VERITY INC \DE\
EXHIBIT 10.7
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>5
<FILENAME>f89145exv10w7.txt
<DESCRIPTION>EXHIBIT 10.7
<TEXT>
<PAGE>
                                                                    EXHIBIT 10.7


                                  VERITY, INC.

             1997 NONSTATUTORY STOCK OPTION PLAN FOR VERITY CANADA

                     (AS AMENDED THROUGH NOVEMBER 15, 2002)

         1.       ESTABLISHMENT, PURPOSE AND TERM OF PLAN.

                  1.1      ESTABLISHMENT. The Verity, Inc. 1997 Nonstatutory
Stock Option Plan for Verity Canada (the "Plan") is hereby established effective
as of May 23, 1997.

                  1.2      PURPOSE. The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by providing
an incentive to attract, retain and reward persons performing services for a
Participating Company and by motivating such persons to contribute to the growth
and profitability of the Participating Company Group.

                  1.3      TERM OF PLAN. The Plan shall continue in effect until
the earlier of its termination by the Board or 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.

         2.       DEFINITIONS AND CONSTRUCTION.

                  2.1      DEFINITIONS. Whenever used herein, the following
terms shall have their respective meanings set forth below:

                           (a)      "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" also means such Committee(s).

                           (b)      "CODE" means the Internal Revenue Code of
1986, as amended, of the United States of America and any applicable regulations
promulgated thereunder.

                           (c)      "COMMITTEE" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and having
such powers as shall be specified by the Board. Unless the powers of the
Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted herein, including, without limitation, the power to
amend or terminate the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law.

                           (d)      "COMPANY" means Verity, Inc., a Delaware
corporation, or any successor corporation thereto.

                           (e)      "CONSULTANT" means any person, including an
advisor, engaged by a Participating Company to render services other than as an
Employee or a Director.

                           (f)      "DIRECTOR" means a member of the Board.

                           (g)      "EMPLOYEE" means any person treated as an
employee (including an officer or a Director who is also treated as an employee)
in the records of a Participating Company; provided, however, that neither
service as a Director nor payment of a director's fee shall be sufficient to
constitute employment for purposes of the Plan.

                           (h)      "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended, of the United States of America.

                           (i)      "FAIR MARKET VALUE" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein, subject to the
following:
<PAGE>
                                    (i)      If, on such date, there is a public
market for the Stock, the Fair Market Value of a share of Stock shall be the
closing sale price of a share of Stock (or the mean of the closing bid and asked
prices of a share of Stock if the Stock is so quoted instead) as quoted on the
Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or
regional securities exchange or market system constituting the primary market
for the Stock, as reported in the Wall Street Journal or such other source as
the Company deems reliable. If the relevant date does not fall on a day on which
the Stock has traded on such securities exchange or market system, the date on
which the Fair Market Value shall be established shall be the last day on which
the Stock was so traded prior to the relevant date, or such other appropriate
day as shall be determined by the Board, in its sole discretion.

                                    (ii)     If, on such date, there is no
public market for the Stock, the Fair Market Value of a share of Stock shall be
as determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.

                           (j)      "INSIDER" means an officer or a Director of
the Company or any other person whose transactions in Stock are subject to
Section 16 of the Exchange Act.

                           (k)      "OPTION" means a right to purchase Stock
(subject to adjustment as provided in Section 4.2) pursuant to the terms and
conditions of the Plan. Options are intended to be nonstatutory stock options
and shall not be treated as incentive stock options within the meaning of
Section 422(b) of the Code.

                           (l)      "OPTION AGREEMENT" means a written agreement
between the Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee and any shares acquired upon
the exercise thereof.

                           (m)      "OPTIONEE" means a person who has been
granted one or more Options.

                           (n)      "PARTICIPATING COMPANY" means Verity Canada
or any other Subsidiary Corporation that the Board may designate from time to
time as a Participating Company and any successor corporation thereto.

                           (o)      "PARTICIPATING COMPANY GROUP" means, at any
point in time, the Company and all corporations collectively which are then
Participating Companies.

                           (p)      "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 4.2.

                           (q)      "SUBSIDIARY CORPORATION" means any
corporation, other than the Company, in an unbroken chain of corporations
beginning with the Company if each of the corporations, other than the last
corporation in the unbroken chain, owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.

                           (r)      "VERITY CANADA" means 14943 Yukon Inc., a
Yukon corporation, or any successor corporation thereto.

                  2.2      CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.

         3.       ADMINISTRATION.

                  3.1      ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan or of any
Option shall be determined by the Board, and such determinations shall be final
and binding upon all persons having an interest in the Plan or such Option. Any
officer of the Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.


