<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-Q

          [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     For the quarterly period ended March 31, 2001

                                       OR

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

                 FOR THE TRANSITION PERIOD FROM         TO

                        Commission file number 000-29757

                                  VERSATA, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                               68-0255203
     (State or other jurisdiction of                (I.R.S. Employer
     Incorporation or organization)                Identification No.)

                         300 Lakeside Drive, Suite 1500
                                OAKLAND, CA 94612
               (Address of principal executive offices)(Zip Code)

                                 (510) 238-4100
              (Registrant's telephone number, including area code)

                                ----------------

                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

    As of March 31, 2001, the total number of outstanding shares of the
Registrant's common stock was 41,460,490.

<PAGE>   2
                                      INDEX

<TABLE>
<CAPTION>
                                                                                                               PAGE NUMBER
                                                                                                               -----------
<S>                                                                                                            <C>
                                PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets At March 31, 2001 And December 31, 2000............................            3

Condensed Consolidated Statements Of Operations For The Three Months Ended March 31, 2001 And 2000.......            4

Condensed Consolidated Statements Of Cash Flows For The Three Months Ended March 31, 2001 And 2000.......            5

Notes To Condensed Consolidated Financial Statements.....................................................            6

Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations............           11

Item 3. Quantitative And Qualitative Disclosures About Market Risk.......................................           21

                                    Part II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................           21

Item 2. Changes In Securities And Use Of Proceeds........................................................           21

Item 4. Submission Of Matters To A Vote Of Security Holders..............................................           22

Item 6. Exhibits And Reports On Form 8-K.................................................................           22

Signatures...............................................................................................           22
</TABLE>


                                       2
<PAGE>   3
                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                  VERSATA, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                           (in thousands, unaudited)

<TABLE>
<CAPTION>
                                                                    MARCH 31,      DECEMBER 31,
                                                                      2001            2000
                                                                   ----------      ------------
<S>                                                                <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents ...............................      $  35,925       $  44,461
     Short-term investments ..................................         16,875          29,926
     Accounts receivable, net of allowance of $1,893 at
          March 31, 2001 and $1,795 at December 31, 2000 .....         10,761          14,177
     Unbilled receivables ....................................          2,712           3,584
     Prepaid expenses and other current assets ...............          2,745           3,075
                                                                    ---------       ---------
              Total current assets ...........................         69,018          95,223
Property and equipment, net ..................................         12,702          11,901
Notes receivable from related parties ........................            108             156
Intangible assets ............................................         11,302          12,205
Other assets .................................................            216             354
                                                                    ---------       ---------
              Total assets ...................................      $  93,346       $ 119,839
                                                                    =========       =========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable ........................................      $   5,650       $   9,040
     Accrued liabilities .....................................         14,784          13,146
     Accrued stock-based compensation ........................          1,372           1,095
     Deferred revenue ........................................          7,327           8,661
     Current portion of long-term debt .......................            125             134
                                                                    ---------       ---------
              Total current liabilities ......................         29,258          32,076
Long-term debt, less current portion .........................            182             218
                                                                    ---------       ---------
              Total liabilities ..............................         29,440          32,294
Stockholders' equity:
     Common stock ............................................             41              41
     Additional paid-in capital ..............................        218,649         226,352
     Notes receivable from stockholders ......................         (2,345)         (3,868)
     Unearned stock-based compensation .......................         (7,324)        (13,870)
     Accumulated other comprehensive income/(loss)............           (219)            166
     Accumulated deficit .....................................       (144,896)       (121,276)
                                                                    ---------       ---------
              Total stockholders' equity .....................         63,906          87,545
                                                                    ---------       ---------
              Total liabilities and stockholders' equity .....      $  93,346       $ 119,839
                                                                    =========       =========
</TABLE>

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


                                       3
<PAGE>   4
                                  VERSATA, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED
                                                                                MARCH 31,
                                                                         -----------------------
                                                                           2001           2000
                                                                         --------       --------
<S>                                                                      <C>            <C>
Revenue:
  Software license ................................................      $  4,140       $  4,136
  Services and other fees .........................................         6,892          5,970
                                                                         --------       --------
        Total revenue .............................................        11,032         10,106
Cost of revenue:
  Software license ................................................           157            194
  Services (exclusive of stock-based compensation
    of $(815) and $4,048, respectively) ...........................         8,388          5,478
                                                                         --------       --------
        Total cost of revenue .....................................         8,545          5,672
                                                                         --------       --------
Gross profit ......................................................         2,487          4,434
Operating expenses:
  Sales and marketing (exclusive of stock-based
    compensation of $(280) and $5,130, respectively) ..............        11,940         10,189
  Product development (exclusive of stock-based
    compensation of $307 and $1,072  respectively) ................         3,895          1,857
  General and administrative (exclusive of stock-based
    compensation of $(77) and $824, respectively) .................         3,992          2,001
  Stock-based compensation ........................................          (865)        11,074
  Amortization of intangibles .....................................         1,145            190
  Nonrecurring expenses ...........................................         6,909             --
                                                                         --------       --------
               Total operating expenses ...........................        27,016         25,311
Loss from operations ..............................................       (24,529)       (20,877)
Interest income (expense), net ....................................           909            665
                                                                         --------       --------
Net loss ..........................................................      $(23,620)      $(20,212)
                                                                         --------       --------
Change in unrealized gain(loss) on marketable securities ..........            23             --
Change in foreign currency translation adjustments ................          (408)            --
                                                                         --------       --------
Comprehensive Loss ................................................      $(24,005)      $(20,212)
                                                                         ========       ========
Basic and diluted net loss per share ..............................      $  (0.59)      $  (1.33)
                                                                         ========       ========
Weighted average common shares used in computing basic
  and diluted net loss per share ..................................        39,821         15,203
                                                                         ========       ========
</TABLE>

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


                                       4
<PAGE>   5
                                  VERSATA, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                     ------------------------
                                                                                       2001            2000
                                                                                     --------       ---------
<S>                                                                                  <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Loss ..................................................................      $(23,620)      $ (20,212)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
          Depreciation and amortization .......................................         1,944             406
          Provision for doubtful accounts .....................................           787             376
          Write-down of leasehold improvements and furniture in
             connection with restructuring ....................................         2,894              --
          Stock-based compensation expense ....................................          (865)         11,074
    Change in operating assets and liabilities:
          Trade accounts receivable ...........................................         2,657          (4,191)
          Unbilled receivable .................................................           844             516
          Prepaid expenses and other assets ...................................           319          (1,295)
          Other assets ........................................................           138            (234)
          Accounts payable and accrued liabilities ............................        (1,752)          5,661
          Deferred revenues ...................................................        (1,334)          1,750
                                                                                     --------       ---------
                       Net cash used in operating activities ..................       (17,987)         (6,149)
                                                                                     --------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Maturities of short-term investments .......................................        13,074              --
   Purchase of property and equipment .........................................        (4,492)         (1,547)
   Decrease in notes receivable from related parties ..........................             2            (289)
   Cash paid for earn-out in connection with past acquisitions ................          (187)           (351)
                                                                                     --------       ---------
                       Net cash used in investing activities ..................         8,397          (2,187)
                                                                                     --------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on capital lease obligations ...........................           (20)            (21)
    Principal payments on equipment loan ......................................           (25)            (22)
    Net proceeds from issuance of convertible preferred stock .................            --           1,500
    Net proceeds from issuance of common stock ................................            --          96,654
    Proceeds from issuance of common stock under
       employee stock purchase plan ...........................................         1,429              --
    Proceeds from exercise of stock options and warrants ......................            73             783
    Repurchase of common stock from stockholder ...............................            --              (6)
    Payments from stockholders on notes receivable ............................             5             272
    Loans provided to stockholders ............................................            --            (650)
                                                                                     --------       ---------
                       Net cash provided by financing activities ..............         1,462          98,510
                                                                                     --------       ---------
Effects of exchange rate changes on cash and cash equivalents .................          (408)             --
                                                                                     --------       ---------
                       Increase (decrease) in cash and cash equivalents .......        (8,536)         90,174
                                                                                     --------       ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..............................        44,461          20,655
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................      $ 35,925       $ 110,829
                                                                                     ========       =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest ......................................      $     14       $      17
                                                                                     ========       =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES
Common stock issued for notes receivable from stockholders ....................      $     --       $   1,813
                                                                                     ========       =========
Conversion of preferred stock to common stock on date of public offering ......      $     --       $      26
                                                                                     ========       =========
Issuance of convertible preferred stock in connection with acquisition ........      $     --       $   1,087
                                                                                     ========       =========
Notes receivable cancelled in exchange for repurchase of common stock from
 stockholders ..................................................................     $  1,518       $      --
                                                                                     ========       =========
</TABLE>


