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

                                    FORM 10-Q

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

                For the quarterly period ended September 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  October  31,  2001,  the total  number of  outstanding  shares of the
Registrant's common stock was 43,826,758.


<PAGE>

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

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets At September 30, 2001 And December 31, 2000 (unaudited).......................       3

Condensed  Consolidated  Statements Of Operations and Comprehensive Loss For The
Three And Nine Months Ended September 30, 2001 And 2000 (unaudited).................................................       4

Condensed Consolidated Statements Of Cash Flows For The Nine Months Ended September 30, 2001 And 2000 (unaudited)...       5

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

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

Item 3. Quantitative And Qualitative Disclosures About Market Risk..................................................      23


                                              PART II. OTHER INFORMATION

Item 1. Legal Proceedings...........................................................................................      24

Item 2. Changes In Securities And Use Of Proceeds...................................................................      24


Item 6. Exhibits And Reports On Form 8-K............................................................................      25

Signatures..........................................................................................................      26
</TABLE>



<PAGE>


                                             PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                   September 30,    December 31,
                                                       2001              2000
                                                    ---------         ---------
ASSETS
Current Assets:
   Cash and cash equivalents                        $  23,965         $  39,272
   Short-term investments                               2,039            29,926
   Accounts receivable, net                             3,959            14,177
   Unbilled receivables                                   231             3,584
   Prepaid expenses and other  assets                   1,612             3,075
                                                    ---------         ---------
      Total current assets                             31,806            90,034

Restricted cash                                         5,698             5,189
Property and equipment, net                             8,826            11,901
Note receivable from related parties                     --                 156
Intangibles, net                                        8,137            12,205
Other assets                                              144               354
                                                    ---------         ---------
      Total assets                                  $  54,611         $ 119,839
                                                    =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                 $     680         $   9,040
   Accrued liabilities                                  5,933            13,146
   Accrued restructuring                                  986
   Accrued stock-based compensation                      --               1,095
   Deferred revenue                                     5,853             8,661
   Current portion of long-term debt                      106               134

                                                    ---------         ---------
      Total current liabilities                        13,558            32,076

Accrued restructuring, less current portion             1,713
Long-term debt, less current portion                      267               218
                                                    ---------         ---------
      Total liabilities                                15,538            32,294

Stockholders' equity
   Common Stock                                            44                41
   Additional paid-in- capital                        216,447           226,352
   Treasury stock                                      (1,383)             --
   Notes Receivable from shareholders                    (926)           (3,868)
   Unearned stock-based compensation                   (1,343)          (13,870)
   Accumulated other comprehensive income (loss)         (207)              166
   Accumulated deficit                               (173,559)         (121,276)
                                                    ---------         ---------
      Total stockholder's equity                       39,073            87,545

                                                    ---------         ---------
      Total liabilities and stockholders' equity    $  54,611         $ 119,839
                                                    =========         =========