                                       2
<PAGE>
                  3.2      ADMINISTRATION WITH RESPECT TO INSIDERS. With respect
to participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3 under the Exchange Act, as amended from time to time, or any
successor rule or regulation.

                  3.3      POWERS OF THE BOARD. In addition to any other powers
set forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:

                           (a)      to determine the persons to whom, and the
time or times at which, Options shall be granted and the number of shares of
Stock to be subject to each Option;

                           (b)      to determine the Fair Market Value of shares
of Stock or other property;

                           (c)      to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction of
any tax withholding obligation arising in connection with the Option or such
shares, including by the withholding or delivery of shares of stock, (iv) the
timing, terms and conditions of the exercisability of the Option or the vesting
of any shares acquired upon the exercise thereof, (v) the time of the expiration
of the Option, (vi) the effect of the Optionee's termination of employment or
service with the Participating Company Group on any of the foregoing, and (vii)
all other terms, conditions and restrictions applicable to the Option or such
shares not inconsistent with the terms of the Plan;

                           (d)      to approve one or more forms of Option
Agreement;

                           (e)      to amend, modify, extend, or renew, or grant
a new Option in substitution for, any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof, including without limitation (1) the reduction of the exercise price of
any outstanding Option under the Plan to the then Fair Market Value and/or (2)
the cancellation of any outstanding Option under the Plan and the grant in
substitution therefor of (A) a new Option under the Plan covering the same or a
different number of shares of Common Stock, (B) a stock bonus, (C) the right to
acquire restricted stock, (D) cash and/or (E) other valuable consideration (as
determined by the Board, in its sole discretion);

                           (f)      to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment or service with the Participating Company Group;

                           (g)      to prescribe, amend or rescind rules,
guidelines and policies relating to the Plan, or to adopt supplements to, or
alternative versions of, the Plan, including, without limitation, as the Board
deems necessary or desirable to comply with the laws of, or to accommodate the
tax policy or custom of, any jurisdictions whose citizens may be granted
Options; and

                           (h)      to correct any defect, supply any omission
or reconcile any inconsistency in the Plan or any Option Agreement and to make
all other determinations and take such other actions with respect to the Plan or
any Option as the Board may deem advisable to the extent consistent with the
Plan and applicable law.

         4.       SHARES SUBJECT TO PLAN.

                  4.1      MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to
adjustment as provided in Section 4.2, the maximum aggregate number of shares of
Stock that may be issued under the Plan shall be two million five hundred ninety
thousand (2,590,000) and shall consist of authorized but unissued or reacquired
shares of Stock or any combination thereof. If an outstanding Option for any
reason expires or is terminated or canceled or shares of Stock acquired, subject
to repurchase, upon the exercise of an Option are repurchased by the Company,
the shares of Stock allocable to the unexercised portion of such Option, or such
repurchased shares of Stock, shall again be available for issuance under the
Plan.

                  4.2      ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. 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 shall be made in the number and class of shares
subject to the Plan and to any outstanding Options, and in the exercise


                                       3
<PAGE>
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of, the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.

         5.       ELIGIBILITY. Options may be granted only to Employees and
Consultants; provided, however, that no Option may be granted to any person
whose eligibility to participate in the Plan would require approval of the Plan
by the stockholders of the Company under any law or regulation or the
requirements of any stock exchange or market system upon which the Stock may
then be listed. For purposes of the foregoing sentence, "Employees" and
"Consultants" shall include prospective Employees and prospective Consultants to
whom Options are granted in connection with written offers of employment or
other service relationship with a Participating Company. Eligible persons may be
granted more than one (1) Option.

         6.       TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:

                  6.1      EXERCISE PRICE. The exercise price for each Option
shall be established in the sole discretion of the Board; provided, however,
that the exercise price per share for an Option shall be not less than the Fair
Market Value of a share of Stock on the effective date of grant of the Option.

                  6.2      EXERCISE PERIOD. Options shall be exercisable at such
time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that no Option granted to a prospective Employee or prospective
Consultant may become exercisable prior to the date on which such person
commences service with a Participating Company.

                  6.3      PAYMENT OF EXERCISE PRICE.

                           (a)      FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of shares
of Stock being purchased pursuant to any Option shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of shares of Stock
owned by the Optionee having a Fair Market Value (as determined by the Company
without regard to any restrictions on transferability applicable to such stock
by reason of United States federal or state securities laws, laws of other
jurisdictions, or agreements with an underwriter for the Company) not less than
the exercise price, (iii) by the assignment of the proceeds of a sale or loan
with respect to some or all of the shares being acquired upon the exercise of
the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the United States Federal Reserve System) (a "CASHLESS EXERCISE"),
(iv) by the Optionee's promissory note in a form approved by the Company, (v) by
such other consideration as may be approved by the Board from time to time to
the extent permitted by applicable law, or (vi) by any combination thereof. The
Board may at any time or from time to time, by adoption of or by amendment to
the standard form of Option Agreement described in Section 7, or by other means,
grant Options which do not permit all of the foregoing forms of consideration to
be used in payment of the exercise price or which otherwise restrict one or more
forms of consideration. The Company may establish, from time to time, an
exchange ratio applicable to amounts paid in a currency other than United States
dollars.