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


                                       5
<PAGE>   6
                                  VERSATA, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  OUR COMPANY

    Versata, Inc. was incorporated on August 27, 1991, and was reincorporated in
the State of Delaware on February 24, 2000. Versata, Inc. helps the world's
leading companies achieve true business agility by enabling them to create
business rules for their business policies and processes, which are used to
automate the development of transaction-intensive, process-oriented
applications.

The consolidated financial statements include the accounts of Versata, Inc. and
its subsidiaries, all of which are wholly and located in North America, Europe,
Australia. All intercompany accounts and transactions have been eliminated in
consolidation. Versata, Inc. and its subsidiaries are collectively referred to
as the "Company" or "Versata."

2.  INTERIM FINANCIAL INFORMATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of
March 31, 2001, and for the three month periods ended March 31, 2001 and 2000,
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements and pursuant to
the rules and regulations of the Securities and Exchange Commission, and include
the accounts of Versata, Inc. and its wholly-owned subsidiaries. Intercompany
accounts have been eliminated in consolidation. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the unaudited condensed
consolidated financial statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary for fair presentation of the financial
position at March 31, 2001, and the operating results and cash flows for the
three month periods ended March 31, 2001 and 2000. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes for the year ended
December 31, 2000.

The unaudited condensed consolidated balance sheet at December 31, 2000 has
been derived from the audited consolidated financial statements at that date,
but does not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete
financial statements.

                                       6
<PAGE>   7

REVENUE RECOGNITION

    Our Company derives revenue from two sources as follows: (i) software
license and maintenance revenue to end users, value added resellers (VARs),
system integrators and application service providers; and (ii) service revenue
which includes consulting, training services and customer support. Our Company
records revenue from licensing of software products to end-users when a license
agreement is signed by both parties, the fee is fixed and determinable,
collection is reasonably assured and delivery of the product has occurred.
Generally, our Company provides payment terms that range from thirty days to
ninety days from the invoice date. Accordingly, payment terms that exceed ninety
days are not considered fixed and determinable and revenue is recognized as
payments become due. When contracts contain multiple elements, and for which
vendor specific objective evidence ("VSOE") of fair value exists for the
undelivered elements, our Company recognizes revenue for the delivered elements
based upon the residual method. Undelivered elements consist primarily of post
contract customer support ("PCS") and other services such as consulting,
mentoring and training. Services are generally not considered essential to the
functionality of the software. Our Company recognizes revenue allocated to
maintenance and support ratably over the period of the maintenance and the
support contracts, respectively, which is generally twelve months. For revenue
related to consulting services, our Company recognizes revenue as the related
services are performed. In instances where services are deemed essential to the
software, both the software license fee and consulting fees are recognized using
the percentage-of-completion method of contract accounting.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under certain
circumstances. The accounting and disclosures prescribed by SAB 101 were
effective for all periods beginning after December 31, 1999 and did not have a
significant impact on our financial position or results of operations, or cash
flows.

NET LOSS PER SHARE

    The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128, basic and diluted net
loss per share is computed by dividing the net loss available to holders of
common stock for the period by weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes potential common stock if their effect is antidilutive. Potential
common stock consists of unvested restricted common stock, incremental common or
preferred shares issuable upon the exercise of stock options and warrants and,
prior to our public offering, shares issuable upon conversion of the Series A,
Series B, Series C, Series D, Series E and Series F convertible preferred stock.

                                       7
<PAGE>   8
    The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share data):


<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                  MARCH 31,
                                                            ---------------------
                                                              2001         2000
                                                            --------     --------
Numerator:
<S>                                                         <C>          <C>
  Net Loss ..............................................   $(23,620)    $(20,212)
                                                            ========     ========
Denominator:
  Weighted average shares outstanding ...................     41,328       17,640
  Weighted average unvested shares of common stock
        subject to repurchase ...........................     (1,507)      (2,437)
                                                            --------     --------
  Denominator for basic and diluted calculation .........     39,821       15,203
                                                            ========     ========
Basic and diluted net loss per share ....................   $  (0.59)    $  (1.33)
                                                            ========     ========
</TABLE>

    The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive for the periods presented (in thousands):


<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                            ------------------
                                                                            2001         2000
                                                                            -----       ------
<S>                                                                         <C>         <C>
Weighted average effect of common stock equivalents:
  Unvested common stock subject to repurchase.........................      1,507        2,437
  Options outstanding.................................................      7,990        6,376
  Shares resulting from the conversion of the:
     Series A convertible preferred stock ............................         --        1,250
     Series B convertible preferred stock ............................         --        3,669
     Series C convertible preferred stock ............................         --        5,231
     Series D convertible preferred stock ............................         --        5,822
     Series E convertible preferred stock ............................         --        3,751
     Series F convertible preferred stock ............................         --        2,658
  Warrants to purchase convertible preferred stock ...................         --          206
  Warrants to purchase common stock ..................................         --          475
                                                                            -----       ------
     Total common stock equivalents excluded from the computation
       of earnings per share as their effect was antidilutive.........      9,497       31,875
                                                                            =====       ======
</TABLE>

SEGMENT INFORMATION

    Effective January 1, 1998, our Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
Versata identifies its operating segments based on the business activities,
management responsibility and geographical location. Revenue for geographic
regions reported below are based upon the customers' locations. Following is a
summary of the geographic information related to revenues (in thousands):

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED MARCH 31,
                                      --------------------------
                                         2001            2000
                                      ----------      ----------
<S>                                   <C>             <C>
Software license revenue:

             United States            $    2,339      $    3,088
             Europe                        1,661             995
             Other international             140              53
                                      ----------      ----------
                                           4,140           4,136

Services revenue:

             United States            $    5,292      $    5,622
             Europe                        1,263             348
             Other international             337               -
                                      ----------      ----------
                                           6,892           5,970

Total revenue:

             United States            $    7,631      $    8,710
             Europe                        2,924           1,343
             Other international             477              53
                                      ==========      ==========
                                      $   11,032      $   10,106
                                      ==========      ==========
</TABLE>

    Long-lived assets, predominantly intangibles and property, plant and
equipment, are based on the location of the assets, or, for intangibles, the
location of the entity owning the intangible asset. As of March 31, 2001, and
December 31, 2000, approximately $23,235,000 and $23,308,000, respectively, of
long-lived assets were located in the United States, $943,000 and $1,054,000,
respectively, were located in Europe, and $150,000 and $254,000, respectively,
were located elsewhere.



                                       8
<PAGE>   9
RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value and
that the corresponding derivative gains or losses be reported either in the
statement of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to these derivatives. In July 1999, the
Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal
years commencing after June 15, 2000. In June 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- An Amendment of FASB Statement No. 133, which amended the
accounting and reporting standards for certain derivative instruments and
hedging activities. Accordingly, we have adopted SFAS No. 133 in the quarter
ending March 31, 2001, and the adoption did not have a material impact on our
financial condition or results of operations or cash flows.




