VERITY INC \DE\, DEF 14A, 1999-08-18

VERITY INC \DE\
DEF 14A, 1999-08-18
COMPUTER PROCESSING & DATA PREPARATION

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant [ ]

Filed by a Party other than the
Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
Verity, Inc.
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(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box)

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1. Title of each class of securities to which transaction applies:

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2. Aggregate number of securities to which transaction applies:

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3. Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):

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4. Proposed maximum aggregate value of transaction:

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5. Total fee paid:

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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

6. Amount Previously Paid:

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7. Form, Schedule or Registration Statement No.:

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8. Filing Party:

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9. Date Filed:

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<PAGE> 2

VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 21, 1999

To The Stockholders Of Verity, Inc.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Verity,
Inc., a Delaware corporation (the "Company"), will be held on Tuesday, September
21, 1999 at 11:00 a.m. local time at the Sunnyvale Sheraton, 1100 N. Mathilda
Avenue, Sunnyvale, California for the following purpose:

1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.

2. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 30,000,000
to 100,000,000 shares.

3. To approve the Company's 1995 Employee Stock Purchase Plan, as amended,
to increase the aggregate number of shares of Common Stock authorized
for issuance under such plan from 1,300,000 to 2,000,000 shares.

4. To approve the Company's 1995 Stock Option Plan, as amended, to increase
the aggregate number of shares of Common Stock authorized for issuance
under such plan from 4,060,836 to 5,060,836 shares.

5. To approve the Company's 1995 Outside Directors Stock Option Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan from 200,000 to 500,000 shares,
and to increase the annual grant size from 5,000 shares to 20,000
shares.

6. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Company for its fiscal year ending May 31, 2000.

7. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

The Board of Directors has fixed the close of business on August 9, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at this Annual Meeting and at any adjournment or postponement
thereof.

By Order of the Board of Directors

/s/ Timothy J. Moore

Timothy J. Moore

Secretary

Sunnyvale, California

August 19, 1999

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 3

VERITY, INC.
894 ROSS DRIVE
SUNNYVALE, CA 94089
------------------------

PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 21, 1999
------------------------

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed proxy is solicited on behalf of the Board of Directors of
Verity, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held on September 21, 1999, at 11:00 a.m. local
time (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting.
The Annual Meeting will be held at the Sunnyvale Sheraton, 1100 N. Mathilda
Avenue, Sunnyvale, California. The Company intends to mail this proxy statement
and accompanying proxy card on or about August 16, 1999, to all stockholders
entitled to vote at the Annual Meeting.

SOLICITATION

The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.

VOTING RIGHTS AND OUTSTANDING SHARES

Only holders of record of Common Stock at the close of business on August
9, 1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on August 9, 1999, the Company had outstanding and entitled to
vote 13,316,954 shares of Common Stock.

Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Except for Proposal 2, Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved. With respect to Proposal 2, broker non-votes
will have the same effect as negative votes.

REVOCABILITY OF PROXIES

Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 894 Ross
Drive, Sunnyvale, CA 94089, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.
<PAGE> 4

STOCKHOLDER PROPOSALS

The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is April 21, 2000. The deadline for submitting a stockholder proposal
or a nomination for director that is not to be included in such proxy statement
and proxy is also April 21, 2000. Stockholders are also advised to review the
Company's By-laws, which contain additional requirements with respect to advance
notice of stockholder proposals and director nominations.

PROPOSAL 1

ELECTION OF DIRECTORS

The Company's Certificate of Incorporation and Bylaws provide that the
Board of Directors shall be divided into three classes, each class consisting,
as nearly as possible, of one-third of the total number of directors, with each
class having a three-year term. Vacancies on the Board of Directors may be
filled only by persons elected by a majority of the remaining directors. A
director elected by the Board of Directors to fill a vacancy (including a
vacancy created by an increase in the Board of Directors) shall serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is elected and qualified.

The Board of Directors is presently composed of four members. There are two
directors in the class whose term of office expires in 1999. The nominees for
election to this class are currently directors of the Company. If elected at the
Annual Meeting, the nominees would serve until the 2002 annual meeting and until
their successors are elected and have qualified, or until such directors'
earlier death, resignation or removal.

Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the nominee named below. In the event that such nominee should be
unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. The nominee has agreed to serve if elected, and management has no
reason to believe that such nominee will be unable to serve.

Set forth below is biographical information for the nominee and each person
whose term of office as a director will continue after the Annual Meeting.

NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING

STEVEN M. KRAUSZ, age 44, has served as a member of the Company's Board of
Directors since May 1988. Mr. Krausz has been a general partner of U.S. Venture
Partners III, U.S.V. Entrepreneur Partners and BHMS Partners III since 1985. Mr.
Krausz holds a B.S. in Electrical Engineering and a M.B.A. from Stanford
University.

CHARLES P. WAITE, JR., age 44, has served as a member of the Company's
Board of Directors since May 1988. Mr. Waite has been a general partner of
Olympic Venture Partners II and a vice president of Northwest Venture Services
Corp. since 1987, a general partner of Olympic Venture Partners III since 1994
and a general partner of Olympic Venture Partners IV since 1997. Mr. Waite is
also a director of Cardima, Inc. and several privately held companies. Mr. Waite
holds an A.B. in History from Kenyon College and a M.B.A. from Harvard
University.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.

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DIRECTOR CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING

STEPHEN A. MACDONALD, age 53, has served as a member of the Company's Board
of Directors since December 1988. From May 1983 until May 1996, Mr. MacDonald
was employed by Adobe Systems Incorporated where he served as Senior Vice
President and Chief Operating Officer. From May 1996 to April 1998, he served as
President and Chief Executive Officer of Active Software. Mr. MacDonald is
currently a consultant. Mr. MacDonald is a director of Network Computing
Devices, Inc. Mr. MacDonald holds a B.Sc. from Dalhousie University.

DIRECTOR CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING

GARY J. SBONA, age 56, has been the Company's President and Chief Executive
Officer since July 1997, a director since May 1998 and the Chairman of the Board
of Directors since March 1999. Since 1974, Mr. Sbona has also served as the
chairman and chief executive officer of Regent Pacific Management Corporation, a
professional services company that is currently providing the Company with
management services. Mr. Sbona holds a B.S. in Business and Engineering from San
Jose State University.

BOARD COMMITTEES AND MEETINGS

During the fiscal year ended May 31, 1999, the Board of Directors held nine
meetings. The Board has an Audit Committee and a Compensation Committee.

The Audit Committee meets with the Company's independent accountants at
least annually to review the results of the annual audit and discuss the
financial statements, recommends to the Board the independent auditors to be
retained, and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of two
non-employee directors: Messrs. Krausz and Waite. It met one time during fiscal
year 1999.

The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of two non-employee directors:
Messrs. Krausz and Waite. It only took actions by unanimous written consent
during fiscal year 1999.

During the fiscal year ended May 31, 1999, each Board member attended 75%
or more of the aggregate of the meetings of the Board and of the committees on
which he served, held during the period for which he was a director or committee
member, respectively.

PROPOSAL 2

APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation to increase the
Company's authorized number of shares of Common Stock from 30,000,000 shares to
100,000,000 shares. As amended, Article FOURTH, Paragraph 1 of the Corporation's
Certificate of Incorporation shall read in its entirety as follows:

"The Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock, having a par value of $0.001 per
share ("Preferred"), and Common Stock, having a par value of $0.001 per
share ("Common"). The total number of shares of Preferred this Corporation
shall have authority to issue is 1,999,995, and the total number of shares
of Common this Corporation shall have authority to issue is 100,000,000."

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<PAGE> 6

The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of the
Company. Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
of the Company, except for effects incidental to increasing the number of shares
of the Company's Common Stock outstanding, such as dilution of the earnings per
share and voting rights of current holders of Common Stock. If the amendment is
adopted, it will become effective upon filing of a Certificate of Amendment of
the Company's Certificate of Incorporation with the Secretary of State of the
State of Delaware.

In addition to the 12,805,912 shares of Common Stock outstanding at May 31,
1999, the Board of Directors has reserved 6,062,963 shares for issuance upon
exercise of options and rights granted under the Company's stock option and
stock purchase plans.

If the stockholders of the Company approve this Proposal 2, the Board of
Directors plans to consider the advisability of declaring a stock split
distributed to stockholders as a stock dividend. However, the ultimate decision
as to whether or not to declare a stock split, and if so then in which
proportion, will be made only if this Proposal 2 is approved and then will be
dependent upon the Company's stock price at the time, as well as market
conditions and any other conditions the Board of Directors deems relevant.
Consequently, if the stockholders do approve this Proposal 2, there can be no
assurance that the Board of Directors will declare a stock split.

Although at present the Board of Directors has no other plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity incentives to employees, officers
or directors, establishing strategic relationships with other companies and
expanding the Company's business or product lines through the acquisition of
other businesses or products.

