UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 10-Q/A
                                 Amendment No. 1

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

                  For the quarterly period ended June 30, 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  July  31,  2001,  the  total  number  of  outstanding  shares  of the
Registrant's common stock was 42,402,809.

    Explanatory Note:


    The following 10-Q/A amends the previously reported stock-based compensation
expense for the three months and six months ended June, 30 2001.


<PAGE>

    INDEX

<TABLE>
<CAPTION>
                                                                                                                      PAGE NUMBER
                                                                                                                      -----------
<S>                                                                                                                        <C>

                                                     PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets At June 30, 2001 And December 31, 2000...................................             3


Condensed Consolidated Statements Of Operations and Comprehensive Loss For The Three And
   Six Months Ended June 30, 2001 And 2000.....................................................................             4


Condensed Consolidated Statements Of Cash Flows For The Six Months Ended June 30, 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..................            10

Item 3. Quantitative And Qualitative Disclosures About Market Risk.............................................            22


                                                       PART II. OTHER INFORMATION

Item 1. Legal Proceedings......................................................................................            22

Item 2. Changes In Securities And Use Of Proceeds..............................................................            23

Item 4. Submission Of Matters To A Vote Of Security Holders....................................................            23

Item 6. Exhibits And Reports On Form 8-K.......................................................................            23

Signatures.....................................................................................................            25

</TABLE>
                                       2
<PAGE>


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                          June 30,  December 31,
                                                            2001       2000
                                                         ---------   ---------
ASSETS
Current Assets:
   Cash and cash equivalents                             $  20,142   $  39,272
   Short-term investments                                   10,298      29,926
   Accounts receivable, net of allowance of $2,063 at
      June 30, 2001 and $1,795 at December 31, 2000         12,954      14,177
   Unbilled receivables                                      2,656       3,584
   Prepaid expenses and other assets                         2,067       3,075
                                                         ---------   ---------
      Total current assets                                  48,117      90,034

Restricted cash                                              5,351       5,189
Property and equipment, net                                 11,903      11,901
Note receivable from related parties                           104         156
Intangibles, net                                            10,120      12,205
Other assets                                                   206         354
                                                         ---------   ---------
      Total assets                                       $  75,801   $ 119,839
                                                         =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                      $   3,454   $   9,040
   Accrued liabilities                                       8,611      13,146
   Restructuring liability                                   1,401        --
   Accrued stock-based compensation                           --         1,095
   Current portion of long-term debt                           116         134
   Deferred revenue                                          9,366       8,661
                                                         ---------   ---------
      Total current liabilities                             22,948      32,076

   Restructuring liability, long-term                          555        --
   Long-term debt, less current portion                        239         218
                                                         ---------   ---------
      Total liabilities                                     23,742      32,294
                                                         ---------   ---------

Stockholders' equity
   Common Stock                                                 44          41
   Additional paid-in- capital                             215,098     226,352
   Treasury stock                                           (1,383)       --
   Notes Receivable from shareholders                         (926)     (3,868)
   Unearned stock-based compensation                          (987)    (13,870)
   Accumulated other comprehensive income (loss)              (452)        166
   Accumulated deficit                                    (159,335)   (121,276)
                                                         ---------   ---------
      Total stockholder's equity                            52,059      87,545
                                                         ---------   ---------
      Total liabilities and stockholders' equity         $  75,801   $ 119,839
                                                         =========   =========

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

                                       3

<PAGE>


<TABLE>
<CAPTION>
                                                 VERSATA, INC.
                     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                     (In thousands, except per share data)
                                                  (unaudited)


                                                                   Three Months Ended       Six Months Ended
                                                                         June 30,                June 30,
                                                                  --------------------    --------------------
                                                                    2001        2000        2001        2000
                                                                  --------    --------    --------    --------
<S>                                                               <C>         <C>         <C>         <C>
Revenue:
Software license                                                  $  5,991    $  6,077    $ 10,131    $ 10,213
Services                                                             4,868       7,798      11,760      13,768
                                                                  --------    --------    --------    --------
Total revenue                                                       10,859      13,875      21,891      23,981
                                                                  --------    --------    --------    --------
Cost of Revenue:
Software license                                                       149         221         306         415
Services (exclusive of stock-based compensation of $549 and          5,136       7,596      13,524      13,074
$1,770 for the three months ended June 30, 2001 and 2000,
respectively, and $1,331 and $5,818 for the six months ended
June 30 , 2001 and 2000, respectively)
                                                                  --------    --------    --------    --------
Total cost of revenue                                                5,285       7,817      13,830      13,489
                                                                  --------    --------    --------    --------
Gross profit                                                         5,574       6,058       8,061      10,492
                                                                  --------    --------    --------    --------

Operating expense:


