      |  |      |        |  |  |   |       
|         | Net income applicable to common stockholders         |  | $            | 1,409  |      |  | $    | 33,760 |  |  | $ | 33,010 | 
|         | Net income per share                                 |  | $            | 0.04   |      |  | $    | 0.92   |  |  | $ | 0.95   | 

As of May 31, 2002, 12,711,589 anti-dilutive shares have been excluded
from the dilutive effect of common stock equivalent shares.

11. Business Segment, Foreign Sales and Operations, and Major Customers

The Company operates in one business segment and develops, markets and
supports products for corporate intranets, extranets, corporate portals, online
publishers and e-commerce providers, and original equipment manufacturer (OEM)
toolkits for independent software vendors (ISVs). Veritys comprehensive and
integrated product family enables enterprise-wide document indexing,
classification, search and retrieval, organization and navigation, viewing,
personalized dissemination, and hybrid online and CD/DVD publishing all from
the same underlying Verity information index.

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

|                               |      |                |   |         |  |         |   |              |  |       |   |       |   |  |   |         |   |  |   |         |  
|------------------------------ | ---- | -------------- | - | ------- |  | ------- | - | ------------ |  | ----- | - | ----- | - |  | - | ------- | - |  | - | ------- | -
|Financial Data by              |      | United         |   |         |  |         |   | Other        |  |       |   |       |   |  |   |        
|Geographical Area              |      | States         |   | Europe  |  | Foreign |   | Eliminations |  | Total
|                               |      |                |   |         |  |         |   |              |  |      
|                               |      | (in thousands)
|Revenues:                      |      |                |   |         |  |         |   |              |  |       |   |       |   |  |   |         |   |  |   |        
|                               | 2002 |                | $ | 81,513  |  |         | $ | 10,943       |  |       | $ | 1,309 |   |  |   |        |   |  | $ | 93,765  |  
|                               | 2001 |                |   | 136,336 |  |         |   | 8,699        |  |       |   |      |   |  |   |        |   |  |   | 145,035 |  
|                               | 2000 |                |   | 89,666  |  |         |   | 6,434        |  |       |   |      |   |  |   |        |   |  |   | 96,100  |  
|Income (loss) from operations: |      |                |   |         |  |         |   |              |  |       |   |       |   |  |   |         |   |  |   |        
|                               | 2002 |                |   | 6,900   |  |         |   | 2,484        |  |       |   | 514   |   |  | $ | (17,494 | ) |  |   | (7,596  | )
|                               | 2001 |                |   | 61,652  |  |         |   | 3,324        |  |       |   | 1,913 |   |  |   | (24,241 | ) |  |   | 42,648  |  
|                               | 2000 |                |   | 36,638  |  |         |   | 2,673        |  |       |   | (156  | ) |  | $ | (13,898 | ) |  |   | 25,257  |  
|Long-lived assets:             |      |                |   |         |  |         |   |              |  |       |   |       |   |  |   |         |   |  |   |        
|                               | 2002 |                |   | 21,106  |  |         |   | 838          |  |       |   | 1,278 |   |  |   |        |   |  |   | 23,222  |  
|                               | 2001 |                |   | 5,211   |  |         |   | 951          |  |       |   | 1,642 |   |  |   |        |   |  |   | 7,804   |  
|                               | 2000 |                | $ | 4,125   |  |         | $ | 350          |  |       | $ | 453   |   |  |   |        |   |  | $ | 4,928   |  

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. Operating income consists of total net sales less
operating expenses, and does not include interest and other income, net, or
income taxes. Long-lived assets of geographic areas are those assets used in
the Companys operations in each area.

Included in software product revenues for the United States are export
sales of approximately $20,406,000, $37,710,000 and $18,307,000 in fiscal years
2002, 2001 and 2000, respectively.

No single customer accounted for 10% or more of the Companys revenue
during fiscal years 2002, 2001 and 2000. Revenues from the federal government
and its agencies were $5,729,000, $10,729,000 and $7,467,000 for fiscal years
2002, 2001 and 2000, respectively.

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SCHEDULE II  VERITY, INC.