The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by the Company to
oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company. For example, without further stockholder approval,
the Board of Directors could strategically sell shares of Common Stock in a
private transaction to purchasers who would oppose a takeover or favor the
current Board of Directors. In addition, if a person or group of persons
attempted a hostile takeover of the Company, such shares could be issued in
connection with the Company's Rights Agreement, which would allow stockholders
(other than the hostile parties) to purchase the Company's Common Stock at a
discount to the then current market price, which would have a dilutive effect on
the hostile parties. Although this proposal to increase the authorized Common
Stock has been prompted by business and financial considerations and not by the
threat of any hostile takeover attempt (nor is the Board of Directors currently
aware of any such attempts directed at the Company), nevertheless, stockholders
should be aware that approval of this proposal could facilitate future efforts
by the Company to deter or prevent changes in control of the Company, including
transactions in which the stockholders might otherwise receive a premium for
their shares over then current market prices.

The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this amendment to the Company's
Certificate of Incorporation. As a result, abstentions and broker non-votes will
have the same effect as negative votes.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.

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PROPOSAL 3

APPROVAL OF 1995 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED

At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1995 Employee Stock Purchase Plan (the "Purchase
Plan") to increase by 700,000 the maximum number of shares of Common Stock that
may be issued under the Purchase Plan. The purpose of the Purchase Plan is to
provide employees of the Company with an opportunity to acquire a proprietary
interest in the Company through the purchase of its Common Stock. As of May 31,
1999, an aggregate of 975,069 shares of Common Stock had been issued under the
Purchase Plan and 324,931 shares remained available for future sales. To provide
an adequate reserve of shares to permit the Company to continue offering
employees a stock purchase opportunity, the Board of Directors has amended the
Purchase Plan, subject to stockholder approval.

SUMMARY OF THE PURCHASE PLAN

The following summary of the Purchase Plan, as amended, is qualified in its
entirety by the specific language of the Purchase Plan, a copy of which is
available to any stockholder upon request.

General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). Each participant in the Purchase Plan is granted at the
beginning of each offering under the Purchase Plan (an "Offering") the right to
purchase through accumulated payroll deductions up to a number of shares of the
Common Stock of the Company (a "Purchase Right") determined on the first day of
the Offering. The Purchase Right is automatically exercised on each purchase
date during the Offering unless the participant has withdrawn from participation
in the Purchase Plan prior to such date.

During the last fiscal year, shares of Common Stock were purchased in the
amounts and at the weighted average prices per share under the Purchase Plan as
follows: Anthony Bettencourt, 3,935 shares ($5.84); Hugh Njemanze, 3,870 shares
($5.84), James Ticehurst, 2,688 shares ($5.35); Ronald Weissman, 4,784 shares
($5.84); Todd Yamami, 2,132 shares ($5.54); all current executive officers as a
group, 17,409 shares ($5.73); and all employees (excluding executive officers)
as a group, 319,644 shares ($5.38).

Shares Subject to Plan. Previously, the stockholders have authorized the
issuance of an aggregate of 1,300,000 shares pursuant to the Purchase Plan. The
Board of Directors has amended the Purchase Plan, subject to stockholder
approval, to increase by 700,000 the maximum number of authorized but unissued
or reacquired shares of Common Stock that may be issued under the Purchase Plan.
Appropriate adjustments will be made to the shares subject to the Purchase Plan
and outstanding Purchase Rights in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification or similar
change in the Company's capital structure and may be made in the event of any
merger, sale of assets or other reorganization of the Company. If any Purchase
Right expires or terminates, the shares subject to the unexercised portion of
such Purchase Right will again be available for issuance under the Purchase
Plan.

Administration. The Purchase Plan is administered by the Board of Directors
or a duly appointed committee of the Board (hereinafter referred to as the
"Board"). Subject to the provisions of the Purchase Plan, the Board determines
the terms and conditions of Purchase Rights granted under the Purchase Plan. The
Board interprets the Purchase Plan and Purchase Rights granted thereunder, and
all determinations of the Board are final and binding on all persons having an
interest in the Purchase Plan or any Purchase Rights. The Purchase Plan
provides, subject to certain limitations, for indemnification by the Company of
any director, officer or employee against all reasonable expenses, including
attorneys' fees, incurred in connection with any legal action arising from such
person's action or failure to act in administering the plan.

Eligibility. Any employee of the Company or of any present or future parent
or subsidiary corporation of the Company designated by the Board for inclusion
in the Purchase Plan is eligible to participate in an Offering under the
Purchase Plan so long as the employee is customarily employed for more than 20
hours per week and more than five months in any calendar year. However, no
employee who owns or holds options to purchase, or as a result of participation
in the Purchase Plan would own or hold options to purchase, five percent or more
of the total combined voting power or value of all classes of stock of the
Company or of any
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parent or subsidiary corporation of the Company is eligible to participate in
the Purchase Plan. As of July 31, 1999, approximately 306 employees, including
five executive officers, were eligible to participate in the Purchase Plan.

Offerings. Offerings of Common Stock under the Purchase Plan commence on
one or more dates determined by the Board, generally on or about April 1 and
October 1 of each year (an "Offering Date"), and continue for such periods of
time as established by the Board (an "Offering Period"), provided that no
Offering Period may exceed 27 months. The Board currently limits Offering
Periods to approximately 12 months in duration. Currently each Offering Period
is comprised of two six-month "Purchase Periods" respectively running from about
April 1 to about September 30 and from about October 1 to March 31. The last day
of a Purchase Period is a "Purchase Date." An employee may not participate
simultaneously in more than one Offering.

Participation and Purchase of Shares. Participation in an Offering under
the Purchase Plan is limited to eligible employees who authorize payroll
deductions prior to the date set by the Board. Payroll deductions may not exceed
20% (or such other rate as the Board determines) of an employee's compensation
on any payday during the Offering Period. An employee who becomes a participant
in the Purchase Plan will automatically participate in each subsequent Offering
Period beginning immediately after the last day of the Offering Period in which
he or she is a participant until the employee withdraws from the Purchase Plan,
becomes ineligible to participate, or terminates employment.

Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to that number of shares (rounded to the nearest whole
share) determined by the lesser of (i) multiplying $2,083.33 by the number of
months (rounded to the nearest whole month) in the Offering Period and dividing
the product by the fair market value of a share of Common Stock on the Offering
Date or (ii) multiplying 208.33 shares by the number of months (rounded to the
nearest whole month) in the Offering Period. As a further limitation, no
participant may purchase in any event under the Purchase Plan shares of the
Company's Common Stock having a fair market value exceeding $25,000 in any
calendar year (measured by the fair market value of the Company's Common Stock
on the first day of the Offering Period in which the shares are purchased).
Purchase Rights are nontransferable and may only be exercised by the
participant.

Upon withdrawal, the Company will refund without interest the participant's
accumulated payroll deductions not previously applied to the purchase of shares.
Once a participant withdraws from an Offering, that participant may not again
participate in the same Offering. If the fair market value of a share of Common
Stock on the Offering Date of the current Offering in which employees are
participating is greater than such fair market value on a Purchase Date during
the Offering, then, unless a participant elects otherwise, each participant will
be automatically withdrawn from the current Offering after purchasing shares and
enrolled in the new Offering beginning immediately following such Purchase Date.

On each Purchase Date during an Offering Period, the Company issues to each
participant in the Offering the number of shares of the Company's Common Stock
determined by dividing the amount of payroll deductions accumulated for the
participant during the Purchase Period by the purchase price, limited in any
case by the maximum number of shares subject to the participant's Purchase Right
for that Offering. The price at which shares are sold under the Purchase Plan is
established by the Board but may not be less than 85% of the lesser of the fair
market value per share of Common Stock on the Offering Date or on the Purchase
Date. The fair market value of the Common Stock on any relevant date generally
will be the closing price per share on such date as reported on the Nasdaq
National Market. On July 30, 1999, the closing price per share of Common Stock
was $49.50. Any payroll deductions under the Purchase Plan not applied to the
purchase of shares will be returned to the participant without interest, unless
the amount remaining is less than the amount necessary to purchase a whole share
of Common Stock, in which case the remaining amount may be applied to the next
Purchase Period.

Change in Control. The Purchase Plan provides that, in the event of (i) a
sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of the Company's voting stock, (ii) a merger or
consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein,
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upon any such event, the stockholders of the Company immediately before such
event do not retain direct or indirect beneficial ownership of more than 50% of
the total combined voting power of the voting stock of the Company, its
successor, or the corporation to which the assets of the Company were
transferred (a "Transfer of Control"), the surviving, continuing, successor or
purchasing corporation or parent corporation thereof may assume the Company's
rights and obligations under the Purchase Plan or substitute substantially
equivalent Purchase Rights for such corporation's stock. However, if such
corporation elects not to assume or replace the outstanding Purchase Rights, the
Board may adjust the last day of the current Purchase Period to a date on or
before the date of the Transfer of Control. Any Purchase Rights that are not
assumed, replaced, or exercised prior to the Transfer of Control will terminate
on the date of the Transfer of Control.

Termination or Amendment. The Purchase Plan will continue until terminated
by the Board or until all of the shares reserved for issuance under the plan
have been issued. The Board may at any time amend or terminate the Purchase
Plan, except that the approval of the Company's stockholders is required within
twelve months of the adoption of any amendment increasing the number of shares
authorized for issuance under the Purchase Plan, or changing the definition of
the corporations which may be designated by the Board as corporations the
employees of which may participate in the Purchase Plan.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE PLAN

The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Purchase Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.