                                       9
<PAGE>   10

4.  Comprehensive Income

    Our Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective January 1, 1998. This statement requires companies to classify
items of comprehensive income by their nature in the financial statements and
display the accumulated balance of comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet.

    Total comprehensive loss was $24.0 million and $20.2 million for the
quarters ended March 31, 2001 and 2000, respectively. Total comprehensive loss
consists of net loss, the net changes in foreign currency translation adjustment
and the net unrealized gains and losses on available-for-sale securities.

5.  Nonrecurring Expenses

    On January 9, 2001, we implemented a cost cutting initiative that included a
reduction in total staff of approximately 13%. This reduction primarily
reflected a shift in the strategy of our services organization.

    In March 2001, the Company announced a restructuring plan to streamline
operations, enhance customer focus and reduce costs. Overall expense reductions
were necessary both to lower existing cost structure and to better align the
work force with customer needs. The restructuring plan was precipitated by the
changing economic conditions and declining revenues from recent past quarters.
Management effected the restructuring plan during the first quarter of 2001 by
eliminating certain employee positions and is reducing office space and related
overhead expenses beginning in the second quarter of 2001. We expect that the
majority of the remaining restructuring actions such as office closures and
subleasing will be completed by the end of the third quarter of 2001.
Obligations related to subleasing may continue until 2008 as estimated and
accrued for as of March 31, 2001.

    The following table summarizes the components of the restructuring and other
nonrecurring expenses, by geographic region (in thousands):

<TABLE>
<CAPTION>
                                                                                                                  Total
                                                                                                               Restructuring
                                                           Office        Asset                                   and other
                                            Employee     Subleasing     Disposal   Nonrecoverable    Other     Nonrecurring
                                            Severance      Costs         Losses         Loan         Costs        Costs
                                           -----------  ------------   ----------  --------------   -------   --------------
<S>                                        <C>          <C>            <C>         <C>              <C>       <C>
United States                                $1,033        $1,703        $3,210        $  500        $  334        $6,780
EMEA                                            111            --            --            --            --           111
Canada and Asia Pacific                          18            --            --            --            --            18

                                             ------        ------        ------        ------        ------        ------
Consolidated expense, March 31, 2001          1,162         1,703         3,210           500           334         6,909

Cash payments prior to March 31, 2001           458           238         2,895           500           161         4,252

                                             ------        ------        ------        ------        ------        ------
Accrual balance, March 31, 2001              $  704        $1,465        $  315        $   --        $  173        $2,657
                                             ======        ======        ======        ======        ======        ======
</TABLE>

6.  Subsequent Events

    In January, 2001, we provided a guarantee to a financial institution to
secure a loan of $1,000,000 made to an officer of our Company by the financial
institution. The guarantee and the loan were secured with 559,300 shares of our
Company's common stock owned by the officer and the officer delivered a full
recourse reimbursement agreement to our Company. In April, 2001, the financial
institution requested payment of the loan and we paid $988,000 under our
guarantee obligations. In connection with the payment by our Company, we
received the right to receive proceeds from the remaining 549,300 shares from
the officer as well as a guarantee to repay any amounts due in excess of the
value of the shares.


                                       10
<PAGE>   11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Versata should be read in conjunction with the
condensed consolidated financial statements of Versata and the accompanying
notes included in this Form 10-Q. This discussion contains forward-looking
statements within the meaning of the Private Securities Act of 1995. These
statements may contain words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or other words indicating future results.
These forward-looking statements are based on management's current expectations,
assumptions and projections and entail various risks and uncertainties including
those set forth below under "Risk Factors That May Affect Future Results," that
could cause actual results to differ materially from those projected in the
forward-looking statements. Versata undertakes no obligation to revise or
publicly revise or publicly release the results of any revision to these forward
looking statements. Given these risks and uncertainties, readers are cautioned
not to place undue reliance on the forward-looking statements.

    OVERVIEW

    We provide a comprehensive suite of software and services that enables our
customers to rapidly deploy business software applications that can be modified
quickly to meet constantly changing business requirements. From our
incorporation in August 1991 through December 1994, we were a professional
services company and generated revenue from technical consulting projects. In
January 1995, we commenced development efforts on our initial software products,
from which we generated revenue from late 1995 through early 1998. In September
1996, we began development of our first Web-based software product, which we
began shipping commercially in September 1997. In September 1998, we introduced
the first generation of what is now our Suite of software products. To date, we
have licensed our products and provided services to approximately 500 customers
around the world.

    We derive our revenue from the sale of software product licenses and from
related services. Our software is priced on a per server basis. Software license
revenue also includes product maintenance, which provides the customer with
unspecified software upgrades over a specified term, typically twelve months.
Services revenue consists of fees from professional services and customer
support. Professional services include consulting, training, mentoring, staff
augmentation and project management or rapid requirements development to
complete turnkey solution services. Customers typically purchase these
professional services from us to enlist our support by way of training and
mentoring activities directed at optimizing the customer's use of our software
product. Professional services are sold generally on a time-and-materials basis,
while customer support is priced based on the particular level of support chosen
by the customer.

    We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition. Software license revenue is recognized when both parties
sign a license agreement, the fee is fixed and determinable, collection is
reasonably assured and delivery of the product has occurred. Our customers
usually purchase maintenance agreements for product updates, and revenue is
recognized ratably over the term of the agreement, typically one year, as a
component of software license revenue. We bill professional service fees
generally on a time-and-materials basis and recognize revenue as the services
are performed. Services are not generally essential to the functionality of the
software. In instances where the services are deemed essential to the software,
both the software license and consulting fees are recognized using the
percentage-of-completion method of contract accounting. Fees from arrangements
that provide for extended payment terms are recognized as revenue when payments
become due. The portion of fees related to either products delivered or services
rendered which are not due under our standard payment terms is reflected in
deferred revenue and in unbilled receivables until payments become due. Deferred
revenue balances also include amounts billed in advance of services rendered.

    We market our products and services through our direct sales force,
international distributors, consulting and system integration partners,
companies that sell pre-packaged software applications, companies that custom
develop and integrate software applications and companies that sell software
applications over the Internet on a subscription services basis, often referred
to as application service providers.


                                       11
<PAGE>   12
    Our revenue to date has been derived predominantly from customers in the
United States. Net revenues from international sales represented 30.8% of our
total revenue in the first quarter of 2001 and 13.8% of our total revenue in the
first quarter of 2000.

    Our cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Our cost of
service revenue consists of salaries of professional service personnel, and
payments to third party consultants incurred in providing customer support,
training, and consulting services. Cost of services revenue as a percentage of
services revenue is likely to vary significantly from period to period depending
on overall utilization rates, the mix of services we provide and whether these
services are provided by us or by third-party contractors.

    Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our product
development, sales and marketing and professional services departments, and to
establish our administrative infrastructure. To date, all software development
costs have been expensed in the period incurred. Historically, our operating
expenses have exceeded the revenue generated by our products and services. As a
result, we have incurred net losses in each quarter since inception and had an
accumulated deficit of $144.9 million and $121.3 million as of March 31, 2001
and December 31, 2000, respectively.

    On January 9, 2001, we implemented a cost cutting initiative that included a
reduction in total staff of approximately 13%. This reduction primarily
reflected a shift in the strategy of our services organization.

    In March 2001, we announced a restructuring effort to realign the company's
expenses with a business plan geared to the changing economy. This restructuring
was designed to align the workforce with customer needs and focus on core
business products. The restructuring plan includes the discontinuation of
further development of non-core business products, facility consolidations, and
a reduction in total staff, including domestic and international employees and
contractors, including staff in our subsidiaries, of approximately 30%. We
expensed $6.9 million for restructuring and other non-recurring expenses in the
first quarter of 2001.

    RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                 MARCH 31
                                                            -------------------
                                                             2001         2000
                                                            ------       ------
<S>                                                         <C>          <C>
Revenue:
  Software license ...................................        37.5%        40.9%
  Services ...........................................        62.5         59.1
                                                            ------       ------
Total revenue ........................................       100.0        100.0
                                                            ------       ------
Cost of Revenue:
</TABLE>


                                       12
<PAGE>   13

<TABLE>
<S>                                                         <C>          <C>
  Software license ...................................         1.4          1.9
  Services ...........................................        76.0         54.2
                                                            ------       ------
Total cost of revenue ................................        77.4         56.1
Gross profit .........................................        22.6         43.9
Operating expense:
  Sales and marketing ................................       108.2        100.8
  Product development ................................        35.3         18.4
  General and administrative .........................        36.2         19.8
  Stock-based compensation ...........................        -7.8        109.6
  Amortization of intangibles ........................        10.4          1.9
  Nonrecurring Expense ...............................        62.6
                                                            ------       ------
Total operating expense ..............................       244.9        250.5
Loss from operations .................................      -222.3       -206.6

  Interest income (expense)
  Other, net .........................................         8.2          6.6
                                                            ------       ------
Net loss .............................................      -214.1%      -200.0%
                                                            ======       ======
</TABLE>

    REVENUE

    Total revenue consists of software license revenue and services revenue.
Total revenue increased by $0.9 million, or 9.1%, from $10.1 million in the
first quarter of 2000 to $11.0 million in the first quarter of 2001. This
increase is principally attributable to the growth in new customers, repeat
business from existing customers and growth in international markets.

    Software License Revenue

    Software license revenue was $4.1 million in both quarters ended March 31,
2001 and 2000. Software license revenues decreased in the number of licenses
sold domestically, which was offset by the growth in international sales. As a
result of the growth of our international operations, software license revenue
from international sales increased by $0.3 million or 18.6% from $1.4 million
in the first quarter of 2000 to $1.7 million in the first quarter of 2001.

    Services Revenue

    Services revenue increased by $0.9 million, or 15.4%, from $6.0 million in
the first quarter of 2000 to $6.9 million in the first quarter of 2001. These
increases were attributable to growth in the number of customers and support
contracts. Services revenue from international customers increased by $0.8
million or 173.9% from $0.5 million in first quarter 2000 to $1.3 million in
first quarter of 2001.

    COST OF REVENUE

    Total cost of revenue consists of cost of software license revenue and cost
of service revenue. Total cost of revenue increased by $2.9 million, or 50.8%,
from $5.7 million in the first quarter of 2000 to $8.6 million in the first
quarter of 2001. These increases were mainly attributable to the increase of
cost of consulting, training and customer support.

    Cost of Software License Revenue


                                       13
<PAGE>   14
    Cost of software license revenue consists of royalty payments to third
parties for technology incorporated into our product, the cost of manuals and
product documentation, as well as packaging and distribution costs. Cost of
software license revenue decreased by $37,000 or 19.1%, from $194,000 in the
first quarter of 2000 to $157,000 in the first quarter of 2001. These decreases
were attributable to a change in the mix of royalty rates paid to third parties.

    Cost of Services Revenue

    Cost of service revenue consists of salaries of professional service
personnel and payments to third party consultants incurred in providing customer
support, training, and consulting services. Cost of service revenue increased by
$2.9 million, or 53.1%, from $5.5 million in the first quarter of 2000 to $8.4
million in the first quarter of 2001. These increases were principally due to an
increase in the number of our consulting, training and customer support
personnel compared to the same period last year.

    OPERATING EXPENSES

    Operating expense increased by $1.7 million, or 6.8%, from $25.3 million in
the first quarter of 2000 to $27.0 million in the first quarter of 2001. The
majority of these increases were due to the nonrecurring charge of $6.9 million,
which is related to the restructuring effort to realign the company's expenses
with a business plan geared to the changing economy in the first quarter of
2001. The balance of the increases were due to increased investments in our
operations and an increase in amortization of intangibles as a result of an
acquisition made in 2000. These increases were offset by a decrease in
stock-based compensation. Excluding the non-cash charges relating to stock-based
compensation and nonrecurring charges, operating expense in the first quarter of
2001 was $21.0 million, a 47.36% increase over $14.2 million in operating
expense in the first quarter of 2000.

    Sales and Marketing

    Sales and marketing expense consists of salaries, commissions, and expense
from our sales offices, travel and entertainment expense and marketing programs.
Sales and marketing expense increased by $1.8 million, or 17.2%, from $10.2
million in the first quarter of 2000 to $11.9 million in the first quarter of
2001. These increases were attributable to growth in the number of sales
employees in North America, as well as the expansion of our international sales
operations. As a percentage of total revenue, sales and marketing increased from
100.8% in the first quarter of 2000 to 108.2% in the first quarter of 2001 due
to investments made to improve our market position and expand our distribution
channels.

    Product Development

    Product development expense includes costs associated with the development
of new products, enhancements to existing products, quality assurance and
technical publication activities. These costs consist primarily of employee
salaries and the cost of consulting resources that supplement our product
development teams. Product development expense increased by $2.0 million, or
109.7%, from $1.9 million in the first quarter of 2000 to $3.9 million in the
first quarter of 2001. These increases were primarily attributable to increases
in the number of personnel in Versata's product development and engineering
organization. As a percentage of total revenue, product development expense
increased from 18.4% in the first quarter of 2000 to 35.3% in the first quarter
of 2001. To date, all software development costs have been expensed in the
period incurred.

    General and Administrative

    General and administrative expense consists of salaries for executive,
finance and administrative personnel, information systems costs and allowance
for doubtful accounts. General and administrative expense increased by $2.0
million, or 99.5%, from $2.0 million in the first quarter of 2000 to $4.0
million in the first quarter of 2001. These increases were attributable to a
growing number of employees and an increase in insurance and other costs to
support a publicly traded company. As a percentage of total revenue, general and
administrative expense increased from 19.8% in the first quarter of 2000 to
36.2% in the first quarter of 2001, as the revenue base only increased slightly
in the first quarter of 2001 compared to the same period of 2000.

    Stock-Based Compensation

    Stock-based compensation expense includes the amortization of unearned
employee stock-based compensation and expenses for stock granted to consultants
in exchange for services. Employee stock-based compensation expense is amortized
on an accelerated basis over the vesting period of the related options,
generally 50 months. We incurred a non-cash charge (credit) of $(0.9) million
for the first quarter of 2001 as compared to $11.1 million in the first quarter
of 2000, related to the issuance of stock options with exercise prices below
fair market value on the date of grant. The credit in the first quarter of 2001
relates to the impact of option cancellations for terminated employees exceeding
the amortization for the period. Additional unvested outstanding options will
continue to vest over the next 38 months, which will result in additional
compensation expense of approximately $7.3 million in the aggregate in periods
subsequent to March 31, 2001, which will be charged to operations over the next
38 months.


                                       14
<PAGE>   15

    Amortization of Intangibles

    We incurred non-cash charges of $1.1 million in the first quarter of 2001
for the amortization of goodwill related to the acquisitions of Pragma6 in the
fourth quarter of 1999, the acquisitions of McGilly and Webink in the first
quarter of 2000, and the acquisitions of Verve, Inc in the fourth quarter of
2000. There were no such charges in the first quarter of 2000. Goodwill of
approximately $11.3 million will continue to be charged to operations ratably
over the period of benefit, which is three years.

    Nonrecurring Expenses

    Nonrecurring expenses primarily relate to severance and office consolidation
costs. In March 2001, the Company announced a restructuring plan to streamline
operations, enhance customer focus and reduce costs. Overall expense reductions
were necessary both to lower existing cost structure and to better align the
work force with customer needs. The restructuring plan was precipitated by the
changing economic conditions and declining revenues from recent past quarters.
Management effected the restructuring plan during the first quarter of 2001 by
eliminating certain employee positions and is reducing office space and related
overhead expenses beginning in the second quarter of 2001. We expect that the
majority of the remaining restructuring actions such as office closures and
subleasing will be completed by the end of the third quarter of 2001.
Obligations related to subleasing may continue until 2008 as estimated and
accrued for as of March 31, 2001. We had nonrecurring expenses of $6.9 million
in the first quarter of 2001. There were no such charges in the first quarter of
2000.