                           (b)      TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company of shares of
Stock to the extent such tender of Stock would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of the
Company's stock. Unless otherwise provided by the Board, an Option may not be
exercised by tender to the Company of shares of Stock unless such shares either
have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.

                           (c)      CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.


                                       4
<PAGE>
                           (d)      PAYMENT BY PROMISSORY NOTE. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on such
terms as the Board shall determine at the time the Option is granted. The Board
shall have the authority to permit or require the Optionee to secure any
promissory note used to exercise an Option with the shares of Stock acquired
upon the exercise of the Option or with other collateral acceptable to the
Company. Unless otherwise provided by the Board, if the Company at any time is
subject to the regulations promulgated by the Board of Governors of the United
States Federal Reserve System or any other governmental entity affecting the
extension of credit in connection with the Company's securities, any promissory
note shall comply with such applicable regulations, and the Optionee shall pay
the unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations.

                  6.4      TAX WITHHOLDING. The Company shall have the right,
but not the obligation, to deduct from the shares of Stock issuable upon the
exercise of an Option, or to accept from the Optionee the tender of, a number of
whole shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the United States federal, state and local taxes, if
any, and taxes of other jurisdictions, if any, required by law to be withheld by
the Participating Company Group with respect to such Option or the shares
acquired upon the exercise thereof. Alternatively or in addition, in its sole
discretion, the Company shall have the right to require the Optionee, through
payroll withholding, cash payment or otherwise, including by means of a Cashless
Exercise, to make adequate provision for any such tax withholding obligations of
the Participating Company Group arising in connection with the Option or the
shares acquired upon the exercise thereof. The Company shall have no obligation
to deliver shares of Stock or to release shares of Stock from an escrow
established pursuant to the Option Agreement until the Participating Company
Group's tax withholding obligations have been satisfied by the Optionee.

                  6.5      REPURCHASE RIGHTS. Shares issued under the Plan may
be subject to one or more repurchase options or other conditions and
restrictions as determined by the Board in its sole discretion at the time the
Option is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.

         7.       STANDARD FORM OF OPTION AGREEMENT.

                  7.1      GENERAL. Unless otherwise provided by the Board at
the time the Option is granted, an Option shall comply with and be subject to
the terms and conditions set forth in the form of Immediately Exercisable Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.

                  7.2      STANDARD TERM OF OPTIONS. Except as otherwise
provided by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.

                  7.3      AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of the standard form of Option
Agreement described in this Section 7 either in connection with the grant or
amendment of an individual Option or in connection with the authorization of a
new standard form or forms; provided, however, that the terms and conditions of
any such new, revised or amended standard form or forms of Option Agreement
shall be in accordance with the terms of the Plan. Such authority shall include,
but not by way of limitation, the authority to grant Options which are not
immediately exercisable.

         8.       TRANSFER OF CONTROL.

                  8.1      DEFINITIONS.

                           (a)      An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:

                                    (i)      the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent (50%) of the voting stock of the Company;

                                    (ii)     a merger or consolidation in which
the Company is a party;


                                       5
<PAGE>
                                    (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.

                           (b)      A "TRANSFER OF CONTROL" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "TRANSACTION") wherein the stockholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of shares
of the Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.

                  8.2      EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the
event of a Transfer of Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.

         9.       PROVISION OF INFORMATION. Each Optionee shall be given access
to information concerning the Company equivalent to that information generally
made available to the Company's common stockholders.

         10.      NONTRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
guardian or legal representative. No Option shall be assignable or transferable
by the Optionee, except by will or by the laws of descent and distribution.

         11.      INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan, or any right granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such person
is liable for gross negligence, bad faith or intentional misconduct in duties;
provided, however, that within sixty (60) days after the institution of such
action, suit or proceeding, such person shall offer to the Company, in writing,
the opportunity at its own expense to handle and defend the same.

         12.      TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or
amend the Plan at any time. However, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
necessary to comply with any applicable law or government regulation.


                                       6
<PAGE>
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the
foregoing Verity, Inc. 1997 Nonstatutory Stock Option Plan for Verity Canada was
duly adopted by the Board on May 23, 1997 and last amended on November 15, 2002.


                                       7

</TEXT>
</DOCUMENT>