Generally, there are no tax consequences to an employee of either becoming
a participant in the Purchase Plan or purchasing shares under the Purchase Plan.
A participant will be taxed on amounts withheld for the purchase of shares of
Common Stock as if such amounts were actually received. The tax consequences of
a disposition of shares vary depending on the period such stock is held before
its disposition. If a participant disposes of shares within two years after the
Offering Date or within one year after the Purchase Date on which the shares are
acquired (a "disqualifying disposition"), the participant recognizes ordinary
income in the year of disposition in an amount equal to the difference between
the fair market value of the shares on the Purchase Date and the purchase price.
Such income may be subject to withholding of tax. Any additional gain or
resulting loss recognized by the participant from the disposition of the shares
is a capital gain or loss. If the participant disposes of shares at least two
years after the Offering Date and at least one year after the Purchase Date on
which the shares are acquired, the participant recognizes ordinary income in the
year of disposition in an amount equal to the lesser of (i) the difference
between the fair market value of the shares on the date of disposition and the
purchase price or (ii) 15% of the fair market value of the shares on the
Offering Date. Any additional gain recognized by the participant on the
disposition of the shares is a capital gain. If the fair market value of the
shares on the date of disposition is less than the purchase price, there is no
ordinary income, and the loss recognized is a capital loss. If the participant
owns the shares at the time of the participant's death, the lesser of (i) the
difference between the fair market value of the shares on the date of death and
the purchase price or (ii) 15% of the fair market value of the shares on the
Offering Date is recognized as ordinary income in the year of the participant's
death.

If the exercise of a Purchase Right does not constitute an exercise
pursuant to an "employee stock purchase plan" under section 423 of the Code, the
exercise of the Purchase Right will be treated as the exercise of a nonstatutory
stock option. The participant would therefore recognize ordinary income on the
Purchase Date equal to the excess of the fair market value of the shares
acquired over the purchase price. Such income is subject to withholding of
income and employment taxes. Any gain or loss recognized on a subsequent sale of
the shares, as measured by the difference between the sale proceeds and the sum
of (i) the purchase price for such shares and (ii) the amount of ordinary income
recognized on the exercise of the Purchase Right, will be treated as a capital
gain or loss, as the case may be.

If the participant disposes of the shares in a disqualifying disposition,
the Company should be entitled to a deduction equal to the amount of ordinary
income recognized by the participant as a result of the disposition,

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<PAGE> 10

except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder. In all other cases, no deduction is allowed
the Company.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the meeting and entitled to vote is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
at the Annual Meeting of Stockholders. Abstentions will have the same effect as
a negative vote on this proposal, but broker non-votes will not be counted for
or against this proposal.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.

PROPOSAL 4

APPROVAL OF 1995 STOCK OPTION PLAN, AS AMENDED

The Company established the stock option plan the subject of this proposal
(the "Option Plan") in August 1988. In June 1995, the Board of Directors amended
and restated the Option Plan, extended its term and renamed the Option Plan the
"Verity, Inc. 1995 Stock Option Plan." In 1996, the Board of Directors amended
the Option Plan to (i) increase the number of shares of Common Stock of the
Company authorized for issuance thereunder from 2,910,836 shares to 3,310,836
shares; (ii) provide that the Board of Directors may not decrease the exercise
price of certain stock options or grant a new option in substitution therefor,
without stockholder approval; (iii) provide that the maximum term of certain
stock options granted from such 400,000 share increase (the "1996 Option Reserve
Increase") will be eight years; and (iv) provide that the exercise price per
share of any stock option granted under the Option Plan must equal at least the
fair market value of a share of the Company's Common Stock on the date of grant
of the stock option. The purpose of the Option Plan is to provide an equity
interest for employees, directors and consultants of the Company or any parent
or subsidiary corporation of the Company, in order to give them a greater
personal interest in the success of the business and to provide added incentive
to continue and advance in their employment or service to the Company.

As a result of a series of amendments (excluding the 1,000,000 shares now
proposed for stockholder approval), a total of 4,060,836 shares of Common Stock
have been reserved for issuance under the Option Plan. As of May 31, 1999,
options to purchase 1,700,568 shares of Common Stock granted pursuant to the
Option Plan had been exercised, 2,495,831 shares of Common Stock were reserved
for issuance upon the exercise of outstanding options at a weighted average
exercise price of $12.61 per share, with exercise prices ranging from $1.00 to
$32.50 and 454,178 shares of Common Stock remained available for future option
grants (excluding the 1,000,000 shares now proposed for stockholder approval),
which equaled approximately 3.1% of the total number of shares of Common Stock
outstanding.

During the last fiscal year, shares of Common Stock were granted in the
amounts and at the weighted average prices per share under the Option Plan as
follows: Anthony Bettencourt, 175,000 shares ($17.79); Hugh Njemanze, 75,000
shares ($18.53); James Ticehurst, 80,000 shares ($14.85); Ronald Weissman,
80,000 shares ($19.41); Todd Yamami, 45,000 shares ($21.44); Gary Sbona, 470,000
shares ($18.74); Steven M. Krausz, 50,000 shares ($25.07); Charles P. Waite,
Jr., 50,000 shares ($25.07); all current executive officers as a group, 945,000
shares ($18.43); and all Directors who are not executive officers as a group,
150,000 shares ($25.07).

PROPOSED AMENDMENTS TO THE OPTION PLAN

The Board of Directors has amended the Option Plan, subject to stockholder
approval, to increase the number of shares of Company Common Stock reserved
under the Option Plan by 1,000,000 shares (the "Option Reserve Increase") so
that the total number of shares available for future grants as of May 31, 1999
under the Option Plan would be 1,454,178. The stockholders are now being asked
to approve the Option

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<PAGE> 11

Reserve Increase at the Annual Meeting in order to make available sufficient
shares for continued operation of the Option Plan.

The Company seeks to attract, motivate and retain talented and enterprising
employees by rewarding performance and encouraging behavior that will improve
the Company's profitability. It believes that the Option Plan plays an important
role in achieving these objectives by enabling the Company to provide broad
employee equity interests in the Company. The Company believes that equity
incentives provided by the Option Plan help align the interests of the employees
with the interests of the Company's stockholders, and enhance the Company's
ability to continue recruiting and retaining qualified officers, employees and
consultants essential to the success of the Company. Management believes that
the continued operation of the Option Plan necessitates an increase in the share
reserve under the Option Plan.

The Company has engaged Regent Pacific Management Corporation ("Regent
Pacific") to provide management services to the Company, with employees of
Regent Pacific currently serving as the Company's President and Chief Executive
Officer, Chief Operating Officer, Vice President, Development and Technical
Services, and Vice President of Product Strategy, respectively (See "Employment
Agreements and Termination and Change in Control Agreements" and "Certain
Transactions"). The Company's goal for the longer term is to attract and retain
key executive officers to replace the Regent Pacific personnel. In order to
attract and retain such key management personnel, the Company believes that it
must offer attractive equity incentives and that the number of shares of Common
Stock currently authorized for issuance pursuant to the Option Plan may be
inadequate for such purpose.

SUMMARY OF THE PROVISIONS OF THE OPTION PLAN

The following summary of the Option Plan, as amended, is qualified in its
entirety by the specific language of the Option Plan, a copy of which is
available to any stockholder upon request.

General. The Option Plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Code, and nonstatutory stock options.
As of May 31, 1999, options to purchase 1,700,568 shares of Common Stock granted
pursuant to the Option Plan had been exercised, 2,005,653 shares of Common Stock
were reserved for issuance upon the exercise of outstanding options, and 454,178
shares of Common Stock remained available for future grants.

Shares Subject to Plan. Currently, a maximum of 4,060,836 of the authorized
but unissued or reacquired shares of Common Stock of the Company may be issued
upon the exercise of options granted pursuant to the Option Plan. The Board of
Directors has amended the Option Plan, subject to stockholder approval, to
increase by 1,000,000 the maximum number of shares of Common Stock issuable
thereunder to an aggregate of 5,060,836.

If the stockholders approve the 1,000,000 share increase in the number of
shares authorized for issuance under the Option Plan, 1,454,178 shares of Common
Stock would be available for future option grants as of May 31, 1999, which
equals approximately 11.3% of the total number of shares of Common Stock
outstanding as of that date. The Option Plan imposes a limit under which no
employee may receive in any fiscal year of the Company options to purchase in
excess of 500,000 shares (the "Grant Limit"). The Grant Limit is intended to
comply with Section 162(m) of the Code and the regulations thereunder in order
to preserve the Company's ability to fully deduct any compensation expense
related to options granted under the Option Plan. In the event of any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments will be made to the shares subject to the Option Plan,
to the Grant Limit and to outstanding options. To the extent any outstanding
option under the Option Plan expires or terminates prior to exercise in full or
if shares issued upon exercise of an option are repurchased by the Company, the
shares of Common Stock for which such option is not exercised or the repurchased
shares are returned to the Option Plan and become available for future grant,
but do not increase the total number of shares authorized for issuance under the
Option Plan.