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

                                        3
<PAGE>
<TABLE>
                                              VERSATA, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                  (In thousands, except per share data)
                                               (unaudited)
<CAPTION>
                                                                                  Three Months          Nine Months
                                                                             Ended September 30,     Ended September 30,
                                                                            ---------------------------------------------
                                                                                2001        2000        2001        2000
                                                                            --------    --------    --------    --------
<S>                                                                         <C>         <C>         <C>         <C>
Revenue:
Software license                                                            $  3,276    $  8,572    $ 13,407    $ 18,785
Services                                                                       2,968       9,031      14,728      22,799
                                                                            --------    --------    --------    --------
Total revenue                                                                  6,244      17,603      28,135      41,584
                                                                            --------    --------    --------    --------
Cost of Revenue:
Software license                                                                  79         376         385         791
Services ( exclusive of stock-based compensation of
   $56 and $1,148 for the three months ended September 30,
   2001 and 2000, respectively, and $91 and $6,966 for
   the nine months ended September 30, 2001 and 2000                           3,155       8,392      16,679      21,466
                                                                            --------    --------    --------    --------
Total cost of revenue                                                          3,234       8,768      17,064      22,257
                                                                            --------    --------    --------    --------
Gross profit                                                                   3,010       8,835      11,071      19,327
                                                                            --------    --------    --------    --------
Operating expense:
Sales and marketing (exclusive of stock-based compensation of                  4,675      12,070      25,272      33,752
$291 and $2,619 for the three months ended September 30,
  2001 and 2000, respectively, and $469 and $11,553 for
   the nine months ended September 30 2001 and 2000
Product development (exclusive of stock-based compensation                     1,748       2,740       8,293       6,763
 of $518 and $541 for the three months ended September
  30, 2001 and 2000, respectively, and $833 and $2,459
  for the nine months ended September 30, 2001 and 2000
General and administrative (exclusive of stock-based                           2,824       3,285       9,839       8,334
  compensation of $76 and $185 for the three months ended
  September 30, 2001 and 2000, respectively, and $123 and
   $1,524 for the nine months ended September 30, 2001
   and 2000, respectively
Stock-based compensation                                                         941       4,493       1,516      22,302
Amortization of intangibles                                                    1,987         233       4,284         660
Restructuring and other expenses (excludes the benefit of $941 and $4,493      5,149         243      15,562         243
for the three months ended September 30, 2001 and 2000
respectively, and $1,516 and $22,302 for the nine months
ended September 30, 2001 and 2000, respectively, relating
to the reversal of previously recorded stock-based compensation
related to employees terminated in the restructuring)
                                                                            --------    --------    --------    --------
Total operating expense                                                       17,324      23,064      64,766      72,054
                                                                            --------    --------    --------    --------
Loss from operations                                                         (14,314)    (14,229)    (53,695)    (52,727)
Interest income, net                                                             303       1,487       1,701       3,771
Other expenses, net                                                             (215)         (1)       (290)         (1)
                                                                            --------    --------    --------    --------
Net loss                                                                    $(14,226)   $(12,743)   $(52,284)   $(48,957)
                                                                            ========    ========    ========    ========
Unrealized gain (loss) on marketable securities                             $    (10)   $     38    $    (24)   $      2
Foreign currency translation gain (loss)                                    $    254    $     46    $   (349)   $     46
                                                                            --------    --------    --------    --------
Comprehensive Loss                                                          $(13,982)   $(12,659)   $(52,657)   $(48,909)
                                                                            ========    ========    ========    ========
Basic and diluted net loss per share                                        ($  0.35)   ($  0.33)   ($  1.30)   ($  1.61)
                                                                            ========    ========    ========    ========
Weighted-average common shares                                                39,888      38,424      40,164      30,361
                                                                            ========    ========    ========    ========
<FN>
The  accompanying  notes are an integral  part of these  condensed  consolidated financial statements.
</FN>
</TABLE>

                                       4
<PAGE>
<TABLE>
                                            VERSATA, INC.
                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            (in thousands)
                                             (unaudited)
<CAPTION>
                                                                                           Nine Months Ended
                                                                                             September 30,
                                                                                         ----------------------
                                                                                              2001         2000
                                                                                         ---------    ---------
<S>                                                                                      <C>          <C>
Cash Flows from operating activities:

    Net Loss                                                                             $ (52,284)   $ (48,957)
    Adjustments to reconcile net loss to net cash  used in operating activities:
           Depreciation and amortization                                                     5,141        1,651
           Provision for doubtful accounts                                                   2,035        1,072
            Cancellation of promissory notes                                                   754         --
         Write-down of leashold improvements and office furniture in connection
          with restructuring                                                                 5,873         --
          Stock-based compensation expense                                                   1,516       22,302
          Change in operating assets and liabilities:
               Trade accounts receivable                                                     8,183       (9,628)
               Unbilled receivable                                                             741       (2,594)
               Prepaid expenses and other assets                                             1,365       (1,011)
              Restricted cash                                                                 (509)        --
               Other assets                                                                    210       (1,141)
               Accounts payable and accrued liabilities                                    (15,573)       5,986
               Accrued restructuring, short-term                                               986
               Accrued restructuring, long-term                                              1,713
               Deferred revenues                                                              (196)       3,598
                                                                                         ---------    ---------
                       Net provided by operating activities                                (40,045)     (28,722)
                                                                                         ---------    ---------
Cash Flows from investing activities:

    Maturities (purchases) of short-term investments                                        27,863      (40,001)
    Purchase of property and equipment                                                      (3,620)      (5,672)
   Increase (decrease) in notes receivable from related parties                                  0          (42)
    Purchase of intangible assets                                                                0         (250)
Cash paid in connection with acquisition and subsequent earnout payments                      (187)        (101)
                                                                                         ---------    ---------
                       Net cash provided by (used in) investing activities                  24,056      (46,066)
                                                                                         ---------    ---------

Cash Flows from financing activities:
    Principal payments on capital lease obligations and loan                                   (71)        (131)
    Net proceeds from issuance of convertible preferred stock                                 --          1,500
    Net proceeds from issuance of common stock                                                --         96,654
    Proceeds from issuance of common stock under employee stock purchase plan                1,479        1,773
 Proceeds from exercise of stock options and warrants                                          111        2,331
   Repurchase of common stock from stockholders                                                (29)          (6)
    Purchase of treasury stock from former officers                                           (464)        --
    Payments from stockholders on notes receivable                                               5          642
    Loans provided to stockholders                                                            --           (650)
                                                                                         ---------    ---------
                       Net cash provided by financing activities                             1,031      102,113
                                                                                         ---------    ---------
Effects of exchange rate changes on cash and cash equivalents                                 (349)          46
                                                                                         ---------    ---------
                             Decrease (increase) in cash and cash equivalents              (15,307)      27,371
Cash and cash equivalents at beginning of period                                            39,272       20,655
                                                                                         ---------    ---------
Cash and cash equivalents at end of period                                                  23,965       48,026
                                                                                         =========    =========
Supplemental Disclosures of Cash Flow information
Cash paid during the period for interest                                                        58           48

Supplemental Schedule of Noncash Investing and Financing Activities
Common stock issued for notes receivable from stockholders                                    --          1,813
Conversion of preferred stock to common stock on date of public offering                      --             26
Issuance of convertible preferred stock in connection with acquisition                        --          1,087
Property and equipment obtained through capital leases                                        --             30
Acquisition of treasury stock in exchange for cancellation of note                             919
Notes receivable cancelled in exchange for repurchase of common stock from stockholders      1,518
</TABLE>

                                       5
<PAGE>

                                  VERSATA, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

1. Our Company

     Versata,  Inc. was  incorporated  in California 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.


2. Interim Financial Information and Basis of Presentation

     The accompanying  unaudited condensed  consolidated financial statements as
of  September  30,  2001,  and for the three  and nine  month  periods  ended of
September 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,  all of which are  wholly-owned and located in North
America, Europe,  Australia,  Hong Kong and India. All intercompany accounts and
transactions  have been  eliminated  in  consolidation.  Versata,  Inc.  and its
subsidiaries  are  collectively  referred  to as  the  "Company"  or  "Versata."
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 September 30, 2001, and the operating results for the three and nine
month  periods ended  September  30, 2001 and 2000,  and cash flows for the nine
month  periods  ended  September 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.

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),
distributors 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 or 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 or
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,  which is generally twelve
months.  For revenue  related to  consulting  services,  our Company  recognizes
revenue


                                       6
<PAGE>
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.

Net Loss Per Share

    The Company  computes  net loss per share in  accordance  with  Statement of
Financial  Accounting  Standard ("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       Nine Months Ended
                                                                              September 30,            September 30,
                                                                         ----------------------    --------------------
                                                                               2001        2000        2001        2000
                                                                           --------    --------    --------    --------
<S>                                                                        <C>         <C>         <C>         <C>
Numerator:                                                                 ($14,226)   ($12,743)   ($52,284)   ($48,957)
                                                                           --------    --------    --------    --------
        Net Loss
Denominator:
        Weighted average shares outstanding                                  42,198      40,613      42,278      32,708
        Weighted average unvested shares of common stock                     (2,310)     (2,189)     (2,114)     (2,347)
                                                                           --------    --------    --------    --------
           subject to repurchase
        Denominator for basic and diluted calculation                        39,888      38,424      40,164      30,361
                                                                           ========    ========    ========    ========
Basic and diluted net loss per share                                       $  (0.36)   $  (0.33)   $  (1.30)   $  (1.61)
                                                                           ========    ========    ========    ========