Sales and marketing (exclusive of stock-based compensation of        8,657      11,493      20,597      21,682
 $1,297 and $3,603 for the three months ended June 30, 2001
 and 2000, respectively, and $3,055 and $8,734 for the six
 months ended June 30, 2001 and 2000, respectively)


Product development (exclusive of stock-based compensation of        2,650       2,166       6,545       4,023
 $297 and $847 for the three months ended June 30, 2001,
 and 2000, respectively, and ($163) and $1,918 for the six
 months ended June 30, 2001 and 2000, respectively)

General and administrative (exclusive of stock-based                 3,045       3,048       7,037       5,049
 compensation of $83 and $515 for the three months ended
 June 30, 2001 and 2000, respectively, and $204 and $1,339
 for the six months ended June 30, 2001 and 2000, respectively)

Stock-based compensation                                               717       6,735         576      17,809

Amortization of intangibles                                          1,152         237       2,297         427


Restructuring and other expenses (excluded the benefit of            3,504        --        10,413        --
 $1,510 for the three  months ended June 30, 2001 and $3,852
 for the six months ended June 30, 2001, relating to the
 reversal of previously recorded stock-based compensation
 related to employees terminated in the restructuring)
                                                                  --------    --------    --------    --------
Total operating expense                                             19,725      23,679      47,465      48,990
                                                                  --------    --------    --------    --------


                                       4
<PAGE>


Loss from operations                                               (14,151)    (17,621)    (39,404)    (38,498)
Interest income, net                                                   489       1,619       1,398       2,284
Other expenses, net                                                    (53)       --           (53)       --
                                                                  --------    --------    --------    --------
Net loss                                                          $(13,715)   $(16,002)   $(38,059)   $(36,214)
                                                                  ========    ========    ========    ========

Unrealized loss on marketable securities                               (37)        (36)        (14)        (36)
Foreign currency translation gain (loss)                              (195)        372        (603)        372
                                                                  --------    --------    --------    --------
Comprehensive Loss                                                $(13,947)   $(15,666)   $(38,676)   $(35,878)
                                                                  ========    ========    ========    ========

Basic and diluted net loss per share                              $  (0.34)   $  (0.42)   $  (0.95)   $  (1.37)
                                                                  ========    ========    ========    ========

Weighted average common shares used in computing basic and
diluted net los per share                                           40,164      37,698      39,949      26,444
                                                                  ========    ========    ========    ========


<FN>
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</FN>
</TABLE>
                                                       5
<PAGE>


<TABLE>
<CAPTION>
                                          VERSATA, INC.
                         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (In Thousands)
                                           (Unaudited)
                                                                             SIX MONTHS ENDED
                                                                                 JUNE 30,
                                                                          --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:                                       2001        2000
                                                                          --------    --------
<S>                                                                          <C>           <C>
    Net Loss                                                              $(38,059)   $(36,214)
    Adjustments  to  reconcile  net loss to net cash used in  operating
activities:
          Depreciation and amortization                                      3,964         915
          Provision for doubtful accounts                                    1,159       1,136
          Cancellation  of  promissory  notes  in  excess  of  value of        598        --
             shares received
          Write-down of leasehold  improvements and office furniture in
             connection with restructuring                                   2,894        --
          Stock-based compensation expense                                     576      17,809
          Change in operating assets and liabilities:
               Trade accounts receivable                                      (232)     (8,858)
               Unbilled receivable                                             900        (200)
               Prepaid expenses and other assets                               899      (1,070)
               Restricted cash                                                (162)     (5,059)
               Other assets                                                    148        (128)
               Accounts payable and accrued liabilities                    (10,121)      4,105
               Accrued restructuring                                         1,956           0
               Deferred revenues                                               705       2,807
                                                                          --------    --------
                       Net cash used in operating activities               (34,775)    (24,757)
                                                                          --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Maturities of short-term investments                                     19,614        --
   Purchases of short-term invstments                                         --       (32,202)
   Purchase of property and equipment                                       (4,749)     (3,887)
   Proceeds from sale of property and equipment                                283        --
   Decrease (Increase) in notes receivable from related parties                  6        (146)
   Purchase of intangible assets                                              --          (250)
   Cash paid for the acquisition of Web Inc., net of cash acquired            (187)       (101)
                                                                          --------    --------
                       Net cash used in investing activities                14,967     (36,586)
                                                                          --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on capital lease obligations                            (38)        (12)
    Principal payments on equipment loan                                       (52)        (44)
    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      1,429        --
      purchase plan
    Proceeds from exercise of stock options and warrants                       101       1,589
    Repurchase of common stock from stockholders                               (24)         (6)
    Purchase of treasury stock from former officer                            (464)       --
    Payments from stockholders on notes receivable                               5         429
    Loans provided to stockholders                                            --          (650)
                                                                          --------    --------
                       Net cash provided by financing activities               957      99,460
                                                                          --------    --------
Effects of exchange rate changes on cash and cash equivalents                 (279)        372
                                                                          --------    --------
                  Increase (decrease) in cash and cash equivalents         (19,130)     38,489
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            39,272      20,655
                                                                          --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                $ 20,142    $ 59,144
                                                                          ========    ========