    Interest Income (Expense), Net

    Interest income (expense), net is primarily comprised of interest income
from our cash and investments. We had net interest income of $909,000 for the
first quarter of 2001 compared to net interest income of $665,000 for the first
quarter of 2000. These increases were principally due to interest income earned
from higher average cash balances during the first quarter of 2001 compared to
the first quarter of 2000.

    Provision for Income Taxes

    We have incurred operating losses for all periods from inception through
March 31, 2001. We have recorded a valuation allowance for the full amount of
our deferred tax assets, as the future realization of the tax benefits is
uncertain.

    LIQUIDITY AND CAPITAL RESOURCES

    Since inception, we have funded our operations primarily through the private
sale of our equity securities, and our initial public offering, resulting in the
aggregate, net proceeds of approximately $167.2 million. We have also funded our
operations through equipment financing. As of March 31, 2001, we had $52.8
million in cash and cash equivalents and short-term investments and $39.8
million in working capital. Net cash used in operating activities was $18.0
million in the first quarter of 2001 and $6.1 million in the first quarter of
2000. Net cash flows used by operating activities in each period reflect
increasing net losses, offset by non-cash expenses including stock-based
compensation, nonrecurring charge due to fixed asset write-off, depreciation,
amortization, and provision for doubtful accounts. The use of operating cash was
also impacted to a lesser extent by changes in working capital.

    Net cash provided in investing activities was $8.4 million in the first
quarter of 2001 and net cash used in investing activities was $2.2 million in
the first quarter of 2000. The increase in cash provided in investing activities
during the first three months of 2001 primarily reflects the maturities of
short-term investments of $13.1 million, net of purchases of $4.5 million of
property and equipment. Our capital expenditures consisted primarily of
purchases of office furniture, equipment and leasehold improvements in
connection with the relocation of the Company's headquarters in the first
quarter of 2001.

    Net cash provided by financing activities was $1.5 million in the first
quarter of 2001 and $98.5 million in the first quarter of 2000.

    We believe that the net proceeds from the sale of common stock generated by
our initial public offering, together with funds generated from operations, will
be sufficient to meet our general expenses, working capital and capital
expenditure requirements for at least the next twelve months. However, we may
find it necessary to obtain additional equity or debt financing in the future.
In the event additional financing is required, we may not be able to raise it on
acceptable terms or at all.


                                       15
<PAGE>   16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

    We operate in a rapidly changing environment that involves numerous risks,
some of which are beyond our control. The following discussion highlights some
of these risks.

WEAKENING OF WORLD WIDE ECONOMIC CONDITIONS REALIZED IN THE INTERNET
INFRASTRUCTURE SOFTWARE MARKET MAY RESULT IN DECREASED REVENUES OR LOWER REVENUE
GROWTH RATES.

    The revenue growth of our business depends on the overall demand for
computer software, particularly in the product segments in which we compete. Any
slowdown of the worldwide economy affects the buying decision of corporate
customers. Because our sales are primarily to Global 2000 customers, our
business also depends on general economic and business conditions. A reduction
in demand for computer software, caused by a weakening of the economy, such as
occurred in 2001, or otherwise, may result in decreased revenues or lower
revenue growth rates.

THE INTERNET INFRASTRUCTURE SOFTWARE MARKET IS HIGHLY COMPETITIVE AND WE MAY
LOSE MARKET SHARE TO LARGER COMPETITORS WITH GREATER RESOURCES.

    The Internet infrastructure software market in general, and the market for
our software and related services in particular, are new, rapidly evolving and
highly competitive. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. As a result, they may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many of our competitors
also have more extensive customer bases, broader customer relationships and
broader industry alliances that they could leverage, thereby establishing
relationships with many of our current and potential customers. These companies
also have significantly more established customer support and professional
service organizations. In addition, these companies may adopt aggressive pricing
policies or offer more attractive terms to customers, may bundle their
competitive products with broader product offerings or may introduce new
products and enhancements. Furthermore, current and potential competitors may
establish cooperative relationships among themselves or with third parties to
enhance their products. As a result, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. If we fail to compete successfully with our competitors, the demand for
our products would decrease. Any reduction in demand could lead to loss of
market share, a decrease in the price of our products, fewer customer orders,
reduced revenues, reduced margins, and increased operating losses. These
competitive pressures could seriously harm our business and operating results.

NEW VERSIONS AND RELEASES OF OUR PRODUCTS MAY CONTAIN ERRORS OR DEFECTS AND
RESULT IN LOSS OF REVENUE.

    The software products we offer are complex and, despite extensive testing
and quality control, may have had, and in the future could have errors or
defects, especially when we first introduce them. Typically we need to issue
corrective releases of our software products to fix any defects or errors.
Defects or errors could also cause damage to our reputation, loss of revenues,
product returns or order cancellations, lack of market acceptance of our
products, and expose us to litigation. Accordingly, defects or errors
particularly if they are more numerous than expected could have a material and
adverse effect on our business, results of operations and financial condition.

OUR FAILURE TO ACCURATELY FORECAST SALES MAY LEAD TO A DISAPPOINTMENT OF MARKET
EXPECTATIONS.

    Our Company uses a "pipeline" system, a common industry practice, to
forecast sales and trends in our business. Our sales personnel monitor the
status of all proposals, such as the date when they estimate that a customer
will make a purchase decision and the potential dollar amount of the sale. We
aggregates these estimates periodically in order to generate a sales pipeline.
We compare the pipeline at various points in time to look for trends in our
business. While this pipeline analysis may provide us with some guidance in
business planning and budgeting, these pipeline estimates are necessarily
speculative and may not consistently correlate to revenues in a particular
quarter or over a longer period of time. A variation in the conversion of the
pipeline into contracts or in the pipeline itself such as occurred in the fourth
quarter of 2000 could cause our Company to improperly plan or budget and thereby
adversely affect our business or results of operations. In particular, the
current slowdown in the economy is causing purchasing decisions to be delayed,
reduced in amount or cancelled which will therefore reduce the overall license
pipeline conversion rates in a particular period of time.

THE PRICE OF OUR COMMON STOCK IS VOLATILE AND IT MAY FLUCTUATE SIGNIFICANTLY.


                                       16
<PAGE>   17
    The market price of our common stock has fluctuated significantly and has
declined sharply since our initial public offering in March 2000 and more
recently following our announcement on March 29, 2001 that we would delay filing
our Annual Report on Form 10-K for fiscal year 2000. Our Company's stock price
is affected by a number of factors, some of which are beyond our control
including:

    -   quarterly variations in results, announcements that our revenue or
        income are below analysts' expectations;

    -   the competitive landscape;

    -   technological innovations by us or our competitors;

    -   changes in earnings estimates or recommendations by analysts;

    -   sales of large blocks of our common stock, sales or the intention to
        sell stock by our executives and directors;

    -   general economic and market conditions;

    -   additions or departures of key personnel and estimates and projections
        by the investment community; and

    -   fluctuations in stock market price and volume, which are particularly
        common among highly volatile securities of software companies.

    As a result, our stock price is subject to significant volatility. In the
past, following periods of volatility or decline in the market price of a
company's securities, securities class action litigation has at times been
instituted against that company. We are currently subject to securities
litigation, and may be subject to additional litigation. This could cause us to
incur substantial costs and experience a diversion of management's attention and
resources.

OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS.

