Verity (VRTY) 8-K Verity Reports Second-Quarter Fiscal 2005 Results

Exhibit 99.1

FOR IMMEDIATE RELEASE

Verity Investor Contact:	Verity Media Contact:
Anne Marie McCauley	Derek van Bronkhorst
Verity, Inc.	Verity, Inc.
408-542-2352	650-315-7856
amccauley@verity.com	derekvb@verity.com

Verity Reports Second-Quarter Fiscal 2005 Results

Second Quarter Revenues Increase 30% Year over Year

Financial Highlights:

• Q2 Revenues: $37.6 million

• Q2 Operating Income as a% of Total Revenues: 12% GAAP; 17% Non-GAAP

• Q2 Earnings Per Share: $0.11 GAAP; $0.13 Non-GAAP

• Q2 End of Quarter Cash and Investments Balance: $210.6 million

Strategic Highlights:

• Verity^® Extractor 1.0 extraction software introduced

• Verity^® Federator 2.0 with Web services available

• Verity^® Ultraseek 5.3 with search relevance and content acquisition improvements launched

• Verity^® MediClaim^™ 9.0 with enhanced security offered

• New Verity^® KeyView^® Software Development Kits announced

• Verity Download Center expanded

• Verity named to ‘Software 500’ again

• Richard G. Stevens and Eric F. Brown named to Board of Directors

SUNNYVALE, Calif. – Dec. 16, 2004 – Verity Inc. (NASDAQ: VRTY), a leading provider of enterprise software that enables organizations to maximize the return on their intellectual capital investment, today reported its financial results for the second quarter fiscal 2005 ended November 30, 2004.

Revenues for the second quarter of fiscal 2005 were $37.6 million, a year over year increase of 30 percent compared to $28.9 million reported in the second quarter of fiscal 2004 and an increase of 9 percent compared to $34.6 million reported in the first quarter of fiscal 2005.

GAAP results:

For the second quarter, operating income was $4.4 million or 12 percent of total revenue compared to operating income of $4.4 million or 15 percent of total revenue for the second quarter of fiscal 2004.

For the second quarter, net income was $4.4 million, or $0.11 per fully diluted share compared to net income of $3.6 million, or $0.09 per fully diluted share for the second quarter of fiscal 2004. The second quarter GAAP effective tax rate was 27 percent and included a one-time research and development investment tax credit of $608,000 received from the Canadian Revenue Agency. It also includes a year to date rate benefit due to the reinstatement of research and development tax credits which occurred in the second fiscal quarter.

Non-GAAP results:

For the second quarter, non-GAAP operating income was $6.4 million or 17 percent of total revenue compared to non-GAAP operating income of $6.0 million or 21 percent of total revenue for the second quarter of fiscal 2004.

For the second quarter, non-GAAP net income was $5.0 million, or $0.13 per fully diluted share compared to non-GAAP net income of $4.6 million, or $0.12 per fully diluted share for the second quarter of fiscal 2004. The second quarter non-GAAP effective tax rate was 37 percent and includes a year to date rate benefit due to a reinstatement of research and development tax credits which occurred in the second fiscal quarter. Non-GAAP results and related reconciliation, as set forth in the financial tables at the end of this release, exclude the amortization of acquired intangible assets, restructuring charges and Canadian investment tax credits. See “Use of GAAP and Non-GAAP Results” below.

“Verity’s second quarter performance reflects the company’s ability to execute,” said Anthony J. Bettencourt, president and chief executive officer. “During the quarter, we introduced Verity Extractor, an entirely new enterprise-class extraction software, released enhanced versions of both search and content capture products, received industry accolades for our technology and formed and extended customer relationships.”

At the end of the second quarter on November 30, Verity’s strong balance sheet included cash and cash equivalents, short-term investments, and long-term investments totaling $210.6 million. Days sales outstanding for the quarter were 77 days, within the company’s target range of 75 to 80 days.

During the second quarter, Verity repurchased approximately 659,000 shares of its common stock at an average price of $12.76 per share, for a total investment of approximately $8.4 million. For the first half of fiscal year 2005, Verity has repurchased approximately 1.2 million shares of its common stock at an average price of $12.85 for an investment of $15.8 million of the $50 million Board approved Fiscal 2005 stock buyback program.