                                               6
<PAGE>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                                                                          --------    --------
Cash paid during the period for interest                                        28          32
                                                                          ========    ========
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       --            26
offering
                                                                          ========    ========
Issuance of convertible preferred stock in connection with acquisition        --         1,087
                                                                          ========    ========
Property and equipment obtained through capital lease                     $   --      $     30
                                                                          ========    ========
Acquisition of treasury stock in exchange for cancellation of note        $    919    $   --
                                                                          ========    ========
Notes receivable cancelled in exchange for repurchase of common stock        1,518        --
                                                                          ========    ========
<FN>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
</FN>
</TABLE>
                                               7
<PAGE>

                                  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-owned  and  located  in North
America,  Europe and 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,  Basis of  Presentation  and  Restatement of
Quarterly Financial Statements

   The accompanying  unaudited condensed consolidated financial statements as of
June 30, 2001,  and for the three and six month  periods  ended of June 30, 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 June 30, 2001, and the operating results for the three and six month
periods  ended June 30, 2001 and 2000,  and cash flows for the six month periods
ended June 30, 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.

Certain balances in prior fiscal years have been  reclassified to conform to the
presentation  adopted in the current fiscal year.  The restricted  cash balances
have been  reclassified as a separate caption in the Consolidated  Balance Sheet
as of December 31, 2000.


During the first half of 2001,  the  Company  reduced  its  workforce  and these
reductions  resulted in  employees  forfeiting  unvested  options.  However,  we
incorrectly  calculated  the reversal of the previously  recognized  stock-based
compensation  charges by including  the  reversal of charges  related to options
that had already vested at the employees' termination dates. As a result, we are
restating  our  previously  reported  stock-based  compensation  expense for the
quarters  ended  March  31,  2001 and June 30,  2001.  The net  effect  of these
adjustments  is an  increase  in the  stock-based  compensation  expense of $2.4
million and $3.2  million for the three  months  ended June 30, 2001 and the six
months ended June 30,2001, respectively.

During the first half of 2001, our stock price decreased such that the liability
related to the Stock  Appreciation  Rights Plan ("SAR"),  which we assumed on an
acquisition in 2000, was reduced to zero under variable  accounting for the SAR.
However,  we incorrectly reduced this liability to zero in the second quarter of
2001 rather then the first quarter of 2001. The effect of this  adjustment is an
increase in the  stock-based  compensation  expense of $1,127,000  for the three
months ended June 30, 2001 with no impact on the six months ended June 30, 2001.

For the three months and six months ended June 30,2001,  the net impact of these
two matters is as follows:


<TABLE>
<CAPTION>
                                                      Three Months Ended                          Six Months Ended
                                                        June 30, 2001                              June 30, 2001
                                          ----------------------------------------- ----------------------------------------------
                                                   As                   As                    As                       As
                                                Reported             Restated              Reported                 Restated
                                          --------------------- ------------------- -----------------------   --------------------
<S>                                        <C>                    <C>                   <C>                     <C>
Net Loss                                   $     (11,284)         $    (13,715)         $    (34,904)           $   (38,059)

Basic and diluted earnings per share       $        0.28          $      (0.34)         $       0.87            $      0.95
</TABLE>

                                       8
<PAGE>

3.  Summary of Significant Accounting Policies

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,  independent  software  vendors,  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.

    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        Six Months Ended
                                                                     June 30,                June 30,
                                                               --------------------    --------------------
                                                                 2001        2000        2001        2000
                                                               --------    --------    --------    --------
<S>                                                            <C>         <C>         <C>         <C>
Numerator:
                Net Loss                                       $(13,715)   $(16,002)   $(38,059)   $(36,214)
                                                               ========    ========    ========    ========
Denominator:
               Weighted average shares outstanding               42,900      40,117      42,070      28,756
                                                               --------    --------    --------    --------
               Weighted  average  unvested  shares of common     (2,736)     (2,419)     (2,121)     (2,312)
               stock subject to repurchase
                                                               --------    --------    --------    --------
               Denominator for basic and diluted calculation     40,164      37,698      39,949      26,444
                                                               ========    ========    ========    ========
Basic and diluted net loss per share                           $  (0.34)   $  (0.42)   $  (0.95)   $  (1.37)
                                                               ========    ========    ========    ========
Weighted average effect of common stock equivalents:
               Unvested common stock subject to repurchase        2,736       2,419       2,121       2,312
               Options outsanding                                 9,901       6,913       9,529       6,645