     Our revenues are relatively difficult to forecast and vary from quarter to
quarter due to various factors including the:

    -   relatively long sales cycles for our products;

    -  size and timing of individual license transactions, the closing of which
        tend to be delayed by customers until the end of a fiscal quarter as a
        negotiating tactic;

    -   introduction of new products or product enhancements by us or our
        competitors;

     -   potential for delay or deferral of customer implementations of our
        software;

    -   changes in customer budgets;

    -   seasonality of technology purchases and other general economic
        conditions; and

    -   changes in our pricing policies or those of our competitors.

     Accordingly, our quarterly results are difficult to predict until the end
of the quarter. Delays in product delivery or closing of sales near the end of a
quarter caused quarterly revenues and net income to fall significantly short of
anticipated levels in the first quarter of 2001, and given the current economic
slowdown, may well occur in future quarters.

     Our license revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter. We typically receive and fulfill a majority
of our orders within the quarter, with the substantial majority of our orders
received in the last month of each fiscal quarter. As a result, we may not learn
of revenue shortfalls until late in a fiscal quarter, after it is too late to
adjust expenses for that quarter. Since our operating expenses are relatively
fixed and are based on anticipated revenue levels, a delay in bookings from even
a small number of license transactions could cause significant variations in
revenues quarter to quarter and could cause net income to fall significantly
short of anticipated levels. As an example, the dollar amounts of large orders
for our products have been increasing and therefore the operating results for a
quarter could be materially adversely affected if a number of large orders are
either not received or are delayed, due to cancellations, delays, or deferrals
by customers. This circumstance occurred in the first quarter of 2001. Revenue
shortfalls below our expectations could have an immediate and significant
adverse effect on our results of operations.

     Our services revenue in any quarter is substantially dependent on our
license revenue. Services are normally purchased in conjunction with software,
although it is not a requirement. Should our license revenues decrease, there
will be a reduced market for our services. Any revenue shortfall in services
could have an immediate and significant adverse effect on our results of
operations.

     Our operating results have in the past been, and will continue to be,
subject to quarterly fluctuations as a result of a number of factors. These
factors include:

    -   competition in the Internet infrastructure software market;

    -   the integration of people, operations, and products from acquired
        businesses and technologies;

    -   the overall trend toward industry consolidation;

    -   the introduction and market acceptance of new technologies and
        standards;

    -   variations in mix of products sold; and

    -   changes in general economic conditions and specific economic conditions
        in the Internet infrastructure software market.

     Any of the above factors could have a material adverse impact on our
operations and financial results.

THE PRIVATE SECURITIES CLASS ACTION LAWSUITS AGAINST US AND CERTAIN OF OUR
DIRECTORS AND OFFICERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     We and certain of our directors and officers have been named as
defendants in several private securities class action lawsuits. Other litigation
and inquiries may be instituted. Depending on the outcome of such litigation, we
may be required to pay substantial damages or settlement costs, which could have
a material adverse effect on our financial condition or results of operations.
Regardless of the outcome of these matters, we may incur substantial defense
costs and that such actions may cause a diversion of management time and
attention.

     Our liability insurance for actions taken by officers and directors
provides only limited liability protection. To the extent that these policies do
not adequately cover our expenses related to any shareholder lawsuits, our
business and financial condition could be seriously harmed. Under Delaware law,
in connection with our charter documents and indemnification agreements we
entered into with our executive officers and directors, we must indemnify our
current and former officers and directors to the fullest extent permitted by
law. Subject to certain conditions, the indemnification may cover expenses and
liabilities reasonably incurred in connection with the investigation, defense,
settlement, or appeal of legal proceedings.

ANY POTENTIAL DELISTING OF VERSATA'S COMMON STOCK FROM THE NASDAQ NATIONAL
MARKET COULD HARM OUR BUSINESS.

     Versata's common stock trades on the Nasdaq National Market, which has
certain compliance requirements for continued listing of common stock, including
a requirement that Versata's common stock have a minimum bid price of $1.00 per
share. On May 14, 2001, Versata's common stock closed at a price per share of
$1.28.

     Under requirements to be listed on Nasdaq Marketplace, if the minimum
closing bid price per share is less than $1.00 for a period of 30 consecutive
trading days, Versata's shares may be delisted following a 90 day notice period,
subject to Versata's right to appeal. If Versata's minimum closing bid price is
above $1.00 for 10 consecutive trading days during the 90 day notice period, the
delisting procedures will be halted. Versata anticipates that it would appeal
any determination to delist its common stock from the Nasdaq National Market.

     If Versata's common stock is delisted and any appeal we file receives an
unfavorable determination by NASD, our common stock would be removed from
listing on the Nasdaq National Market which could have a material adverse effect
on us and on the price of our common stock.

WE HAVE INCURRED INCREASING OPERATING LOSSES SINCE OUR INCEPTION AND ARE LIKELY
TO INCUR NET LOSSES AND NEGATIVE CASH FLOWS FOR THE FORESEEABLE FUTURE.

    We have experienced operating losses in each quarterly and annual period
since inception, and we expect to incur significant losses in the future. If our
revenue grows less than we anticipate or if our operating expenses increase more
than expected or are not reduced in the event of lower revenue, we may never
achieve profitability. As of March 31, 2001, we had an accumulated deficit of
$144.9 million. Although we have an objective of achieving profitability as soon
as practical, we cannot assure you that we will be successful. In order to
achieve and maintain profitability, we will need to increase revenues while
decreasing expenses.

WE MAY REQUIRE FUTURE ADDITIONAL FUNDING TO STAY IN BUSINESS.

    Over time, we may require additional financing for our operations. We have
not been operating on a profitable basis and have relied on sale of stock to
finance our operations. We may need to return to the capital markets in order to
receive additional financing. This additional financing may not be available to
us on a timely basis if at all, or, if available, on terms acceptable to us.
Moreover, additional financing will cause dilution to existing stockholders.

IF WE DO NOT DEVELOP AND ENHANCE NEW AND EXISTING PRODUCTS TO KEEP PACE WITH
TECHNOLOGICAL, MARKET AND INDUSTRY CHANGES, OUR REVENUES MAY DECLINE.

    The markets for our products are characterized by rapid technological
advances in software development, evolving standards in software technology and
frequent new product introductions and enhancements. Product introductions and
short product life cycles necessitate high levels of expenditures for research
and development. To maintain our competitive position, we must:

    -   enhance and improve existing products and continue to introduce new
        products that keep pace with technological developments;


                                       17
<PAGE>   18
    -   satisfy increasingly sophisticated customer requirements; and

    -   achieve market acceptance.

    The success of new products is dependent on several factors including proper
new product definition, product cost, timely completion and introduction of new
products, differentiation of new products from those of our competitors, and
market acceptance of these products. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products
to market in a timely manner, and achieve market acceptance of our products or
that products and technologies developed by others will not render our products
or technologies obsolete or noncompetitive. Our inability to run on new or
increasingly popular operating systems, and/or our failure to successfully
enhance and improve our products in a timely manner could have a material
adverse effect on our business, results of operations, financial condition or
cash flows.

IF THE VERSATA E-BUSINESS AUTOMATION SYSTEM AND RELATED SERVICES DO NOT ACHIEVE
WIDESPREAD MARKET ACCEPTANCE, THE SOURCE OF SUBSTANTIALLY ALL OF OUR REVENUE
WILL BE AT RISK.

    We cannot predict the level of market acceptance that will be achieved or
maintained by our products and services. If either the Internet infrastructure
software market in general, or the market for our software or related services
in particular, fails to grow or grows more slowly than we anticipate, or if
either market fails to accept our products and related services, the source of
substantially all of our revenue will be at risk. We expect to continue to
derive substantially all our revenue from and be dependent upon the Versata
System and related services in the future. The market for the Versata System and
related services is new, rapidly evolving and highly competitive, and we cannot
be certain that a viable market for our products will ever develop or be
sustained. Our future financial performance will depend in large part on the
successful development, introduction and customer acceptance of our new
products, product enhancements and related services in a timely and cost
effective manner. We expect to continue to commit significant resources to
market and further develop our E-Business Automation System and related services
and to enhance the brand awareness of our software and services.