Customer Activity

During the second quarter, Verity recorded customer sales transactions with a wide range of leading companies in the consumer products, defense, financial services, government, healthcare, high-technology, manufacturing, professional services, publishing and media, and telecommunications industries. Customer wins included Allergan, Dartmouth College, Dow Chemical, FedEx, Gevity HR, Independence Blue Cross, Mercedes Benz, Pfizer, Seagate and Siemens Westinghouse. The company also extended its position in the OEM market for enterprise search, categorization and recommendation as well as importing, filtering and viewing software technology through new or extended agreements with existing customers, including ePeople, IBM and Perceptive Software.

Business Outlook

The following financial outlook is provided based on information as of December 16, 2004. It includes the impact of the Dralasoft acquisition announced and closed today.

Management initiates the following guidance for the third fiscal quarter ending February 28, 2005:

• Total revenues are expected to be in the range of $38 million to $40 million

• GAAP earnings per fully diluted share are expected to be in the range of $0.07 to $ 0.09

• Non-GAAP earnings per fully diluted share are expected to be in the range of $0.12 to $0.14

• Per-share calculations are based on projections of 38.9 million fully diluted shares

Third quarter non-GAAP guidance is adjusted from GAAP guidance by excluding amortization of acquired intangible assets of approximately $1.7 million associated with previous acquisitions, and with respect to the Dralasoft acquisition an estimated $200,000 for amortization of intangibles and an estimated $1.0 million for In Process R&D which, after adjusting for the tax effects of these exclusions using an effective tax rate of 38.5 percent, results in approximately $0.05 per share based on the projected fully diluted shares.

Management provides the following guidance for the full fiscal year ending May 31, 2005:

• Total revenues are expected to be in the range of $153 million to $157 million

• GAAP earnings per fully diluted share are expected to be in the range of $0.31 to $ 0.37

• Non-GAAP earnings per fully diluted share are expected to be in the range of $0.44 to $0.50

• Per-share calculations are based on projections of 38.2 million fully diluted shares

Fiscal 2005 non-GAAP guidance is adjusted from GAAP guidance by excluding amortization of acquired intangible assets of approximately $6.7 million, restructuring charges of $377,000 associated with the closing of the Cardiff UK facility and the consolidation of Verity’s San Diego facility, Canadian investment tax credit of $608,000, and an estimated $400,000 for amortization of intangibles and an estimated $1.0 million for In Process R&D both associated with the acquisition of Dralasoft, which, after adjusting for the tax effects of these exclusions using an effective tax rate of 38.5 percent, results in $0.13 per share based on the projected fully diluted shares.

Use of GAAP and Non-GAAP Results

Although GAAP disclosure provides investors and management with an overall view of Verity’s financial performance, Verity believes that it is important for investors to also understand the performance of its ongoing operational business. Consequently, the non-GAAP results exclude charges and benefits not reflective of Verity’s ongoing operational business, namely, charges for the amortization of acquired intangible assets, restructuring charges and the Canadian investment tax credit, as set forth in the financial tables at the end of this news release. Management uses the non-GAAP results to assess the financial performance of Verity’s ongoing operational business.

Management Conference Call

All investors are cordially invited to join Verity’s quarterly conference call on Thursday, December 16, 2004, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time). Key members of the management team will review second quarter fiscal 2005 results and discuss the current business outlook.

Interested investors should dial the numbers listed below five (5) minutes prior to the scheduled start time and ask for the Verity Quarterly Earnings Conference Call. Alternatively, investors may access the webcast of the call at the corporate Web site.

Dial-in Numbers:	United States & Canada: 1-800-762-4717
	International: 480-629-9025
Webcast Link:	http://www.verity.com/webcast

A replay of the call will be available through February 2005 at 1-800-475-6701 (United States and Canada) or 320-365-3844 (International) using access code 759314, as well as on the Verity Web site athttp://www.verity.com/webcastuntil the next earnings call.

About Verity

Headquartered in Sunnyvale, California, Verity provides software that enables organizations to maximize the return on their intellectual capital investment. The company’s intellectual capital management (ICM) solutions provide integrated search, classification, recommendation, monitoring and analytics across the real-time flow of enterprise information, along with question and answer interfaces for effective online self-service. Other Verity ICM solutions capture content and drive automated business processes. Verity technology also serves as a core component of more than 260 applications from leading independent software vendors.