                                       9
<PAGE>

               Shares resulting from the onversion of the:
                Series A convertible preferred stock                --           --         --          625
                Series B convertible preferred stock                --           --         --        1,834
                Series C convertible preferred stock                --           --         --        2,616
                Series D convertible preferred stock                --           --         --        2,911
                Series E convertible preferred stock                --           --         --        1,876
                Series F convertible preferred stock                --           --         --        1,329
               Warrants  to purchase  convertible  preferred
                stock                                               --           95         --          151
               Warrants to purchase common stock                    --          240         --          357
                                                               --------    --------    --------    --------
                Total  common  stock  equivalents excluded
                from the computation  of earnings  per
                share as their effect was antidilutive           12,637       9,667      11,650      20,656
                                                               ========    ========    ========    ========
</TABLE>

         In April of 2001, the Company approved the issuance of 2,585,473 shares
of common stock to certain of its  officers,  which are subject to repurchase by
the Company.  The repurchase  rights expire over two and four-year  periods.  In
connection with the issuance of restricted shares,  1,479,291 stock options held
by the same officers were cancelled.  The cancellation of these options resulted
in a reduction of stock-based  compensation of $999,000 in the second quarter of
2001.

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):

                                           THREE MONTHS ENDED   SIX MONTHS ENDED
                                                JUNE 30,            JUNE 30,
                                             2001      2000      2001      2000
                                           -------   -------   -------   -------
Software license revenue:
             United States                 $ 2,474   $ 4,302   $ 4,813   $ 7,390
             Europe                          3,517     1,459     5,178     2,454
             Other international              --         316       140       369
                                           -------   -------   -------   -------
                                             5,991     6,077    10,131    10,213
Services revenue:
             United States                 $ 3,746   $ 6,308   $ 9,038   $11,930
             Europe                          1,122     1,490     2,385     1,838
             Other international              --        --         337      --
                                           -------   -------   -------   -------
                                             4,868     7,798    11,760    13,768
Total revenue:
             United States                 $ 6,220   $10,610   $13,851   $19,320
             Europe                          4,639     2,949     7,563     4,292
             Other international              --         316       477       369
                                           =======   =======   =======   =======
                                           $10,859   $13,875   $21,891   $23,981
                                           =======   =======   =======   =======

    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 June 30, 2001,  and
December 31, 2000, approximately $20,049,000 and $23,308,000,  respectively,  of
long-lived  assets were located in the United States,  $836,000 and  $1,054,000,
respectively,  were located in Europe, and $104,000 and $254,000,  respectively,
were located elsewhere.

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

                                       10
<PAGE>
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.

    In July 2001,  the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  No. 141 ("SFAS  141"),  "Business
Combinations."  SFAS 141 requires the purchase method of accounting for business
combinations    initiated    after   June   30,   2001   and    eliminates   the
pooling-of-interests  method.  We believe that the adoption of SFAS 141 will not
have a significant impact on our financial statements.

    In July 2001, the FASB issued  Statement of Financial  Accounting  Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
for fiscal years beginning after March 15, 2001. SFAS 142 requires,  among other
things, the discontinuance of goodwill  amortization.  In addition, the standard
includes  provisions upon adoption for the  reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized   intangibles,   reclassification   of  certain  intangibles  out  of
previously reported goodwill and the testing for impairment of existing goodwill
and other  intangibles.  We are currently  assessing but have not yet determined
the impact of SFAS 142 on our financial position and results of operations.

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  $13.9  million  and  $15.7  million  for the
quarters ended June 30, 2001 and 2000, respectively, and $38.7 and $35.9 for the
six months ended June 30, 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. Restructuring and Other 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 reduced  office space and related
overhead expenses beginning in the second quarter of 2001.


     Our Company holds an investment in the preferred stock of TruMarkets, Inc.,
a privately  held  corporation  that was also a customer.  In January  2001,  we
provided the investee  with a $500,000  bridge loan. As of December 31, 2000 the
investee  was in the  process  of  developing  its  products  and  was  actively
negotiating with third parties for additional  financing to fund its operations.
During  March 2001,  the  investee's  attempts to obtain  sufficient  additional
financing  failed  and the  investee  began  efforts  to sell the  Company.  The
$500,000  loan was  recorded in  restructuring  and other  expenses in the first
quarter of 2001. In June 2001, Tru Markets,  Inc. was acquired by  MortgageSight
Holding LLC  (MortgageSight)  and our  investment  and fully  reserved loan were
converted to 22.122 shares of preferred stock, or less than 1% of MortgageSight.