Administration. The Option Plan is administered by the Board of Directors
or a duly appointed committee of the Board (hereinafter referred to as the
"Board"). The Option Plan provides that with respect

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<PAGE> 12

to the participation of individuals whose transactions in the Company's equity
securities are subject to Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Option Plan must be administered in compliance with the
requirements of Rule 16b-3 under the Exchange Act. With respect to persons
covered by Section 162(m) of the Code the Option Plan permits administration in
compliance with Section 162(m) of the Code (for more information on Section
162(m) of the Code, please see the paragraph "Potential Limitation on Company
Deductions" below). Subject to the provisions of the Option Plan, the Board
determines the persons to whom options are to be granted, the number of shares
to be covered by each option, whether an option is to be an incentive stock
option or a nonstatutory stock option, the timing and terms of exercisability of
each option or the vesting of shares acquired upon the exercise of an option,
including the effect thereon of an optionee's termination of service, the
exercise price of and the type of consideration to be paid to the Company upon
the exercise of each option, the duration of each option, and all other terms
and conditions of the options. The Option Plan authorizes the Board to amend,
modify, extend, renew, or grant a new option in substitution for, any option, to
waive any restrictions or conditions applicable to any option or any shares
acquired upon the exercise thereof, and to accelerate, continue, extend or defer
the exercisability of any option or the vesting of any shares acquired upon the
exercise of an option, including with respect to the period following an
optionee's termination of service with the Company. However, the Board may not
decrease the exercise price of a stock option granted from the 1996 Option
Reserve Increase, or grant a new option in substitution therefor having a lower
exercise price without the approval of the stockholders of the Company. Subject
to certain limitations, the Option Plan provides for indemnification by the
Company of any director, officer of employee against all reasonable expenses,
including attorney's fees, incurred in connection with any legal action arising
from such person's action or failure to act in administering the Option Plan.
The Board will interpret the Option Plan and options granted thereunder, and all
determinations of the Board will be final and binding on all persons having an
interest in the Option Plan or any option.

Eligibility. Generally, all employees, directors and consultants of the
Company or of any present or future parent or subsidiary corporations of the
Company are eligible to participate in the Option Plan. As of June 30, 1999, the
Company had approximately 295 employees, including nine executive officers and
four directors. In addition, the Option Plan permits options to be granted to
prospective employees and consultants in connection with written offers of
employment or engagement. Any such options may not become exercisable prior to
such individual's commencement of service. Any person eligible under the Option
Plan may be granted a nonstatutory option. However, only employees may be
granted incentive stock options.

Terms and Conditions of Options. Each option granted under the Option Plan
is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the Option Plan.
The exercise price per share of each option must equal at least the fair market
value of a share of the Company's Common Stock on the date of grant. The
exercise price of any incentive stock option granted to a person who at the time
of grant owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation
of the Company (a "Ten Percent Stockholder") must be at least 110% of the fair
market value of a share of the Company's Common Stock on the date of grant. The
Board determines the fair market value of the Company's Common Stock in its sole
discretion.

The option exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares of Common Stock being acquired upon the exercise of the option, by means
of a promissory note, by any other lawful consideration approved by the Board,
or by any combination of these. The Board may nevertheless restrict the forms of
payment permitted in connection with any option grant.

Options granted under the Option Plan become exercisable and vested at such
times and subject to such conditions as specified by the Board. Generally,
options granted under the Option Plan are exercisable on and after the date of
grant, subject to the right of the Company to reacquire at the optionee's
exercise price any unvested shares held by the optionee upon termination of
employment or service with the Company or if the optionee attempts to transfer
any unvested shares. Shares subject to options generally vest in installments
subject to the optionee's continued employment or service. The maximum term of
an incentive stock option or
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<PAGE> 13

nonstatutory stock option that draws upon shares from the 1996 Option Reserve
Increase under the Option Plan is eight years unless the incentive stock option
is granted to a Ten Percent Stockholder, in which case the maximum term is five
years. The maximum term of any other incentive stock option granted under the
Option Plan is ten years unless granted to a Ten Percent Stockholder, in which
case the maximum term is five years. Consistent with the Code, the Option Plan
does not limit the term of any nonstatutory stock option not drawing upon shares
from the 1996 Option Reserve Increase. Options are nontransferable by the
optionee other than by will or by the laws of descent and distribution, and are
exercisable during the optionee's lifetime only by the optionee.

Transfer of Control. The Option Plan provides that, in the event of (i) a
sale or exchange by the stockholders of more than 50% of the Company's voting
stock, (ii) a merger or consolidation in which the Company is a party, (iii) the
sale, exchange or transfer of all or substantially all of the assets of the
Company, or (iv) a liquidation or dissolution of the Company wherein, upon any
such event, the stockholders of the Company immediately before such event do not
retain direct or indirect beneficial ownership of more than 50% of the total
combined voting power of the voting stock of the Company, its successor, or the
corporation to which the assets of the Company were transferred in substantially
the same proportions as prior to such event (a "Transfer of Control"), the
acquiring or successor corporation may assume the Company's rights and
obligations under outstanding options or substitute substantially equivalent
options for such corporation's stock. To the extent that the options outstanding
under the Option Plan are not assumed, substituted for, or exercised prior to
the Transfer of Control, they will terminate; provided, however, that the terms
of certain options provide for acceleration of vesting upon such a change in
control (see "Employment Agreements and Termination and Change in Control
Agreements").

Termination and Amendment. The Option Plan will continue in effect until
the earlier of its termination by the Board or the date on which all shares
available for issuance under the Option Plan have been issued and all
restrictions on such shares under the terms of the Plan and the option
agreements have lapsed, provided that all incentive stock options must be
granted prior to July 19, 2006, the date on which the Board approved the
amendment of the Option Plan. The Board may terminate or amend the Option Plan
at any time, but, without stockholder approval, the Board may not amend the
Option Plan to increase the total number of shares of Common Stock issuable
thereunder, change the class of persons eligible to receive incentive stock
options, or expand the class of persons eligible to receive nonstatutory stock
options. No amendment may adversely affect an outstanding option without the
consent of the optionee, unless the amendment is required to preserve the
option's status as an incentive stock option or is necessary to comply with any
applicable law.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION PLAN

The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Option Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.

Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an
incentive stock option qualifying under Section 422 of the Code. Optionees who
do not dispose of their shares for two years following the date the option was
granted nor within one year following the exercise of the option will normally
recognize a long-term capital gain or loss equal to the difference, if any,
between the sale price and the purchase price of the shares. If an optionee
satisfies such holding periods upon a sale of the shares, the Company will not
be entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares within two years after the date of grant or within one year
from the date of exercise (a "disqualifying disposition"), the difference
between the fair market value of the shares on the determination date (see
discussion under "Nonstatutory Stock Options" below) and the option exercise
price (not to exceed the gain realized on the sale if the disposition is a
transaction with respect to which a loss, if sustained, would be recognized)
will be taxed as ordinary income at the time of disposition. Any gain in excess
of that amount will be a capital gain. If a loss is recognized, there will be no
ordinary income, and such loss will be a capital loss. A capital gain or loss
will be long-term if the optionee's holding period is more than 12 months. Any
ordinary income recognized by the optionee upon the disqualifying disposition of
the shares
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<PAGE> 14

generally should be deductible by the Company for federal income tax purposes,
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder.

The difference between the option exercise price and the fair market value
of the shares on the determination date of an incentive stock option (see
discussion under "Nonstatutory Stock Options" below) is an item of adjustment in
computing the optionee's alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basic adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.

Nonstatutory Stock Options. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options. Nonstatutory stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the determination date (as defined below). If the
optionee is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. The "determination date" is the date
on which the option is exercised unless the shares are subject to a substantial
risk of forfeiture and are not transferable, in which case the determination
date is the earlier of (i) the date on which the shares are transferable or (ii)
the date on which the shares are not subject to a substantial risk of
forfeiture. If the determination date will be after the exercise date, the
optionee may elect, pursuant to Section 83(b) of the Code, to have the exercise
date be the determination date by filing an election with the Internal Revenue
Service not later than 30 days after the date the option is exercised. Upon the
sale of stock acquired by the exercise of a nonstatutory stock option, any gain
or loss, based on the difference between the sale price and the fair market
value on the determination date, will be taxed as capital gain or loss. A
capital gain or loss will be long-term if the optionee's holding period is more
than 12 months. No tax deduction is available to the Company with respect to the
grant of a nonstatutory option or the sale of the stock acquired pursuant to
such grant. The Company generally should be entitled to a deduction equal to the
amount of ordinary income recognized by the optionee as a result of the exercise
of a nonstatutory option, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.

Potential Limitation on Company Deductions. As part of the Omnibus Budget
Reconciliation Act of 1933, the U.S. Congress amended the Code to add Section
162(m) which denies a deduction to any publicly held corporation for
compensation paid to a covered employee in a taxable year to the extent that
non-performance-based compensation paid to such a covered employee exceeds $1
million. It is possible that compensation attributable to stock options granted
under the Option Plan, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to be
exceeded in any particular year.

Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation.
Treasury regulations issued under Section 162(m) of the Code provide that
compensation attributable to stock options will qualify as performance-based
compensation if: (i) the stock option plan contains a per-employee limitation on
the number of shares for which stock options may be granted during a specified
period; (ii) the per-employee limitation is approved by the stockholders; (iii)
the stock option is granted by a compensation committee comprised solely of
"outside directors;" and (iv) the exercise price of the stock option is no less
than the fair market value of the stock on the date of grant. The term "outside
directors" excludes from the compensation committee directors who are (i)
current employees of the Company or an affiliate, (ii) former employees of the
Company or an affiliate receiving compensation for past services (other than
benefits under a tax-qualified pension plan), (iii) current and former officers
of the Company or an affiliate, (iv) directors currently receiving direct or
indirect remuneration from the Company or an affiliate in any capacity (other
than as a director), and (v) any other person who is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.

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ADDITIONAL INFORMATION

1996 Nonstatutory Stock Option Plan: In February 1996, the Company's Board
of Directors approved the 1996 Nonstatutory Stock Option Plan. Pursuant to the
1996 Nonstatutory Stock Option Plan, the Board of Directors has the power to
grant nonstatutory stock options to employees, prospective employees,
consultants and prospective consultants; provided, however, that no such grant
may be made to a person who is (i) a holder of 10% or more of the Company's
stock or (ii) an executive officer or director of the Company. In April 1997,
the Company increased the number of shares reserved under the 1996 Nonstatutory
Stock Option Plan from 300,000 to 600,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. In March 1998, the Company
raised the number of shares to 1,860,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. In May 1999, the Company
raised the number of shares to 2,860,000 shares of Common Stock for issuance to
certain employees and consultants of the Company. At May 31, 1999, 487,779
shares of Common Stock were available for grant under the 1996 Nonstatutory
Stock Option Plan.

Outside Directors Plan: In July 1995, the Company's Board of Directors
approved the 1995 Outside Directors Plan and reserved 200,000 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. The Board is seeking approval of an increase in the number of
shares reserved for issuance under the 1995 Outside Directors Plan in Proposal
5. See Proposal 5 for more details on the terms of the 1995 Outside Directors
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. Under this plan, the Company has reserved 150,000 shares of Common Stock
for issuance to certain employees and consultants of 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. In March 1998, the Company increased the number
of shares reserved under the Plan from 150,000 to 390,000 shares of Common Stock
for issuance to certain employees and consultants of the Company. In May 1999,
the Company increased the number of shares reserved under the Plan from 390,000
to 590,000 shares of Common Stock for issuance to certain employees and
consultants of the Company. At May 31, 1999, 199,008 shares of Common Stock were
available for grant under the 1997 Stock Option Plan for Verity Canada.

VOTE REQUIRED AND BOARD OF DIRECTOR'S RECOMMENDATION.

The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the meeting and entitled to vote is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
at the Annual Meeting of Stockholders. Abstentions will have the same effect as
a negative vote on this proposal. Broker non-votes will have no effect on the
outcome of this vote.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.

PROPOSAL 5

APPROVAL OF 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN, AS AMENDED

In July 1995, the Company's Board of Directors adopted, and the
stockholders subsequently approved, the Company's 1995 Outside Directors Plan
(the "Directors' Plan") and reserved 200,000 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.

In July 1999, the Board of Directors amended the Directors' Plan, subject
to stockholder approval, to increase the number of shares of Common Stock
authorized for issuance under the Directors' Plan from a

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<PAGE> 16

total of 200,000 shares to a total of 500,000 shares, and to increase the number
of shares granted to each non-employee director each year from 5,000 shares to
20,000 shares. The Board of Directors adopted this amendment in order to ensure
that the Company can continue to attract and retain non-employee directors.

As of July 31, 1999, options (net of canceled or expired options) covering
an aggregate of 150,000 shares of the Company's Common Stock had been granted
under the Directors' Plan. Only 50,000 shares of Common Stock (plus any shares
that might in the future be returned to the Directors' Plan as a result of
cancellations or expiration of options) remained available for future grant
under the Directors' Plan.

Stockholders are requested in this Proposal 5 to approve the amendments to
the Directors' Plan. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve the amendments to the Directors' Plan.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this proposal has been approved.

SUMMARY OF THE PROVISIONS OF THE DIRECTORS' PLAN

The essential features of the Directors' Plan are outlined below:

GENERAL

The Directors' Plan provides for the automatic grant of nonstatutory stock
options. Options granted under the Directors' Plan are not intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Code. See
"Federal Income Tax Information" for a discussion of the tax treatment of
nonstatutory stock options.

PURPOSE

The Board of Directors adopted the Directors' Plan to provide a means by
which non-employee directors of the Company may be given an opportunity to
purchase stock in the Company, to assist in retaining the services of such
persons, to secure and retain the services of persons capable of filling such
positions and to provide incentives for such persons to exert maximum efforts
for the success of the Company. Three of the current directors of the Company
are eligible to participate in the Directors' Plan.

ADMINISTRATION

The Board of Directors administers the Directors' Plan. The Board has the
power to construe and interpret the Directors' Plan but not to determine the
persons to whom or the dates on which options will be granted, the number of
shares to be subject to each option, the time or times during the term of each
option within which all or a portion of such option may be exercised, the
exercise price, the type of consideration or the other terms of the option
except in the sense of administering the Plan subject to the provisions of the
Plan.

The Board has the power to delegate administration of the Directors' Plan
to a committee of the Board. As used herein with respect to the Directors' Plan,
the "Board" refers to any committee the Board appoints as well as to the Board
itself.

ELIGIBILITY

The Directors' Plan provides that options may be granted only to
non-employee directors of the Company. A "non-employee director" is defined in
the Directors' Plan as a director of the Company who is not otherwise an
employee of the Company or any affiliate.

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<PAGE> 17

STOCK SUBJECT TO THE DIRECTORS' PLAN

Subject to this Proposal, an aggregate of 500,000 shares of Common Stock is
reserved for issuance under the Directors' Plan. If options granted under the
Directors' Plan expire or otherwise terminate without being exercised, the
shares of Common Stock not acquired pursuant to such options again becomes
available for issuance under the Directors' Plan. If the Company reacquires
unvested stock issued under the Directors' Plan, the reacquired stock may be
reissued under the Directors' Plan.

TERMS OF OPTIONS

The following is a description of the terms of options under the Directors'
Plan. Individual option grants may not be more restrictive as to the terms
described below except as otherwise noted.

Automatic Grants. Each person who is first elected or appointed as an
outside director to the Board (excluding any person who is already a director at
the time of first becoming an outside director) on or after the effective date
of the Directors' Plan is automatically granted an option to purchase 20,000
shares of Common Stock on the date of such election or appointment. Thereafter
at each annual meeting of the stockholders, those outside directors with six
months of service as a director (not necessarily as an outside director) who
will be outside directors after such meeting automatically receive a new option
to purchase 20,000 shares of the Company's Common Stock (5,000 shares of the
Company's Common Stock if this Proposal 5 is not approved).

Exercise Price; Payment. The exercise price of options is the fair market
value of the stock subject to the option on the date of the grant. At July 30,
1999, the closing price of the Company's Common Stock as reported on the Nasdaq
National Market System was $49.50 per share.

The exercise price of options granted under the Directors' Plan must be
paid either in cash at the time the option is exercised or (i) by delivery of
other Common Stock of the Company, (ii) by the assignment of the proceeds from a
sale or loan with respect to some or all of the shares being acquired, or (iii)
in any combination of the foregoing.

Repricing. In the event of a decline in the value of the Company's Common
Stock, the Board does not have the authority to offer optionholders the
opportunity to replace outstanding higher-priced options with new lower-priced
options granted under the Directors' Plan.

Option Exercise. Options granted under the Directors' Plan become
exercisable in cumulative increments ("vest") as set out in the Directors' Plan
during the optionholder's continuous service as a director or employee of or
consultant to the Company ("service"). The Board does not have the power to
accelerate the time during which an option may vest without amending the
Directors' Plan. Options granted under the Directors' Plan do not permit
exercise prior to vesting. The Company may require, in its discretion, that an
optionholder satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by a cash payment upon exercise, by
authorizing the Company to withhold a portion of the Common Stock otherwise
issuable to the optionholder, by delivering already-owned Common Stock of the
Company or by a combination of these means.

Term. The term of options under the Directors' Plan is 10 years. Options
under the Directors' Plan terminate three months after termination of the
optionholder's service unless (i) such termination is due to the optionholder's
disability, in which case the option may be exercised (to the extent the option
was exercisable at the time of the termination of service) at any time within 6
months of such termination; or (ii) the optionholder dies before the
optionholder's service has terminated, or within three months after termination
of such service, in which case the option may be exercised (to the extent the
option was exercisable at the time of the optionholder's death) within 6 months
of the optionholder's death by the person or persons to whom the rights to such
option pass by will or by the laws of descent and distribution. An optionholder
has no right to designate a beneficiary who may exercise the option following
the optionholder's death.