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

|                                   |                         |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |         |  
|---------------------------------- | ----------------------- | ------------------------------- |  | ---------- | ------- | ------------ |  | ---------- | ------- | ------- |  | - | ------- | ------- |  | - | ---- | - |  | - | ------- | -
|                                   |                         |                                 |  |            |         |              |  | Amounts    |         |         |  |   |         |         |  |   |      |   |  |  
|                                   |                         |                                 |  |            |         |              |  | Charged    |         |         |  |   |         |         |  |   |      |   |  |  
|                                   |                         |                                 |  | Balance at |         | (Benefit) to |  | Amounts    |         |         |  |   |         | Balance
|                                   |                         |                                 |  | Beginning  |         | Profit and   |  | Charged    |         |         |  |   |         | at End 
|Description                        |                         | of Year                         |  | Loss       |         | to APIC      |  | Deductions |         | of Year
|                                   |                         |                                 |  |            |         |              |  |            |         |        
|Allowance for Doubtful Accounts:   |                         |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |  
|                                   | Year ended May 31, 2002 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Allowance for doubtful accounts |  | $          | 1,350   |              |  | $          | 993     |         |  |   |        |         |  | $ | (915 | ) |  | $ | 1,428   |  
|                                   | Year ended May 31, 2001 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Allowance for doubtful accounts |  |            | 900     |              |  |            | 1,163   |         |  |   |        |         |  |   | (713 | ) |  |   | 1,350   |  
|                                   | Year ended May 31, 2000 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Allowance for doubtful accounts |  |            | 900     |              |  |            | 621     |         |  |   |        |         |  | $ | (621 | ) |  |   | 900     |  
|Allowance for Deferred Tax Assets: |                         |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |  
|                                   | Year ended May 31, 2002 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Valuation Allowance             |  |            | (12,883 | )            |  |            |        |         |  | $ | (5,821  | )       |  |   |     |   |  |   | (18,704 | )
|                                   | Year ended May 31, 2001 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Valuation Allowance             |  |            |        |              |  |            |        |         |  | $ | (12,883 | )       |  |   |     |   |  | $ | (12,883 | )
|                                   | Year ended May 31, 2000 |                                 |  |            |         |              |  |            |         |         |  |   |         |         |  |   |      |   |  |   |        
|                                   |                         | Valuation Allowance             |  | $          | 18,887  |              |  | $          | (18,887 | )       |  |   |        |         |  |   |     |   |  |   |        |  

Certain reclassifications of prior year amounts have been made to conform
with the current years presentation

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.             
|                     
|Date: August 16, 2002 | By:                       | /s/ GARY J. SBONA
|                      |                          
|                      | (Chief Executive Officer)

Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.

|                                                  |  |                                                                                              |  |                
|------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ---------------
|Signature                                         |  | Title                                                                                        |  | Date           
|                                                  |  |                                                                                              |  |                
|                                                 
|/s/ GARY J. SBONA
Gary J. Sbona                   |  | Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)              |  | August 16, 2002
|                                                 
|/s/ ANTHONY J. BETTENCOURT
Anthony J. Bettencourt |  | President and Director                                                                       |  | August 16, 2002
|                                                 
|/s/ TODD K. YAMAMI
Todd K. Yamami                 |  | Vice President, Chief Financial Officer,
Assistant Secretary and
Principal Financial Officer |  | August 16, 2002
|                                                 
|/s/ PAUL H. COOK
Paul H. Cook                     |  | Corporate Controller
(Principal Accounting Officer)                                          |  | August 16, 2002
|                                                 
|/s/ STEVEN M. KRAUSZ
Steven M. Krausz             |  | Director                                                                                     |  | August 16, 2002
|                                                 
|/s/ STEPHEN A. MACDONALD
Stephen A. MacDonald     |  | Director                                                                                     |  | August 16, 2002
|                                                 
|/s/ CHARLES P. WAITE, JR.
Charles P. Waite, Jr.   |  | Director                                                                                     |  | August 16, 2002
|                                                 
|/s/ KARL C. POWELL
Karl C. Powell                 |  | Director                                                                                     |  | August 16, 2002