    In April  2001,  we  expensed  our  deductible  amount  for  director's  and
officer's  liability  insurance of $350,000 as restructuring and other expenses.
This is a result of  securities  class action  complaints  filed  against us and
several of our current and former officers and directors (see Note 6).

                                       11
<PAGE>

    In May 2001, the Company took further  actions to restructure and streamline
operations  which  consisted  primarily  of  additional  reductions  in employee
positions  and field  offices.  We expect  that the  majority  of the  remaining
restructuring  actions such as office  closures  will be completed by the end of
the third quarter of 2001. Obligations related to subleasing will continue until
2008 and the undiscounted future lease obligations,  net of sublease income, are
accrued for as of June 30, 2001.

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


<TABLE>
<CAPTION>
                                                                                      Settlement                  Total
                                              Office Closure   Asset                  with Former              Restructuring
                                    Employee  and Subleasing  Disposal  Nonrecoverable  Officer      Other       and Other
                                   Severance      Costs       Losses        Loan       (note 6)      Costs       Expenses
                                    ------       ------       ------       ------       ------       ------       ------
<S>                                 <C>          <C>          <C>          <C>                       <C>          <C>
First Quarter of 2001
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


Noncash portion in first quarter      --           --          2,895          500         --           --          3,395

Cash payments in first quarter         458          238         --           --           --            161          857
                                    ------       ------       ------       ------       ------       ------       ------
Accrual balance, March 31, 2001        704        1,465          315         --           --            173        2,657
                                    ------       ------       ------       ------       ------       ------       ------
Second Quarter of 2001
United States                          450          222          369         --          1,122          572        2,735

EMEA                                   758         --           --           --           --           --            758

Canada and Asia Pacific                 11         --           --           --           --           --             11
                                    ------       ------       ------       ------       ------       ------       ------
Consolidated expense,                1,219          222          369         --          1,122          572        3,504

Noncash portion in second quarter     --           --            200         --            598         --            798

Cash payments in second quarter      1,417          535          484         --            524          447        3,407
                                    ------       ------       ------       ------       ------       ------       ------
Accrual  balance,  June 30, 2001    $  506       $1,152       $ --         $ --         $ --         $  298       $1,956
                                    ======       ======       ======       ======       ======       ======       ======
</TABLE>


6. Related Party Transactions

    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.  On the date of the payment to the  financial  institution,
the fair market value of the 549,300  shares was $464,000 and has been  recorded
as treasury shares and $524,000 and has been included in nonrecurring expenses.

    In  June  2001,  in  connection  with  the  same  officer's  termination  of
employment, we forgave promissory notes and accrued interest totaling $1,517,000
in  exchange  for  770,009  shares of our  Company's  common  stock owned by the
officer.  On the date of the  agreement,  the fair  market  value of the 770,009
shares was  $919,000 and has been  recorded as treasury  shares and $598,000 has
been included in nonrecurring expenses.

                                       12
<PAGE>

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  generally  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,
training,  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.

    Net revenues from international sales represented 42.7% of our total revenue
in the second  quarter of 2001 and 23.5% of our total revenue in the same period
last year. Net revenues from international  sales represented 36.7% of our total
revenue in the six months ended June 30, 2001 and 19.4% of our total  revenue in
the same period last year. The increase in the international  revenue mix during
the  first  half of 2001  over  the same  period  last  year is a result  of the
European office openings during the beginning of fiscal year 2000.

                                       13
<PAGE>

    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 $156.2 million and $121.3 million as of June 30, 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.

    In May 2001, we further reduced staff and closed  additional  field offices.
We  expensed  $3.5 for  restructuring  and other  non-recurring  expenses in the
second 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>
                                                         VERSATA, INC.
                                        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                          (unaudited)

                                               Three Months Ended June 30,                   Six Months Ended June 30,
                                          --------------------------------------      ----------------------------------------
                                                2001                2000                    2001                   2000
                                          ------------------  ------------------      -----------------      -----------------
<S>                                                   <C>                 <C>                    <C>                    <C>
Revenue:
  Software license                                    55.2%               43.8%                  46.3%                  42.6%
  Services                                            44.8%               56.2%                  53.7%                  57.4%
                                          ------------------  ------------------      -----------------      -----------------
Total revenue                                        100.0%              100.0%                 100.0%                 100.0%

Cost of Revenue:
  Software license                                     1.4%                1.6%                   1.4%                   1.7%
  Services                                            47.3%               54.7%                  61.8%                  54.5%
                                          ------------------  ------------------      -----------------      -----------------
Total cost of revenue                                 48.7%               56.3%                  63.2%                  56.2%
                                          ------------------  ------------------      -----------------      -----------------
Gross profit                                          51.3%               43.7%                  36.8%                  43.8%