The option term is extended in the event that exercise of the option within
these periods is prohibited. An optionholder's option agreement provides that if
the exercise of the option following the termination of the

15
<PAGE> 18

optionholder's service would result in liability under Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), then the option will
terminate on the earlier of (i) the expiration of the term of the option, (ii)
the 10th day after the last date on which such exercise would result in such
liability under Section 16(b), or (iii) the 190th day after termination of
service. An optionholder's option agreement also provides that if the exercise
of the option following the termination of the optionholder's service would be
prohibited by law, then the option will terminate on the earlier of (i) the
expiration of the term of the option or (ii) three months after the optionholder
is notified by the Company that exercise of the option would not be in violation
of applicable law.

Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Directors' Plan as
determined by the Board.

RESTRICTIONS ON TRANSFER

The optionholder may not transfer an option otherwise than by will or by
the laws of descent and distribution. During the lifetime of the optionholder,
an option may be exercised only by the optionholder.

ADJUSTMENT PROVISIONS

Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Directors'
Plan and outstanding options. In that event, the Directors' Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Directors' Plan, and outstanding options will be
adjusted as to the class, number of shares and price per share of Common Stock
subject to such options.

EFFECT OF CERTAIN CORPORATE EVENTS

The Directors' Plan provides that, in the event of: (i) a sale or exchange
by the stockholders in a single or series of related transactions of more than
50% of the Company's voting stock, (ii) a merger or consolidation in which the
Company is a party, (iii) the sale, exchange or transfer of all or substantially
all of the assets of the Company, or (iv) a liquidation or dissolution of the
Company wherein, upon any such event, the stockholders of the Company
immediately before such event do not retain direct or indirect beneficial
ownership of more than 50% of the total combined voting power of the voting
stock of the Company, its successor, or the corporation to which the assets of
the Company were transferred (a "Transfer of Control"), the surviving,
continuing, successor or purchasing corporation or parent corporation thereof
may assume the outstanding options or substitute substantially equivalent
options to purchase such corporation's stock. Whether or not such corporation
elects to assume or replace outstanding options, the outstanding options will be
immediately exercisable and vested in full ten days prior to the date of the
Transfer of Control (with such exercisability and vesting conditioned on the
consummation of the Transfer of Control). If not exercised, assumed or
substituted then outstanding options will terminate on the date of the Transfer
of Control. The acceleration of an option in the event of an acquisition or
similar corporate event may be viewed as an anti-takeover provision, which may
have the effect of discouraging a proposal to acquire or otherwise obtain
control of the Company.

DURATION, AMENDMENT AND TERMINATION

The Board may suspend or terminate the Directors' Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Directors' Plan will terminate on the date on which all of the
shares of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.

The Board may also amend the Directors' Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would (i) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Directors' Plan to
16
<PAGE> 19

satisfy Rule 16b-3 of the Exchange Act; (ii) increase the number of shares
reserved for issuance upon exercise of options; or (iii) change any other
provision of the Directors' Plan in any other way if such modification requires
stockholder approval in order to comply with Rule 16b-3 of the Exchange Act or
any securities exchange listing requirements. However, the Board may not amend
the Plan more than once every six months with respect to the provisions of the
Plan that relate to the amount, price and timing of grants, other than to
comport with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder. The Board may submit any other
amendment to the Directors' Plan for stockholder approval.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTORS' PLAN

Stock options granted under the Directors' Plan generally have the
following federal income tax consequences:

There are no tax consequences to the optionholder or the Company by reason
of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory
stock option, the optionholder normally will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the option exercise price. Slightly different rules may apply to
optionholders who acquire stock subject to certain repurchase options or whose
options are not exempt on grant from the application of Section 16(b) of the
Exchange Act. If the optionholder becomes an employee, the Company is required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code (if then applicable) and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionholder.

Upon disposition of the stock, the optionholder will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option (or vesting of the stock). Such gain or loss will be
long-term or short-term depending on whether the stock was held for more than
one year. Long-term capital gains currently are generally subject to lower tax
rates than ordinary income or short-term capital gains. The maximum long-term
capital gains rate for federal income tax purposes is currently 20% while the
maximum ordinary income rate and short-term capital gains rate is effectively
39.6%. Slightly different rules may apply to optionholders who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5.

PROPOSAL 6

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

The Board of Directors has selected PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending May 31, 2000 and
has further directed that management submit the selection of independent
accountants for ratification by the stockholders at the Annual Meeting.
PricewaterhouseCoopers LLP, together with Coopers & Lybrand LLP, the predecessor
entity of PricewaterhouseCoopers LLP, has audited the Company's financial
statements since its inception. Representatives of PricewaterhouseCoopers LLP
are expected to be present at the Annual Meeting, will have an opportunity to
make a statement if they so desire and will be available to respond to
appropriate questions.

Stockholder ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent accountants is not required by the Company's Bylaws or
otherwise. However, the Board of Directors is submitting the selection of
PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of
good corporate practice. If the stockholders fail to ratify the selection, the
Audit Committee and the Board of Directors will reconsider whether or not to
retain that firm. Even if the selection is ratified, the Audit Committee and the
Board of Directors in their discretion may direct the appointment of different
independent accountants at any time during the year if they determine that such
a change would be in the best interests of the Company and its stockholders.
17
<PAGE> 20

The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of PricewaterhouseCoopers LLP. Abstentions
will be counted toward the tabulation of votes cast on proposals presented to
the stockholders and will have the same effect as negative votes. Broker
non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether this matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 6.

SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of June 30, 1999 by:

- each director and nominee for director;

- each of the executive officers named in the Summary Compensation Table;

- all directors and executive officers as a group; and

- each person, or group of affiliated persons, known by the Company to be
beneficial owners of 5% or more of its common stock;

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of June 30, 1999 are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.

18
<PAGE> 21

Except as indicated in this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Percentage of ownership is based on 12,937,659 shares of
common stock, outstanding on June 30, 1999. Unless otherwise indicated, the
address of each of the individuals named below is 894 Ross Drive, Sunnyvale,
California 94089.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------
NUMBER OF
NUMBER OF SHARES
SHARES ISSUABLE PERCENT
ACTUALLY PURSUANT TO BENEFICIALLY
NAME OF BENEFICIAL OWNER ISSUED STOCK OPTIONS OWNED
------------------------ --------- ------------- ------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Gary J. Shona............................................... -- 820,000 5.96%
Anthony J. Bettencourt...................................... 1,497 270,000 2.06
Hugh S. Njemanze............................................ 44,500 164,123 1.59
James E. Ticehurst.......................................... 1,953 103,218 *
Ronald F.E. Weissman........................................ 13,637 153,647 1.28
Steven M. Krausz............................................ -- 75,000 *
Stephen A. MacDonald........................................ 4,201 82,000 *
Charles P. Waite, Jr. ...................................... 4,764 62,000 *
All executive officers and directors as a group (12
persons).................................................. 73,777 1,785,466 12.63%
</TABLE>

- ---------------
* Represents less than one percent.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and the Company's other equity securities. Officers, directors and greater than
ten percent stockholders are required by the SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended May 31, 1999, all Section
16(a) filing requirements applicable to the Company's officers, directors and
greater than ten percent beneficial owners were complied with.

EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

Directors do not receive any cash compensation for their services as
members of the Board of Directors, although they are reimbursed for their
expenses in attending Board and committee meetings. In addition, all Directors
who have served on the Board for more than six months and are not members of
management will receive stock options to purchase 5,000 shares of Common Stock
pursuant to the 1995 Outside Directors Stock Option Plan upon the date of each
annual stockholders' meeting. The exercise price of each option is the fair
market value on the day it is granted. Each option will vest over four years and
generally must be exercised within ten years. The Company is seeking in Proposal
5 to increase the number of shares subject to the automatic grant of stock
options under the 1995 Outside Directors Stock Option Plan to 20,000 shares. For
a further description of the terms of the 1995 Outside Directors Stock Option
Plan, see Proposal 5.

During the last fiscal year, the Company granted options covering 50,000
shares to each of Steven M. Krausz, Stephen A. MacDonald and Charles P. Waite,
Jr., at a weighted average exercise price of $25.07 per share. Five thousand of
these options were granted under the 1995 Outside Directors Stock Option Plan
and the remainder were granted under the 1995 Stock Option Plan. The per share
exercise price of each option is the fair market value of such common stock on
the date of grant (based on the closing sales price reported in the Nasdaq
National Market for the date of grant).

19
<PAGE> 22

COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY OF COMPENSATION

The following table shows for the fiscal years ended May 31, 1997, 1998 and
1999, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at May 31, 1999 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTION COMPENSATION
--------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gary J. Sbona.............................. 1999 $ 52,000 $ 10,400 470,000 $ 585(1)
President, Chief Executive Officer 1998 15,167 -- 350,000 73(1)
and Chairman of the Board(2) 1997 -- -- -- --
Anthony J. Bettencourt..................... 1999 200,000 200,000 175,000 264(1)
Senior Vice President, 1998 147,051 292,500(4) 150,000 198(1)
Worldwide Sales and Product Marketing(3) 1997 60,633 92,015 50,000 124(1)
Hugh S. Njemanze........................... 1999 196,875 39,375 75,000 408(1)
Chief Technology Officer 1998 171,250 35,000 55,000 408(1)
1997 133,333 0 88,000 324(1)
James E. Ticehurst......................... 1999 136,250 27,250 80,000 1,422(1)
Vice President, Finance and
Administration 1998 106,711 21,342 30,000 994(1)
and Assistant Secretary 1997 79,333 -- 6,100 684(1)
Ronald F.E. Weissman....................... 1999 213,333 42,667 80,000 696(1)
Vice President, Strategy 1998 183,333 40,000 35,000 696(1)
and Corporate Marketing 1997 4,327 15,000 -- 29(1)
</TABLE>

- ---------------
(1) Represents premiums paid on behalf of such Named Executive Officer for life
insurance coverage in excess of a base amount of $50,000 in coverage.