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

Weighted average effect of common stock equivalents:
        Unvested common stock subject to repurchase                            2,310       2,189       2,114       2,347
        Options outsanding                                                     9,627       6,882      14,748       6,718
        Shares resulting from the conversion of the:                            --          --          --          --
              Series A convertible preferred stock                              --          --          --         1,500
              Series B convertible preferred stock                              --          --          --         4,403
              Series C convertible preferred stock                              --          --          --         6,278
              Series D convertible preferred stock                              --          --          --         6,991
              Series E convertible preferred stock                              --          --          --         4,510
              Series F convertible preferred stock                              --          --          --         3,239
        Warrants to purchase convertible preferred stock                        --          --          --           100
        Warrants to purchase common stock                                       --          --          --           238
                                                                            --------    --------    --------    --------
              Total common stock equivalents excluded from the
              computation of earnings per share as their effect
                                                                            --------    --------    --------    --------
              was antidilutive                                                11,937       9,071      16,862      36,324
                                                                            ========    ========    ========    ========
</TABLE>

         In April of 2001, the Company approved the issuance of 2,305,000 shares
of common stock to certain of its  officers,  which are subject to repurchase by
the Company.  The repurchase  rights  relating to 1,202,400 of the shares expire
over two years,  while the  remaining1,102,600  shares  granted  are  subject to
repurchase  rights  which expire over 50 months.  The issuance of the  2,305,000
shares  resulted in  stock-based  compensation  expense of $149,000 in the third
quarter of 2001 and $249,000 for the nine months ended  September  30, 2001.  In
connection with the issuance of restricted shares,  1,479,291 stock options held
by the same officers were cancelled.


                                       7
<PAGE>
Segment 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      Nine Months Ended
                                         September 30,         September 30,
                                     -------------------   ---------------------
                                         2001       2000       2001        2000
                                     --------   --------   --------    --------
Software license revenue:
               United States         $  2,806   $  6,718   $  7,768    $ 14,107
               Europe                     470      1,667      5,642       4,491
               Other international       --          187         (3)        187
                                     --------   --------   --------    --------
                                        3,276      8,572     13,407      18,785

Services revenue:
               United States            2,262      7,172     11,637      18,654
               Europe                     706      1,583      3,091       3,869
               Other international       --          276       --           276
                                     --------   --------   --------    --------
                                        2,969      9,031     14,942      22,799

Total revenue:
               United States            5,069     13,890     19,400      32,761
               Europe                   1,176      3,251      8,733       8,360
               Other international       --          463         (3)        463
                                     --------   --------   --------    --------
                                     $  6,244   $ 17,603   $ 28,155    $ 41,584
                                     ========   ========   ========    ========


    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 September 30, 2001,
and December 31, 2000, approximately $14,796,000 and $22,798,000,  respectively,
of long-lived assets were located in the United States, $683,000 and $1,054,000,
respectively,  were located in Europe, and $101,000 and $254,000,  respectively,
were located elsewhere.

Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business  Combinations."  SFAS No. 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
No. 141 will not have a significant impact on our financial statements.

     In July 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
Assets",  which is effective  for fiscal years  beginning  after March 15, 2001.
SFAS No. 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 No. 142 on
our financial position and results of operations.

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets".  SFAS No. 144 supercedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived  assets (including
discontinued  operations) and consequently  amends  Accounting  Principles Board
Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell.  Additionally,  SFAS No. 144  expands the scope of
discontinued  operations to include all components of an entity with  operations
that  (1) can be  distinguished  from  the  rest of the  entity  and (2) will be
eliminated from the ongoing  operations of the entity in a disposal  transaction
SFAS No. 144 is effective for the Company for all financial statements issued in
fiscal 2002. The Company does not believe that the adoption of SFAS No. 144 will
have a material impact on its financial position or 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  $14.0  million  and  $12.6  million  for the
quarters ended September 30, 2001 and 2000, respectively,  and $52.7 million and
$58.9  million  for  the  nine  months  ended   September  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