Operating expense:
  Sales and marketing                                 79.7%               82.8%                  94.1%                  90.4%
  Product development                                 24.4%               15.6%                  29.9%                  16.8%


                                                              14
<PAGE>

  General and administrative                          28.0%               22.0%                  32.1%                  21.1%
  Stock-based compensation                             6.6%               48.5%                   2.6%                  74.3%
  Amortization of intangibles                         10.6%                1.7%                  10.5%                   1.8%
  Nonrecurring Expense                                32.3%                0.0%                  47.6%                   0.0%
                                          ------------------  ------------------      -----------------      -----------------
Total operating expense                              181.6%              170.7%                 216.8%                 204.3%
                                          ------------------  ------------------      -----------------      -----------------
Loss from operations                                -130.3%             -127.0%                -180.0%                -160.5%
Interest income, net                                   4.5%               11.7%                   6.4%                   9.5%
Other, net                                            -0.5%                0.0%                  -0.2%                   0.0%
                                          ------------------  ------------------      -----------------      -----------------
Net loss                                            -126.3%             -115.3%                -173.9%                -151.0%
                                          ==================  ==================      =================      =================
</TABLE>

    Revenue

    Total revenue  consists of software  license  revenue and services  revenue.
Total  revenue  decreased by $3.0  million,  or 21.7%,  to $10.9  million in the
second  quarter of 2001 from $13.9 million in the same period last year. For the
six months ended June 30, 2001,  total  revenue  decreased by $2.1  million,  or
8.7%,  to $21.9  million from $24.0  million in the same period last year.  This
decrease is principally  attributable to the decrease in services revenue, which
is a result of the decrease in IT spending due to overall market conditions,  as
well as our shifting away from becoming a services provider.

    Software License Revenue

    Software license revenue decreased slightly by $0.1 million, or 1.4% to $6.0
in the second  quarter of 2001 from $6.1 in the same period  last year.  For the
six months  ended June 30,  2001,  software  license  revenue  decreased by $0.1
million,  or 0.8%,  to $10.1  million from $10.2 million in the same period last
year.  Software  license  revenues  are  fairly  consistent  with the prior year
periods due to an increase in software license revenue from European  customers,
offset by a decrease in domestic  software license  revenues.  European software
license  revenues  accounted for 58.7% of license revenues in the second quarter
of 2001 versus 24.0% in the same period last year.

    Services Revenue

    Services revenue decreased by $2.9 million, or 37.6%, to $4.9 million in the
second  quarter of 2001 from $7.8 million in the same period last year.  For the
six months ended June 30, 2001,  services revenue decreased by $2.0 million,  or
14.6%,  to $11.8 million from $13.8 million in the same period last year.  These
decreases  were  attributable  to the  decrease  in IT  spending  on  consulting
services  due to  overall  market  conditions  as well as our  shift  away  from
providing  consulting  services  implementation  work to a strategy of providing
training and mentoring.

    Cost of Revenue

    Total cost of revenue  consists of cost of software license revenue and cost
of service revenue.  Total cost of revenue decreased by $2.5 million,  or 32.4%,
to $5.3  million  in the second  quarter  of 2001 from $7.8  million in the same
period  last  year.  This  decrease  was  mainly  attributable  to  management's
restructuring  plan  initiated  in the first  quarter of 2001 which  resulted in
savings in  personnel,  subcontracting,  and office costs  beginning in April of
2001. For the six months ended June 30, 2001, total cost of revenue increased by
$0.3 million,  or 2.5%, to $13.8 million,  from $13.5 million in the same period
last year.  This is due to an  increase  in  services  personnel  from the first
quarter of 2001 over first  quarter of 2000,  offset by reductions at the end of
the first  quarter of 2001 which  resulted  in savings in the second  quarter of
2001.

    Cost of Software License Revenue

    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 $72,000 or 32.6%,  to  $149,000 in the
second  quarter of 2001 from $221,000 in the same period last year.  For the six
months  ended

                                       15
<PAGE>

June 30, 2001, cost of software license revenue decreased by $109,000, or 26.3%,
to  $306,000  from  $415,000 in the same  period  last year.  Although  software
license revenues were fairly consistent with the same periods in the prior year,
the costs  decreased  due 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 decreased by
$2.5 million,  or 32.4%, to $5.1 million in the second quarter of 2001 from $7.6
million in the same period last year.  This decreases is mainly  attributable to
management's  restructuring  plan  initiated in the first  quarter of 2001 which
lowered  personnel  and  subcontracting  costs from the prior year.  For the six
months ended June 30, 2001, cost of service  revenue  increased by $0.4 million,
or 3.4%, to $13.5 million from $13.1 million in the same period last year.  This
increase was mainly  attributable  to the higher levels of staffing in the first
quarter of 2001 due to hiring of  personnel  in the latter half of 2000.  During
the second quarter of 2001,  however,  services revenues decreased from the same
period last year,  resulting in decreases in cost of services as a result of the
restructuring initiatives in response to the revenue declines.