Verity software solutions are used by more than 11,500 customers in the private and public sectors. Customers include American Express, AT&T, Bristol-Myers Squibb, Cap Gemini Ernst & Young, Cardinal Health, Cisco Systems, EMC Documentum, Dow Jones, Financial Times, Hewlett-Packard, Home Depot, Lotus, Kaiser Permanente, META Group, SAP, Siemens, the State of California, Stellent, Sybase, and the U.S. Departments of Energy and Justice.

To access Verity’s investor relations Web site, visithttp://investor.verity.com.

Forward-Looking Statements

The statements in this news release under the heading “Business Outlook” are forward-looking statements. These forward-looking statements are expectations and beliefs based on assumptions that may or may not prove to be accurate, and actual financial results could differ materially as a result of many factors. These include: Verity’s estimates of the charges to be taken in the remainder of fiscal 2005 for the Dralasoft acquisition are preliminary estimates only, and after complete analysis may be substantially different; future demand for Verity’s products may not be as strong as Verity predicts; many of Verity’s product orders are large, and a delay in closing a large sale during any quarter could materially reduce Verity’s revenues for that period; transactions accounting for a disproportionate percentage of Verity’s quarterly revenues are frequently closed in the last few weeks or days of a quarter and, accordingly, even a slight delay in the closing of some of these transactions could materially reduce Verity’s revenues for that period; Verity incurs expenses based upon anticipated revenues and, consequently, if the revenues are less than anticipated, Verity will have lower gross margins and operating results; if competitors develop new products that compete favorably against Verity’s products, sales of Verity’s products will be less than projected; a portion of Verity’s sales are in the international market, which exposes Verity to currency fluctuation and other risks; and the effect of any of the foregoing factors may cause Verity to change its business plan. These and other risks relating to Verity and its business and products are set forth under the caption “Risks Relating to Our Operations” in Item 2 of Part I of Verity’s latest Form 10-Q, filed with the Securities and Exchange Commission on October 8, 2004.

# # #

Verity and the Verity logo are registered trademarks or trademarks of Verity, Inc.

All other trademarks are the property of their respective owners.

World Wide Web sitehttp://www.verity.com

VERITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

SECOND QUARTER FISCAL 2005 VS. SECOND QUARTER FISCAL 2004

	Quarter Ended November 30, 2004						Quarter Ended November 30, 2003
	(unaudited)						(unaudited)
	GAAP		adj		non-GAAP		GAAP		adj		non-GAAP
Revenues:
Software products	$	22,103			$	22,103	$	16,227			$	16,227
Service and other		15,533				15,533		12,672				12,672
Total revenues		37,636				37,636		28,899				28,899
Costs of revenues:
Software products		851				851		429				429
Service and other		5,075				5,075		3,288				3,288
Amortization of purchased intangible assets		1,690	(1,690	)		—		645	(645	)		—
Total costs of revenues		7,616				5,926		4,362				3,717
Gross profit		30,020				31,710		24,537				25,182
Operating expenses:
Research and development		5,851				5,851		4,773				4,773
Marketing and sales		14,874				14,874		11,687				11,687
General and administrative		4,604				4,604		2,712				2,712
Restructuring charges		279	(279	)		—		972	(972	)		—
Total operating expenses		25,608				25,329		20,144				19,172
Income from operations		4,412				6,381		4,393				6,010
Other income, net		1,591				1,591		1,770				1,770
Income before provision for income taxes		6,003				7,972		6,163				7,780
Provision for income taxes		1,640	1,339			2,979		2,524	662			3,186
Net income	$	4,363			$	4,993	$	3,639			$	4,594
Net income per share — basic	$	0.12			$	0.13	$	0.10			$	0.12
Net income per share — diluted	$	0.11			$	0.13	$	0.09			$	0.12
Number of shares — basic		37,517				37,517		37,579				37,579
Number of shares — diluted		38,684				38,684		39,475				39,475

VERITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

YEAR-TO-DATE

	Six Months Ended November 30, 2004						Six Months Ended November 30, 2003
	(unaudited)						(unaudited)
	GAAP		adj		non-GAAP		GAAP		adj		non-GAAP
Revenues:
Software products	$	41,795			$	41,795	$	30,404			$	30,404
Service and other		30,463				30,463		25,098				25,098
Total revenues		72,258				72,258		55,502				55,502
Costs of revenues:
Software products		1,584				1,584		768				768
Service and other		10,049				10,049		6,676				6,676
Amortization of purchased intangible assets		3,379	(3,379	)		—		1,290	(1,290	)		—
Total costs of revenues		15,012				11,633		8,734				7,444
Gross profit		57,246				60,625		46,768				48,058
Operating expenses:
Research and development		11,540				11,540		10,234				10,234
Marketing and sales		29,935				29,935		23,820				23,820
General and administrative		7,846				7,846		5,600				5,600
Restructuring charges		377	(377	)		—		972	(972	)		—
Total operating expenses		49,698				49,321		40,626				39,654
Income from operations		7,548				11,304		6,142				8,404
Other income, net		2,642				2,642		2,956				2,956
Income before provision for income taxes		10,190				13,946		9,098				11,360
Provision for income taxes		3,315	2,054			5,369		3,639	905			4,544
Net income	$	6,875			$	8,577	$	5,459			$	6,816
Net income per share — basic	$	0.18			$	0.23	$	0.15			$	0.18
Net income per share — diluted	$	0.18			$	0.22	$	0.14			$	0.17
Number of shares — basic		37,350				37,350		37,542				37,542
Number of shares — diluted		38,380				38,380		39,569				39,569

VERITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	November 30, 2004			May 31, 2004
	(unaudited)			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	76,207		$	92,245
Short-term investments		52,573			25,256
Trade accounts receivable, net of allowance for doubtful accounts of $1,741 and $2,131		32,101			31,807
Deferred tax assets		2,590			2,482
Prepaid and other current assets		6,396			4,636
Total current assets		169,867			156,426
Property and equipment, net		5,842			4,272
Long-term investments		81,780			84,248
Deferred tax assets		16,831			17,884
Intangible assets, net		21,475			24,854
Goodwill		55,824			55,824
Other assets		573			573
Total assets	$	352,192		$	344,081
LIABILITIES
Current liabilities:
Accounts payable	$	3,034		$	2,855
Accrued compensation		11,592			10,086
Income tax payable		6,415			4,214
Deferred purchase payment		—			3,066
Other accrued liabilities		6,212			5,043
Deferred revenue		21,731			21,421
Total current liabilities		48,984			46,685
Other non-current liabilities:
Deferred purchase payment		570			570
Total liabilities		49,554			47,255
STOCKHOLDERS’ EQUITY
Common stock		38			37
Additional paid-in capital		257,724			259,245
Accumulated other comprehensive income		2,694			2,249
Deferred stock compensation		(76	)		(88	)
Retained earnings		42,258			35,383
Total stockholders’ equity		302,638			296,826
Total liabilities and stockholders’ equity	$	352,192		$	344,081

VERITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

MOST RECENT VS. PRIOR QUARTER

	Quarter Ended November 30, 2004						Quarter Ended August 31, 2004
	(unaudited)						(unaudited)
	GAAP		adj		non-GAAP		GAAP		adj		non-GAAP
Total revenues	$	37,636			$	37,636	$	34,622			$	34,622
Costs of revenues:
Software products		851				851		733				733
Service and other		5,075				5,075		4,974				4,974
Amortization of purchased intangible assets		1,690	(1,690	)		—		1,689	(1,689	)		—
Total costs of revenues		7,616				5,926		7,396				5,707
Gross profit		30,020				31,710		27,226				28,915
Total operating expenses		25,608	(279	)		25,329		24,090	(98	)		23,992
Income from operations		4,412				6,381		3,136				4,923
Other income, net		1,591				1,591		1,051				1,051
Income before provision for income taxes		6,003				7,972		4,187				5,974
Provision for income taxes		1,640	1,339			2,979		1,675	715			2,390
Net income	$	4,363			$	4,993	$	2,512			$	3,584
Net income per share — basic	$	0.12			$	0.13	$	0.07			$	0.10
Net income per share — diluted	$	0.11			$	0.13	$	0.07			$	0.09
Number of shares — basic		37,517				37,517		37,183				37,183
Number of shares — diluted		38,684				38,684		38,118				38,118