   During Q1 2001,  we  implemented  a cost cutting  initiative  that included a
reduction  in total  staff  of  approximately  70  people,  or 13% of the  total
workforce.  This reduction impacted all departments,  but 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


                                       8
<PAGE>
reduce  costs.  Overall  expense  reductions  were  necessary  both to lower the
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 approximately
107 employees and contractor  positions in all  departments  and reducing office
space and related overhead expenses  beginning in the second quarter of 2001. In
connection with the reduction in office space,  certain  leasehold  improvements
and office  furniture  totaling  $2.9  million  were written off and included in
restructuring and other expenses in the first quarter of 2001.

    Our company held an investment in the preferred stock of Tru Markets,  Inc.,
a privately  held  corporation.  Our Chairman of the Board of  Directors  held a
membership  interest  in the  general  partner  of a  partnership  that  owned a
controlling  interest in the outstanding  capital stock of Tru Markets,  Inc. 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  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 loan were  converted to
22,122 shares of preferred stock, or less than 1% of MortgageSight. The value of
these shares is  uncertain,  so no amount has been recorded on the balance sheet
relative to such shares.

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

    In May 2001, the Company took further  actions to restructure and streamline
operations which consisted  primarily of additional  reductions of approximately
50 employee  positions and several field  offices.  As well as the  undiscounted
future  lease  obligations,  net of  sublease  income.  Obligations  related  to
subleasing  will  continue  until 2008 and are accrued for as of  September  30,
2001.

    In August, the Company again took actions to further streamline  operations,
which  resulted in an  additional  reduction of 60  positions,  43 in the United
States,  and 17  internationally.  The Company is making an effort to centralize
these offices to reduce redundant overhead expenses.

    In October 2001,  the Company  eliminated an additional 46 positions,  25 in
the United States, and 21 internationally,  for which the costs will be taken in
Q4 2001.

    The following table summarizes the components of the restructuring and other
nonrecurring expenses, by geographic region (in thousands):
<TABLE>
<CAPTION>
                                                            Office
                                                            Closure                                                        Total
                                                              and        Asset        Non-                             Restructuring
                                                 Employee  Subleasing   Disposal  recoverable   Settlement     Other      and Other
                                                Severance    Costs       Losses      Loan       Agreement      Costs       Costs
                                                ---------  ----------   --------  -----------   ----------    ------   -------------
<S>                                              <C>         <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
Cash payments prior to March 31, 2001               458         238       2,895         500         --           161       4,252
                                                 ------      ------      ------      ------       ------      ------      ------
Accrual balance, March 31, 2001                     704       1,465         315        --           --           173       2,657
                                                 ------      ------      ------      ------       ------      ------      ------
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        (598)        --           447       2,285
                                                 ------      ------      ------      ------       ------      ------      ------
Accrual balance, June 30, 2001                      506       1,152        --          --           --           298       1,956
                                                 ------      ------      ------      ------       ------      ------      ------
Third Quarter of 2001
United States                                       790       2,327       1,413         104         --           299       4,934
EMEA                                                211        --          --          --           --          --           211
Canada and Asia Pacific                               5        --          --          --           --          --             5
                                                 ------      ------      ------      ------       ------      ------      ------
Consolidated expense, September 30, 2001          1,007       2,327       1,413         104         --           299       5,150

Noncash portion in third quarter
Cash payments in third quarter                    1,122       1,583       1,413         104         --           361       4,690

                                                 ------      ------      ------      ------       ------      ------      ------
Accrual balance, September 30, 2001              $  567      $1,895      $ --        $ --         $ --        $  237      $2,699
                                                 ======      ======      ======      ======       ======      ======      ======
</TABLE>


                                       9
<PAGE>
6.  Impairment of Intangible Assets

As  part  of  the  Company's  restructuring  and  reorganization,  focus  on the
provision  of  consulting  services  has been  reduced.  The number of employees
engaged in providing  consulting services to employees has also been reduced. As
a result of this the  Company  has  taken a full  impairment  charge,  totalling
$835,000,  against the remaining balance of the intangible assets arising on the
acquisition  of three  service  companies  in the  first  quarter  of 2000.  The
impairment charge is included as part of amortization of intangibles.