    Operating Expenses

    Operating expenses decreased by $4.0 million,  or 16.7%, to $19.7 million in
the second  quarter of 2001 from $23.7 million in the same period last year. For
the six  months  ended  June 30,  2001,  operating  expenses  decreased  by $1.5
million,  or 3.1%,  to $47.5  million from $49.0 million in the same period last
year.  The  majority  of the  decreases  were due to a decrease  in  stock-based
compensation  and  sales  and  marketing  expenses,  offset  by an  increase  in
non-recurring expenses.

    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 decreased by $2.8 million, or 24.7%, to $8.7 million
in the second  quarter of 2001 from $11.5  million in the same period last year.
For the six months ended June 30, 2001, sales and marketing  expenses  decreased
by $1.1 million, or 5.0%, to $20.6 million from $21.7 million in the same period
last year.  These  decreases were  attributable  to a reduction in the number of
sales  employees,  primarily  the inside sales  group,  in  connection  with the
reorganization  in March of 2001 as well as a reduction in spending on marketing
programs during the second quarter of 2001.

    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 $0.5 million,  or
22.3%,  to $2.7  million in the second  quarter of 2001 from $2.2 million in the
same  period  last  year.  For the six  months  ended  June  30,  2001,  product
development  expense  increased by $2.5 million,  or 62.7%, to $6.5 million from
$4.0  million in the same  period  last year.  These  increases  were  primarily
attributable  to  increases  in the number of  personnel  in  Versata's  product
development  and engineering  organization,  following the acquisition of Verve,
Inc.  in  November  2000.  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 was $3.0 million in
both the second  quarter of 2001 compared to the same period last year.  For the
six months ended June 30, 2001, general and administrative  expense increased by
$2.0  million,  or 39.4%,  to $7.0  million from $5.0 million in the same period
last year.  The  increase  during the six months  ended June 30, 2001 relates to
increases in the first  quarter of 2001  compared to the first  quarter of 2000,
and was  attributable  to a  growing  number of  employees  and an  increase  in
insurance and other costs to support a publicly traded company.

    Stock-Based Compensation

                                       16
<PAGE>


    Stock-based  compensation  expense  includes  the  amortization  of unearned
employee  stock-based  compensation,  offset by reversals of previously expensed
amounts  for  cancellations  of  the  related  options.   Employee   stock-based
compensation  expense is  amortized  on an  accelerated  basis over the  vesting
period of the related options,  generally 50 months.  If an employee  terminates
prior to the full vesting of their options,  that portion of the expense related
to the converted options that was previously  recognized on an accelerated basis
is reversed.  Stock-based  compensation expense also includes expenses for stock
granted to  consultants  in  exchange  for  services.  Stock-based  compensation
expense  decreased  by $6.0  million,  or 89.4%,  to $0.7 million for the second
quarter of 2001 from an expense of $6.7  million in the same  period  last year.
For the six  months  ended  June  30,  2001,  stock-based  compensation  expense
decreased by $17.2 million,  or 96.8%, to $0.6M million in the second quarter of
2001 from $17.8 million in the same period last year.  The decreases are related
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 35  months,  which  will  result  in  additional
compensation  expense of approximately  $3.4 million in the aggregate in periods
subsequent to June 30, 2001. This future expense will be reduced in the event of
related option cancellations for employee terminations in the future.


    Amortization of Intangibles

    Amortization of intangibles expense increased by $1.0 million, or 386.1%, to
$1.2  million  for the second  quarter of 2001 from  $237,000 in the same period
last year. For the six months ended June 30, 2001,  amortization  of intangibles
expense  increased by $1.9 million,  or 437.9%, to $2.3 million from $427,000 at
the same period last year.  These  increases are related to the  acquisitions of
McGilly and Webink in the first quarter of 2000, and the  acquisitions of Verve,
Inc in the fourth quarter of 2000.


    Restructuring and Other Expenses

    Restructuring  and Other 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 and second quarters of 2001 by eliminating  certain employee positions and
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  will be  completed  by the end of the  third
quarter of 2001.  Obligations  related to subleasing  may continue until 2008 as
estimated and are accrued for as of June 30, 2001. We had nonrecurring  expenses
of $3.5 million in the second quarter of 2001 and $10.4 for the six months ended
June 30,2001. There were no such charges in the first or second 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 $489,000 for the
second  quarter of 2001,  a decrease of $1.1  million  compared to net  interest
income of $1.6 million for the second  quarter of 2000. For the six months ended
June 30, 2001, net interest income was $1.4 million,  a decrease of $0.9 million
from net interest  income of $2.3 in the same period last year.  These decreases
were due to the reduction of cash and cash  equivalents  in 2001 compared to the
same periods last year.