(2) Mr. Sbona is partially compensated for his services to the Company by Regent
Management Corporation. See "Certain Transactions" below.

(3) Mr. Bettencourt served as Vice President, Worldwide Sales and Marketing, of
the Company until December 1996. He rejoined the Company in September 1997,
and currently serves as Senior Vice President, Worldwide Sales and
Marketing.

(4) Of such amount, $180,000 represents a signing bonus paid in connection with
Mr. Bettencourt rejoining the Company in September 1997, and $112,500
represents sales commissions earned under a sales commission plan.

20
<PAGE> 23

STOCK OPTION GRANTS AND EXERCISES

The Company grants options to its executive officers under its 1995 Stock
Option Plan. As of June 30, 1999, options to purchase a total of 1,972,610
shares were outstanding under the 1995 Stock Option Plan and options to purchase
466,987 shares remained available for grant thereunder.

The following tables show for the fiscal year ended May 31, 1999, certain
information regarding options granted to, exercised by, and held at year end by,
the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
PERCENT OF
TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
NUMBER OF GRANTED TO AT ASSUMED ANNUAL RATES
SECURITIES EMPLOYEES OPTION OF STOCK PRICE APPRECIATION
UNDERLYING IN FISCAL DATE FOR OPTION TERM(3)
OPTIONS YEAR IN EXERCISE MARKET EXPIRATION ----------------------------
NAME GRANTED(1) 1999(2) PRICE VALUE DATE 5% ($) 10% ($)
---- ---------- ---------- -------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary J. Sbona........... 260,000 9.45 $ 7.625 $ 7.625 10/20/2006 $ 946,556 $ 2,267,165
210,000 7.63 32.500 32.500 05/25/2007 3,258,633 7,804,993
------- ----- ---------- -----------
470,000 17.07 4,205,189 10,072,158
Anthony J.
Bettencourt........... 50,000 1.82 5.875 5.875 09/01/2006 140,253 335,929
50,000 1.82 7.625 7.625 10/20/2006 182,030 435,993
75,000 2.72 32.500 32.500 05/25/2007 1,163,797 2,787,498
------- ----- ---------- -----------
175,000 6.36 1,486,080 3,559,420
Hugh S. Njemanze........ 30,000 1.09 5.875 5.875 09/01/2006 84,151 201,557
10,000 0.36 7.625 7.625 10/20/2006 36,406 87,199
35,000 1.27 32.500 32.500 05/25/2007 543,106 1,300,832
------- ----- ---------- -----------
75,000 2.72 663,663 1,589,588
James E. Ticehurst...... 25,000 0.91 5.875 5.875 09/01/2006 70,127 167,964
30,000 1.09 7.625 7.625 10/20/2006 109,218 261,596
25,000 0.91 32.500 32.500 05/25/2007 387,932 929,166
------- ----- ---------- -----------
80,000 2.91 567,277 1,358,726
Ronald F.E. Weissman.... 30,000 1.09 5.875 5.875 09/01/2006 84,152 201,558
10,000 0.36 7.625 7.625 10/20/2006 36,406 87,199
40,000 1.45 32.500 32.500 05/25/2007 620,692 1,486,665
------- ----- ---------- -----------
80,000 2.91 741,250 1,775,422
</TABLE>

- ---------------
(1) Options granted in fiscal 1999 generally vest over a 12-month period.

(2) Based on an aggregate of 2,802,585 options granted to employees, including
the Named Executive Officers, in fiscal year 1999.

(3) The potential realizable value is calculated based on the term of the option
at its time of grant, 10 years, compounded annually. It is calculated by
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.

21
<PAGE> 24

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
NAME ON EXERCISE(1) VALUE REALIZED(2) YEAR END(1) AT FISCAL YEAR END(1)(3)
---- --------------- ----------------- ------------------------- ------------------------
VESTED/UNVESTED VESTED/UNVESTED
<S> <C> <C> <C> <C>
Gary J. Sbona ........ 0 $ -- 501,666/318,334 $13,698,837/$2,913,663
Anthony J.
Bettencourt......... 40,000 809,074 119,310/150,690 3,277,878/ 2,122,747
Hugh S. Njemanze...... 80,957 2,388,398 73,379/90,744 2,003,429/ 1,474,751
James E. Ticehurst ... 8,317 149,046 44,033/59,185 1,178,723/ 936,765
Ronald F.E.
Weissman............ 36,353 891,987 54,104/99,543 1,484,395/ 1,659,512
</TABLE>

- ---------------
(1) These options are immediately exercisable in full at the date of grant, but
shares purchased upon exercise of unvested options are subject to a
repurchase right in favor of the Company to repurchase unvested shares at
the original issuance price.

(2) Represents the fair market value of the underlying securities on the
exercise date minus the aggregate exercise price of such option.

(3) Calculated on the basis of the fair market value of the underlying
securities as of May 28, 1999, of $33.1875 per share, the last trading day
of fiscal 1999, as reported by the Nasdaq National Market, minus the
aggregate exercise price.

EMPLOYMENT AGREEMENTS AND TERMINATION
AND CHANGE IN CONTROL AGREEMENTS

The 1995 Stock Option Plan provides that, in the event of (a) a sale or
exchange by the stockholders of all or substantially all of the Company's voting
stock or certain mergers or consolidations to which the Company is a party and
in which the Company's stockholders do not retain beneficial ownership of at
least a majority of the Company's or the Company's successor's voting stock, (b)
the sale, exchange or transfer of all or substantially all of the Company's
assets other than to one or more subsidiary corporations, or (c) liquidation or
dissolution of the Company, the Board of Directors may provide for the acquiring
or successor corporation to assume or substitute new options for the options
outstanding under the 1995 Stock Option Plan. To the extent that the options
outstanding under the 1995 Stock Option Plan are not assumed, substituted for,
or exercised prior to such event, they will terminate; provided, however, that
the Company has granted options to certain of its officers, including the Named
Executive Officers, which provide for acceleration of vesting upon such a change
in control.

Under the 1995 Stock Option Plan, the Board of Directors retains discretion
to modify the terms, including the price, of outstanding shares. Options granted
under that plan are immediately exercisable, subject to a right of repurchase in
favor of the Company for all exercised, unvested shares. Generally, 12.5% of the
shares subject to options granted to new employees become vested six months
after the date of commencement of employment and 2.083% of the shares subject to
options vest upon completion of each succeeding full month of continuous
employment with the Company. Shares subject to options granted to existing
employees generally vest at the rate of 2.083% per month for 48 months following
the date of grant. Generally, options have a term of eight (8) years. All
options were granted at fair market value as determined by the Board of
Directors on the date of grant.

22
<PAGE> 25

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

The Compensation Committee (the "Committee") is comprised of two
non-employee directors of the Board of Directors, Messrs. Krausz and Waite. The
Committee is responsible for setting and administering policies governing
compensation of executive officers. For all executive officers, the Committee
reviews the performance and compensation levels for executive officers, sets
salary and bonus levels and makes option grants under the Company's 1995 Stock
Option Plan.

COMPENSATION POLICIES GENERALLY

The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with the Company's performance
and to motivate executive officers to achieve the Company's business objectives.
The Company uses salary, executive officer bonuses and stock options to achieve
these goals.

SALARIES AND BONUSES. Salaries are set for each executive officer with
reference to a range of salaries for comparable positions among high technology
companies of similar size and location. Annual salary adjustments take into
account individual executive officers' achievements during the prior fiscal year
towards key Company-wide objectives set annually by the Board of Directors, in
consultation with the Chief Executive Officer, as well as the executive
officers' performance of their individual responsibilities.

Variable cash incentive compensation for fiscal 1999 was provided through
the Company's employee bonus plan for all executive officers except for the
executive officer responsible for sales operations, whose bonus plan for fiscal
1999 was determined based upon negotiations between the officer and the Company.
In accordance with the Committee's goal, fiscal 1999 variable cash incentive
compensation for the bonus plan participants was targeted for up to 20% of the
officer's salary if predetermined corporate revenue and net income objectives
were achieved.