IF JAVA TECHNOLOGY DOES NOT CONTINUE TO BE WIDELY ADOPTED FOR E-BUSINESS
APPLICATION DEVELOPMENT, OUR BUSINESS WILL SUFFER.

    Our products are based on Java technology, an object-oriented software
programming language and distributed computing platform developed by Sun
Microsystems. Java is a relatively new language and was developed primarily for
the Internet and corporate intranet applications. It is still too early to
determine whether Java will achieve greater acceptance as a programming language
and platform for enterprise applications. Alternatives to Java include
Microsoft's C+ language and .net computing platform. Should Java not continue to
be widely adopted, or is adopted more slowly than anticipated, our business will
suffer. Alternatively, if Sun Microsystem makes significant changes to the Java
language or its proprietary technology, or fails to correct defects and
limitations in these products, our ability to continue improving and shipping
our products could be impaired. In the future, our customers also may require
the ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.

WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT AND NEW CUSTOMERS AND IF WE
FAIL TO GENERATE REPEAT AND EXPANDED BUSINESS OR GROW OUR CUSTOMER BASE, OUR
PRODUCT AND SERVICES REVENUE WILL LIKELY DECLINE.

    In order to be successful, we need to broaden our business by selling
product licenses and services to current and new customers. Many of our
customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. These and other potential customers also
may not yet have developed or deployed initial software applications based on
our products. If these customers do not successfully develop and deploy these
initial software applications, they may choose not to purchase deployment
licenses or additional development licenses. In addition, as we introduce new
versions of our products or new products, our current customers may not require
the functionality of our new products and may not license these products.

    If we fail to add new customers who license our products, our services
revenue will also likely decline. Our service revenue is derived from fees for
professional services and customer support related to our products. The total
amount of services and support fees we receive in any period depends in large
part on the size and number of software licenses that we have previously sold as
well as our customers electing to renew their customer support agreements. In
the event of a downturn in our software license revenue such as is likely at
least for some period during 2001 or a decline in the percentage of customers
who renew their annual support agreements, our services revenue could become
flat or decline.


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<PAGE>   19

OUR FAILURE TO MAINTAIN ONGOING SALES THROUGH DISTRIBUTION CHANNELS WILL RESULT
IN LOWER REVENUES.

    To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as packaged application
software vendors (ISVs), systems integrators and independent consultants,
application service providers (ASPs) and distributors. Our ability to achieve
revenue growth in the future will depend in part on our success in making our
direct sales force more efficient and in further establishing and expanding
relationships with distributors, ASPs, ISVs, OEMs and systems integrators. We
intend to seek distribution arrangements with additional ISVs to embed our
Versata Logic Server and Versata Interaction Server in their products. It is
possible that we will not be able to increase the efficiency of our direct sales
force or other distribution channels, or secure license agreements with
additional ISVs on commercially reasonable terms. Moreover, even if we succeed
in these endeavors, it still may not increase our revenues. If we invest
resources in these types of expansion and our revenues do not correspondingly
increase, our business, results of operations and financial condition will be
materially and adversely affected.

    We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing efforts,
particularly with respect to implementation and support of our products as well
as lead generation and assistance in the sales process. We will need to expand
our relationships with third parties in order to support license revenue growth.
Many such firms have similar, and often more established, relationships with our
principal competitors. It is possible that these and other third parties will
not provide the level and quality of service required to meet the needs of our
customers, that we will not be able to maintain an effective, long term
relationship with these third parties, and that these third parties will not
successfully meet the needs of our customers.

FAILURE TO EXPAND OR GROW THE SERVICE OFFERINGS THAT COMPLEMENT OUR E-BUSINESS
AUTOMATION SYSTEM COULD PUT AT RISK A SUBSTANTIAL COMPONENT OF OUR REVENUE.

    We believe that growth in our product license revenue depends on our ability
to provide our customers with comprehensive services and to educate third-party
resellers, instructors and consultants on how to provide similar services. These
services include customer support, training, mentoring, staff augmentation and
project management services. If we fail to attract, train and retain the skilled
persons who deliver these services, our business and operating results could be
jeopardized. However, competition for qualified service personnel is intense,
and we may not be able to attract, train, retain, or employ through acquisition,
the number of highly qualified service personnel that our business needs.

    Our objective is to increase our service revenue in dollar amount as we
continue to provide mentoring, training and customer support services that
complement our products and as our installed base of customers grows. However,
our services revenue is substantially related to our license revenue. Should our
license revenue decline or should there be a decline in the price of or demand
for our service offerings, a substantial component of our revenue could be at
risk. The economic slowdown of the first quarter of 2001 has had a negative
impact on our service revenues and may continue to do so.

FAILURE TO ATTRACT, TRAIN AND RETAIN KEY PERSONNEL, OR THE INABILITY OF OUR
SENIOR MANAGEMENT TEAM TO WORK TOGETHER EFFECTIVELY, COULD HARM OUR BUSINESS.

    Our success depends largely on the skills, experience and performance of the
members of our senior management team and other key personnel, including our
Interim Chief Executive Officer and Executive Vice President of Worldwide Field
Operations, our Chief Operating Officer and Chief Financial Officer, and our
Vice President of Human Resources, each of whom have joined us recently. As a
result, our senior management team has had a limited time to work together. If
they are unable to work together effectively and manage our organization as a
public company, our business will suffer. Furthermore, if we lose officers or
other key employees, our business and operating results could be seriously
harmed. We do not maintain key person insurance on any of our employees. In
addition, our future success will depend largely on our ability to continue to
attract, train and retain highly skilled personnel. We face intense competition
for qualified personnel including sales, engineering, service and support.
Furthermore, the cash compensation necessary to attract and retain these skilled
employees is likely to increase as current and prospective employees may
perceive that the stock option component of our compensation package is not as
valuable as it was in the past. If we are unable to hire and retain additional
qualified employees, our business could suffer, particularly our ability to
develop new products and enhance our existing products.

OUR LIMITED EXPERIENCE IN MANAGING A LARGE SALES FORCE MAY IMPAIR OUR ABILITY TO
EXPAND SALES AND GENERATE INCREASED REVENUE.

    Until recently, we did not have a large direct sales force. Despite the
recent reductions in force in the first quarter of 2001, we have expanded our
direct sales force over the past year.


                                       19
<PAGE>   20

Our products and services require a sophisticated sales effort targeted at the
senior management of our prospective customers. Newly hired employees require
extensive training and generally take at least nine months to achieve full
productivity. We have limited experience in managing a large, expanding,
geographically dispersed sales force. In addition, we have limited experience
marketing our products broadly to a large number of potential customers. We may
have difficulty in hiring enough qualified individuals in the future or assuring
that newly hired employees will achieve necessary levels of productivity.

OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS.

    We conduct business internationally. Accordingly, a portion of our revenues
is derived from international sales and is therefore subject to the related
risks including the general economic conditions in each country, the overlap of
different tax structures, the difficulty of managing an organization spread over
various countries, changes in regulatory requirements, compliance with a variety
of foreign laws and regulations, longer payment cycles and volatilities of
exchange rates in certain countries. There can be no assurances that we will be
able to successfully address each of these challenges. Other risks associated
with international operations include import and export licensing requirements,
trade restrictions and changes in tariff rates.

    A portion of our business is conducted in currencies other than the U.S.
dollar. Changes in the value of major foreign currencies relative to the value
of the U.S. dollar may adversely affect revenues and operating results.

IF WE INFRINGE THE PATENTS OR PROPRIETARY RIGHTS OF OTHERS OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED.

    We do not believe our products infringe the proprietary rights of third
parties, but third parties may nevertheless assert infringement claims against
us in the future. Regardless of whether these claims have merit, they can be
time consuming and expensive to defend or settle, and can harm our business and
reputation. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Litigation, whether resolved in our favor or not,
could be time-consuming to defend, result in increased costs, divert
management's attention and resources, cause product shipment delays or require
us to enter into unfavorable royalty or licensing agreements.