    Provision for Income Taxes

    We have incurred  operating  losses for all periods from  inception  through
June 30, 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 June 30,  2001,  we had  $35.8
million in cash and cash equivalents, restricted cash and short-term investments
and $30.0 million in working capital.  Net cash used in operating activities was
$34.3 million in the first six months of 2001 and $19.7 million in the first six
months of 2000.  Net cash  flows used by  operating  activities  in each  period
reflect  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.

                                       17
<PAGE>

    Net cash provided in investing  activities was $9.6 million in the first six
months of 2001 and net cash used in investing  activities  was $36.6  million in
the first  six  months of 2000.  The  increase  in cash  provided  in  investing
activities during the first six months of 2001 primarily reflects the maturities
of  short-term  investments  of $19.6  million  in the first six  months of 2001
compared to purchases of  investments  of $32.2  million in the same period last
year.  This  increase is partially  offset by purchases of  restricted  cash and
increases in purchases of property and equipment in the first six months of 2001
compared  to the same  period  last year.  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  $957,000 in the first six
months of 2001 and $99.5  million in the first six months of 2000.  The decrease
from the prior year is primarily  due $96.7 million in proceeds from the initial
public  offering  in March 2000.  The  majority  of cash  provided by  financing
activities  in the first six months of 2001 relate to proceeds from the issuance
of common stock under the employee stock  purchase  plan.  After the most recent
employee stock purchase plan purchase in August of 2001, the Company has decided
to suspend the plan indefinitely.

    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.

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

                                       18
<PAGE>

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.

    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:

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

    o    the competitive landscape;

    o    technological innovations by us or our competitors;

    o    changes in earnings estimates or recommendations by analysts;

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

    o    general economic and market conditions;

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

    o    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:

    o    relatively long sales cycles for our products;

    o    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;

    o    introduction  of new  products  or  product  enhancements  by us or our
         competitors;
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<PAGE>

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

    o    changes in customer budgets;

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

    o    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:

    o    competition in the Internet infrastructure software market;

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

    o    the overall trend toward industry consolidation;

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

    o    variations in mix of products sold; and

    o    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

                                       20
<PAGE>

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.

    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 June 30, 2001, we had an  accumulated  deficit of
$156.2 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:

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

    o   satisfy increasingly sophisticated customer requirements; and

    o   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.

                                       21
<PAGE>

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.

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.

                                       22
<PAGE>

    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 half 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  half of 2001,  we have  expanded  our
direct sales force over the past year.

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

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<PAGE>

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 55.2% of our revenue in the second 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
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.

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<PAGE>

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 June 30, 2001, Versata had operating  subsidiaries
located in the United  Kingdom,  Germany,  Belgium,  Hong Kong,  Australia,  and
France. Internationally,  Versata invoices customers primarily in local currency
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 June 30, 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.   The  actions  are  subject  to
consolidation under the Private Securities  Litigation Reform Act of 1995, which
requires  the  consolidation  of  similar   securities  class  actions  and  the
appointment  of a lead  plaintiff  who  pursues  the  action  on  behalf  of the
consolidated class.

Until the  consolidated  amended  complaint is filed, it is premature to come to
any conclusions as to the allegations and potential damages. We intend to defend
these actions  vigorously.  There can be no assurance  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.

State Derivative Action

Since June 11, 2001, several  derivative action on behalf of Versata,  Inc. were
filed against  certain  current and former  officers and directors in California
state court.  The complaints also name the Company as a nominal  defendant.  The
complaint  allege that the defendants  breached their fiduciary  duties,  abused
their  control of the  corporation,  and engaged in gross  mismanagement  of the
corporation,  by  allegedly  making or  permitting  the  Company  to make  false
financial statements and seek, among other things, compensatory damages.

At  this  early  stage  in  the  litigation,  it is  premature  to  come  to any
conclusions  as to the  allegations  and the impact that the claim could have on
the Company.

Item 2. Changes in Securities and Use of Proceeds

(a) Sales of Unregistered Securities

    During  the  period  from  January 1, 2000 to June 30,  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  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.

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<PAGE>
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:

    EXHIBIT
    NUMBER                           DESCRIPTION OF DOCUMENT
    ------                           -----------------------

    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.

+    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.
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<PAGE>



(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.

                                       27

<PAGE>

                                  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: November 19, 2001             /s/  DOUGLAS ROBERTS
                                    -------------------------------------------
                                         Chief Executive Officer
                                         and President

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



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