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INDEX TO EXHIBITS

|        |  |                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                               
|Number  |  | Description of Document                                                                                                       
|        |  |                                                                                                                               
|3.1     |  | Restated Certificate of Incorporation of the Company.(20)                                                                     
|3.2     |  | By-Laws.(20)                                                                                                                  
|4.1     |  | Amended and Restated Rights Agreement dated August 1, 1995, as amended.(1)                                                    
|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.(15)                     
|10.1    |  | Form of Indemnification Agreement for directors and officers.(1),(4)                                                          
|10.2    |  | Amended and Restated 1995 Stock Option Plan and forms of agreements thereunder.(4),(5)                                        
|10.3    |  | 1995 Employee Stock Purchase Plan, as amended.(4),(21)                                                                        
|10.4    |  | 1995 Outside Directors Stock Option Plan, as amended, and forms of agreement thereunder.(4),(17)                              
|10.5    |  | 1996 Non-Statutory Stock Option Plan, as amended.(4),(22)                                                                     
|10.6    |  | 1997 Non-Statutory Stock Option Plan for Verity, Canada, as amended.(4),(23)                                                  
|10.18   |  | Lease Agreement between Ross Drive Investors and the Company dated January 22, 1996.(6)                                       
|10.19   |  | Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated July 31,
1997.(4),(7)                 
|10.21   |  | Employment Agreement between Anthony J. Bettencourt and the Company dated August 28, 1997.(4),(8)                             
|10.22   |  | Security and Loan Agreement between Imperial Bank and the Company dated November 30, 1997.(9)                                 
|10.23   |  | Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated
April 13, 1998.(4),(10)  
|10.24   |  | Amendment to Security and Loan Agreement between Imperial Bank and the Company dated November 15,
1998.(11)                   
|10.25   |  | Amendment to Employment Agreement between Anthony J. Bettencourt and the Company dated October 6,
1998.(4),(11)               
|10.26   |  | Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated
March 12, 1999.(4),(12)  
|10.27   |  | Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated
February 9, 2000.(4),(14)
|10.28   |  | Amendment to Employment Agreement between Anthony J. Bettencourt and the Company dated September 23,
1999.(4),(18)            
|10.29   |  | Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated
March 12, 2001.(4),(19)  
|10.30   |  | Promissory Note dated January 2, 2001 given by Anthony Bettencourt in favor of Verity, Inc.(4),(19)                           
|10.31   |  | Promissory Note dated January 2, 2001 given by Todd Yamami in favor of Verity, Inc.(4),(19)                                   
|10.32   |  | Amendment to Employment Agreement between Anthony J. Bettencourt and the Company dated September 29,
2000.(4)(24)             
|10.33   |  | Amendment to Employment Agreement between Anthony J. Bettencourt and the Company dated September 1,
2001.(4)                  
|10.34   |  | Amendment to Retainer Agreement between Regent Pacific Management Corporation and Verity, Inc. dated
June 17, 2002.(4)        
|10.35   |  | 1995 Employee Stock Purchase Plan, as amended September 28, 2001.(4)                                                          
|21.1    |  | Subsidiaries of the Company.                                                                                                  
|23.1    |  | Consent of Independent Accountants, PricewaterhouseCoopers LLP.                                                               
|99.1    |  | Certification.                                                                                                                

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---

|(1)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Registration Statement (No. 33-96228), declared
effective on October 5, 1995.                                                                                                                                                                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended August 31, 1996.                                                                                                                                                                                                                                                                                                                                                              
|    
|    
|    
|    
|(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)  |  | Management contract or compensatory plan or arrangement required to be
filed as an exhibit.                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|    
|    
|    
|(5)  |  | With respect to the Amended and Restated 1995 Stock Option Plan,
incorporated by reference to Exhibit 99.2 to the Companys Registration
Statement on Form S-8 filed October 22, 1999. With respect to the form of
agreements under the Amended and Restated 1995 Stock Option Plan,
incorporated by reference to such agreements filed as exhibits with
corresponding exhibit number from the Companys Form 10-Q for the quarter
ended August 31, 1996.                                               
|    
|    
|    
|    
|(6)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended February 29, 1996.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(7)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-K for the year ended May 31, 1997.                                                                                                                                                                                                                                                                                                                                                                    
|    
|    
|    
|    
|(8)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended August 31, 1997.                                                                                                                                                                                                                                                                                                                                                              
|    
|    
|    
|    
|(9)  |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended February 28, 1998.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(10) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-K for the year ended May 31, 1998.                                                                                                                                                                                                                                                                                                                                                                    
|    
|    
|    
|    
|(11) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended November 30, 1998.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(12) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended February 28, 1999.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(13) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended November 30, 1999.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(14) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended February 29, 2000.                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(15) |  | Incorporated by reference from Exhibit No. 99.2 to the Companys Form 8-K
as filed with the Securities and Exchange Commission on July 29, 1999.                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(16) |  | Incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed October 22, 1999.                                                                                                                                                                                                                                                                                                                                                                                   
|    
|    
|    
|    
|(17) |  | With respect to the 1995 Outside Directors Stock Option Plan, as amended,
incorporated by reference to Exhibit 99.3 to the Companys Registration
Statement on Form S-8 filed October 22, 1999. With respect to the form of
agreements under the 1995 Outside Directors Stock Option Plan, as amended,
incorporated by reference to such agreements filed as exhibits with
corresponding exhibit number from the Companys Registration Statement
(No. 33-96228), declared effective on October 5, 1995.
|    
|    
|    
|    
|(18) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-K for the year ended May 31, 2000.                                                                                                                                                                                                                                                                                                                                                                    

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|(19) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended February 28, 2001.
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|(20) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-Q for the quarter ended November 30, 2000.
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|(21) |  | Incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed December 11, 2000.                      
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|(22) |  | Incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed August 29, 2001.                        
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|(23) |  | Incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed June 25, 2002.                          
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|(24) |  | Incorporated by reference from the exhibits with corresponding numbers
from the Companys Form 10-K for the year ended May 31, 2001.        

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