STOCK OPTIONS. The Committee strongly believes that equity ownership by
executive officers provides incentives to build stockholder value and align the
interests of executive officers with the stockholders. Initial stock option
grants to executive officers are subject to four year vesting. The size of the
initial grant has been determined with reference to comparable stock option
compensation offered by similarly sized high technology companies for similar
positions and the responsibilities and expected future contributions of the
executive officer, as well as recruitment considerations. In determining the
size of, or whether to grant, refresher grants, the Committee has considered
each executive officer's performance during the previous periods and expected
contributions during future periods, as well as the relative position and
responsibilities of each executive officer and previous option grants to such
executive officers. Generally, refresher option grants vest monthly over a one
year period from the date of grant. The Committee believes that refresher
options have provided strong incentives for executive officers to remain with
the Company.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION. The Company has considered
regulations of the Internal Revenue Service which restrict deductibility of
executive compensation paid to each of the five most highly compensated
executive officers at the end of any fiscal year to the extent such compensation
exceeds $1,000,000 for any of such officers in any year and does not qualify for
an exception under the statute or proposed regulations. The Committee concluded
in March 1996 that it would be advisable to establish certain restrictions on
the granting of options under the Option Plan to assist in the qualification of
compensation recognized in connection with the exercise of such options for an
exemption; these restrictions were approved at the Special Meeting of
Stockholders held on March 28, 1996. The Committee does not believe that other
components of the Company's compensation will be likely to exceed $1,000,000 for
any executive officer in the foreseeable future and therefore concluded that no
further action with respect to qualifying such compensation for deductibility
was necessary at this time. In the future, the Committee will continue to
evaluate the advisability of qualifying its executive compensation for
deductibility of such compensation. The Committee's policy is to qualify its
executive compensation for deductibility under applicable tax laws as
practicable.

23
<PAGE> 26

CHIEF EXECUTIVE OFFICER COMPENSATION

On July 31, 1997, the Company and Regent Pacific Management Corporation
("Regent Pacific") executed an agreement (the "Agreement") pursuant to which
Regent Pacific agreed to provide certain management services to the Company for
a term of 12 months, including a noncancelable period of 26 weeks, in exchange
for a retainer of $200,000 and fees of $50,000 per week. On April 13, 1998, the
Company and Regent Pacific executed an amendment to the Agreement (the
"Amendment"). Pursuant to the Amendment, Regent Pacific increased the size of
the management team provided to the Company; the Company hired Gary J. Sbona as
an employee at a salary of $52,000 per year, effective as of February 16, 1998;
the parties agreed to extend the term of the Agreement to 25 months, including
an extension of the noncancelable period to February 28, 1999; the Company
granted an incentive stock option to Mr. Sbona to purchase 350,000 shares of the
Company's Common Stock; and the Company agreed to release $146,000 of the
retainer to Regent Pacific upon the expiration of the noncancelable period and
Regent Pacific agreed to return $54,000 of the retainer to the Company to offset
Mr. Sbona's salary. The Amendment provides that the Company may terminate the
Agreement upon 60 days written notice to Regent Pacific at any time after the
expiration of the noncancelable period, and that the Company has an option to
extend the Agreement for an additional 26 week period.

In October 1998, the Board of Directors granted Mr. Sbona another option to
purchase an additional 260,000 shares of Common Stock, at an exercise price of
$7.625 per share. In May 1999, the Board of Directors granted Mr. Sbona a third
option to purchase an additional 210,000 shares of Common Stock, at an exercise
price of $32.50 per share. The shares subject to these options vest on a monthly
basis during the 13-month period ending on February 28, 1999, the 12-month
period ending on October 20, 1999, and the 12-month period ending May 25, 2000,
respectively, subject to Mr. Sbona's continued employment as President and Chief
Executive Officer. The shares subject to these options shall fully vest upon the
occurrence of certain change of control transactions or upon a termination of
Mr. Sbona without cause. The options 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. Under this amended agreement,
Regent Pacific continues to provide certain services to the Company for a fee of
$50,000 per week. The new agreement provides the Company with an option to
further extend the term of this agreement through February 2001.

Compensation Committee

Steven M. Krausz
Charles P. Waite, Jr.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Steven M. Krausz and Charles P. Waite, Jr. served as members of the Board
of Directors' compensation committee during the fiscal year ended May 31, 1999.

None of the Company's executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or compensation
committee.

The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such individuals
to the fullest extent permitted by law.

24
<PAGE> 27

PERFORMANCE MEASUREMENT COMPARISON(1)

The following graph shows the total stockholder return of an investment of
$100 in cash on October 6, 1995 for (i) the Company's Common Stock, (ii) the
Nasdaq Stock Market and (iii) the American Stock Exchange Biotechnology Index
(the "AMEX Biotech"). All values assume reinvestment of the full amount of all
dividends and are calculated as of May 31 of each year:

Comparison of 5 year Cumulative Total Return on Investment from October 6,
1995 through May 29, 1999:

COMPARISON OF 44 MONTH CUMULATIVE TOTAL RETURN
AMONG VERITY, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX

<TABLE>
<CAPTION>
NASDAQ STOCK NASDAQ COMPUTER &
VERITY, INC. MARKET (U.S.) DATA PROCESSING
------------ ------------- -----------------
<S> <C> <C> <C>
10/6/1995 100 100 100
10/95 199 103 110
11/95 269 105 111
12/95 239 104 109
1/96 205 105 108
2/96 257 109 115
3/96 182 109 114
4/96 186 118 128
5/96 212 124 132
6/96 155 118 127
7/96 118 108 114
8/96 132 114 117
9/96 67 122 130
10/96 64 121 127
11/96 90 129 136
12/96 83 128 135
1/97 76 138 147
2/97 53 130 135
3/97 42 121 125
4/97 30 125 141
5/97 35 139 157
6/97 29 144 160
7/97 35 159 177
8/97 35 159 172
9/97 26 168 175
10/97 28 159 172
11/97 27 160 176
12/97 27 157 165
1/98 24 162 178
2/98 28 178 202
3/98 45 184 219
4/98 51 187 220
5/98 42 177 205
6/98 58 189 242
7/98 56 187 234
8/98 28 150 190
9/98 37 171 228
10/98 59 178 221
11/98 93 196 256
12/98 143 222 295
1/99 184 254 358
2/99 209 231 317
3/99 181 248 355
4/99 189 255 337
5/99 179 249 329
</TABLE>

* $100 invested on 10/6/98 in Stock or Index, including reinvestment of
dividends. Fiscal year ending May 31.
- ---------------
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.

CERTAIN TRANSACTIONS

On July 31, 1997, 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 firm of which Mr. Sbona is
the chief executive officer. Pursuant to the original agreement, Regent Pacific
agreed to provide management services to the Company, for a fee of $50,000 per
week. The management services included the services of Mr. Sbona as Chief
Executive Officer and President, and at least three other Regent Pacific
personnel as part of the Company's management team. The agreement had a one-year
term

25
<PAGE> 28

and the Company retained the option to cancel the agreement after the 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.

On April 13, 1998, the Company amended its agreement with Regent Pacific to
provide that Mr. Sbona and at least four other Regent Pacific personnel would
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.

Mr. Sbona was appointed chairman of the Board of Directors on March 12,
1999. In connection with Mr. Sbona's service as President and Chief Executive
Officer, an employee of Verity, the Company's Board of Directors compensation
committee granted to him an option to purchase 350,000 shares of the Company's
Common Stock, at an exercise price of $5.125 per share. In October 1998, the
Board of Directors granted Mr. Sbona another option to purchase an additional
260,000 shares of the Company's Common Stock, at an exercise price of $7.625 per
share. In May 1999, the Board of Directors granted Mr. Sbona a third option to
purchase an additional 210,000 shares of the Company's Common Stock, at an
exercise price of $32.50 per share. The shares subject to these options vest on
a monthly basis during the 13-month period ending on February 28, 1999, the
12-month period ending on October 20, 1999, and the 12-month period ending May
25, 2000, respectively, subject to Mr. Sbona's continued employment as the
Company's President and Chief Executive Officer. The shares subject to these
options shall fully vest upon the occurrence of certain change of control
transactions or upon a termination of Mr. Sbona without cause. The options also
remain exercisable for one year following the termination of Mr. Sbona's
services.

26
<PAGE> 29

OTHER MATTERS

The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.

By Order of the Board of Directors

/s/ Timothy J. Moore

Timothy J. Moore

Secretary

August 19, 1999

27
<PAGE> 30

VERITY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 21, 1999

The undersigned hereby appoints Gary J. Sbona and James E. Ticehurst,
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of Verity, Inc. which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
Verity, Inc. to be held at the Sunnyvale Sheraton, 1100 N. Mathilda Avenue,
Sunnyvale, California on Tuesday, September 21, 1999 at 11:00 a.m. local time,
and at any and all postponements, continuations and adjournments thereof, with
all powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.

UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4, 5 AND 6, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.

[See Reverse Side] CONTINUED AND TO BE SIGNED ON REVERSE SIDE [See Reverse Side]

<PAGE> 31

[X] Please mark votes as in this example.

MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW AND FOR
PROPOSALS 2,3,4,5 AND 6.

PROPOSAL 1: To elect two directors to hold office until the 2002 Annual Meeting
of Stockholders.

NOMINEES: Steven M. Krausz, Charles P. Waite, Jr.

[ ] FOR both nominees listed above [ ] WITHHOLD AUTHORITY
(except as marked to the contrary to vote for both nominees
below). listed above.

[ ]
-------------------------------------------
FOR both nominees except as note above

[ ] MARK here for address change and note below

PROPOSAL 2: To approve an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of Common
Stock from 30,000,000 shares to 100,000,000.