WE MAY INCUR SUBSTANTIAL EXPENSES IF WE ARE SUED FOR PRODUCT LIABILITY.

    Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale and
support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations and
financial condition. Our products interoperate with many parts of complicated
computer systems, such as mainframes, servers, personal computers, application
software, databases, operating systems and data transformation software. Failure
of any one of these parts could cause all or large parts of computer systems to
fail. In such circumstances, it may be difficult to determine which part failed,
and it is likely that customers will bring a lawsuit against several suppliers.
Even if our software was not at fault, we could suffer material expense and
material diversion of management time in defending any such lawsuits.

SINCE THE LICENSING OF OUR AUTOMATION TECHNOLOGY IS A KEY COMPONENT OF SALES,
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUT INTELLECTUAL PROPERTY.

    Approximately 37.5% of our revenue in the first quarter of 2001 was derived
from the sales of software product licenses. We rely on a combination of
contractual provisions, confidentiality procedures, and patent, trademark, trade
secret and copyright laws to protect the proprietary aspects of our technology.
We currently have a U.S. patent relating to our automated development tool that
uses a drag-and-drop metaphor. This patent is scheduled to expire on April 9,
2016. In addition, we have a U.S. patent pending relating to our business rules
automation in database application development and maintenance. We cannot
predict whether this patent application will result in an issued patent, or if a
patent is issued, whether it will provide any meaningful protection. Moreover,
these legal protections afford only limited protection and competitors may gain
access to our intellectual property which may result in the loss of our
customers.

    Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use our proprietary
information. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets and to determine the validity and scope of
the proprietary rights of others. Any litigation could result in substantial
costs and diversion of resources with no assurance of success and could
seriously harm our business and operating results. In addition, we sell our


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<PAGE>   21


products internationally, and the laws of many countries do not protect our
proprietary rights as well as do the laws of the United States. Our patent and
future patents, if any, may be successfully challenged or may not provide us
with any competitive advantages.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Versata is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and, to a lesser extent, foreign
currency fluctuations. In the normal course of business Versata establishes
policies and procedures to manage its exposure to fluctuations in interest rates
and foreign currency values.

INTEREST RATE RISKS. Versata's exposure to interest rate risks results primarily
from its short-term investments. These securities have been classified as cash
equivalents when the maturity dates are less than 90 days at the date of
issuance, and as short-term investments when the maturity dates are between 90
and 365 days at the date of issuance. Versata does not believe its exposure to
interest rate risk is material given the short-term nature of its investment
portfolio. Declines in interest rates over time will, however, reduce our
interest income.

FOREIGN CURRENCY RISKS. As of March 31, 2001, Versata had operating subsidiaries
located in the United Kingdom, Germany, Belgium, Hong Kong, Australia, and
France. Internationally, Versata invoices customers primarily in U.S. dollars
and we maintain only nominal foreign currency cash balances. Working funds
necessary to facilitate the short-term operations of our subsidiaries are kept
in local currencies in which they do business. We do not currently enter into
foreign currency hedge transactions. Through March 31, 2001, foreign currency
fluctuations have not had a material impact on our financial position or results
of operations.

                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SECURITIES CLASS ACTION

Since April 11, 2001, several putative securities class action complaints were
filed against us, and certain of our current and former officers and directors.
The complaints allege violations of the federal securities laws. The complaints
seek an unspecified amount of damages on behalf of persons who purchased our
stock during the proposed class periods.

We intend to defend these actions vigorously. There can be no assurance that
there will not be additional lawsuits filed and that the pending actions will be
resolved without costly litigation, or in a manner that is not materially
adverse to our financial position, results of operations or cash flows. No
estimate can be made of the possible loss or possible range of loss associated
with the resolution of these contingencies.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities

    During the period from January 1, 2000 to March 31, 2001, employees of
Versata exercised options to purchase 92,267 shares of common stock at a
weighted average exercise price of $0.81 per share. The options were granted
pursuant to our 1997 Stock Option Plan. We sold these securities in reliance
upon Rule 701 promulgated under the Securities Act of 1933, as amended.

(b) Use of Proceeds

    Versata has invested the net proceeds from its initial public offering of
common stock in interest bearing investment grade instruments. We expect to use
the net proceeds primarily to fund working capital, technology and product
development and sales and


                                       21
<PAGE>   22
marketing. None of the net proceeds of our initial public offering were paid to
any of our directors or officers, or to any person owning 10% or more of any
class of our equity securities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)  The following exhibits are included herein:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF DOCUMENT
-------                       -----------------------
<S>                           <C>
      2.1(1)       Agreement and Plan of Reorganization by and among Versata, Inc., VATA Acquisition Corp.,
                   Verve, Inc. and Certain Shareholders of Verve, Inc., dated October 18, 2000
      3.1(2)       Amended and Restated Certificate of Incorporation of Versata.
      3.2(2)       Amended and Restated Bylaws of Versata.
      4.1(2)       Form of Specimen Common Stock Certificate.
     10.1(2)*      2000 Stock Incentive Plan of Versata.
     10.2(2)*      Employee Stock Purchase Plan of Versata.
     10.3(2)       Fourth Amended and Restated Investors' Rights Agreement, among Versata and some of its
                   stockholders, dated November 30, 1999.
     10.4(2)       Form of Indemnification Agreement to be entered into between Versata and each of its
                   directors and executive officers.
     10.5(2)       Office Lease dated June 17, 1997, between Versata and Webster Street Partners, Ltd., for
                   2101 Webster.
     10.6(2)       Agreement of Sublease dated October 18, 1999, between Versata and ICF Kaiser International, Inc.
     10.7(2)       Loan and Security Agreement, dated January 23, 1997, between Versata and Venture Banking
                   Group, a division of Cupertino National Bank, as amended September 22, 1998.
     10.8(2)       Senior Loan and Security Agreement, dated August 20, 1999, between Versata and Phoenix
                   Leasing Incorporated, as amended on October 1, 1999.
     10.9(2)+      Joint Product and Marketing Agreement, dated September 27, 1999, between Versata and IBM.
     10.10(3)      Lease agreement, dated as of April 10, 2000, by and between Versata and Kaiser Center,
                   Inc. for the sublease of office space in Oakland, CA.
     10.11(4)      Software Remarketing Agreement, effective September 27, 2000, between Versata and
                   International Business Machines Corporation.
     21.1**        Subsidiaries of Versata.

</TABLE>

+    Specified portions of this agreement have been omitted and have been filed
     separately with the Securities and Exchange Commission pursuant to a
     request for confidential treatment.

*    Management contract or compensatory plan or arrangement.

**   Previously filed.

(1)  Incorporated by reference from the Company's Form 8-K dated December 1,
     2000.

(2)  Incorporated by reference from the Company's Registration Statement on Form
     S-1 (File No. 333-92451).

(3)  Incorporated by reference from the Company's Form 10-Q dated August 14,
     2000.

(4)  Incorporated by reference from the Company's Form 10-Q dated September 24,
     2000.


(b) Reports on Form 8-K:

    The Company filed an Amended Current Report on Form 8-K/A, dated January 30,
2001, containing Verve, Inc.'s consolidated financial statements for the year
ended June 30, 2000.


                                 VERSATA, INC.

                                   SIGNATURES

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

VERSATA, INC.

Date: May 15, 2001                      /s/  DOUGLAS ROBERTS
                                        ----------------------------------------
                                             Interim Chief Executive Officer
                                             and Executive Vice President of
                                             Worldwide Field Operations

                                        /s/  JIM DOEHRMAN
                                        ----------------------------------------
                                             Chief Operating Officer,
                                             Chief Financial Officer, Secretary
                                             and Executive Vice President


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