7. 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 restructuring and other
operating expenses.

    In  June  2001,  in  connection  with  the  same  officer's  termination  of
employment,   we  cancelled  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 restructuring and other operating expenses.


                                       10
<PAGE>

8. Legal Proceedings

Securities Class Action

Since April 11, 2001,  several  securities  class action  complaints  were filed
against us, and certain of our current and former  officers  and  directors.  In
August 2001 the class action lawsuits were consolidated  before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs  filed an amended class action complaint naming us,
certain  of our former  officers  and a current  director,  as  defendants.  The
amended class action  complaint  alleges  claims under section 10(b) and section
20(a) of the Securities  Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
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,  two  derivative  actions were filed on our behalf  against
certain current and former officers and directors in California state court. The
complaints also name us as a nominal  defendant.  The complaints 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 us to make false financial statements and seek, among other
things,  compensatory  damages.  On November 7, 2001,  the state court issued an
Order granting  Versata's  Motion to Stay  Proceedings in the derivative  action
until the earlier of the filing of an answer by Versata in the Federal action or
dismissal of that action.

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.

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. 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 Form  10-Q  contains  forward-looking
statements within the meaning of the Private Securities Litigation Reform 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  include,   without  limitation,
statements regarding future revenue,  expenses, and risks. 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  software  and  services  that  accelerate  and  simplify the way
business logic is developed and maintained for enterprise applications. Business
logic is an umbrella term  referring to the aggregated set of business rules and
business processes that govern and define a business' operations. Business logic
is a critical part of today's new generation of enterprise  applications,  which
are  increasingly  built in the Java 2  Enterprise  Edition  (J2EE)  programming
language.

     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


                                       11
<PAGE>
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, 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  or  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 18% of our total revenue
in the third  quarter of 2001 and 21% of our total  revenue  in the same  period
last year. Net revenues from  international  sales  represented 31% of our total
revenue in the nine months ended September 30, 2001 and 21% of our total revenue
in the same period last year.

    Our cost of software  license revenue  consists of royalty payments to third
parties for technology  incorporated into our products,  the cost of manuals and
product documentation,  as well as packaging and distribution costs. Our cost of
service  revenue  consist 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 $173.6  million and $121.3  million as of September  30,
2001 and December 31, 2000, respectively.

    In January,  2001, we implemented a cost cutting  initiative that included a
reduction  in total  staff  of  approximately  70  people,  or 13% of the  total
workforce.  This reduction impacted all departments,  but 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


                                       12
<PAGE>
approximately 107 positions across all departments. We expensed $6.9 million for
restructuring and other expenses in the first quarter of 2001.

    Our company holds an investment in the preferred stock of Tru Markets, Inc.,
a privately  held  corporation.  Our Chairman of the Board of  Directors  held a
membership  interest  in the  general  Partner  of a  Partnership  that  owned a
controlling  interest in the  outstanding  capital stock of TruMarkets,  Inc. 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 loan were  converted to
22,122 shares of preferred stock, or less than 1% of MortgageSight. The value of
these shares is  uncertain,  so no amount has been recorded on the balance sheet
relative to such shares.

    In April  2001,  we  expensed  our  deductible  amount  for  directors'  and
officers'  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).

    In May 2001, we further reduced staff by approximately 50 positions,  across
all departments,  and closed additional field offices.  We expensed $3.5 million
for restructuring and other expenses in the second quarter of 2001.

    In August 2001,  we again  reduced  staff by 20%, 43 positions in the United
States and 17 positions internationally.  We expensed an additional $5.3 million
in restructuring, and other costs.

    In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally. While final costs are not determinable,
we expect to expense a minimum of a million dollars in restructuring expenses in
the fourth quarter of 2001.

    Results of Operations

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

                                    Three Months Ended       Nine Months Ended
                                      September 30,            September 30,
                                    ----------------        --------------------
                                    2001      2000          2001      2000
                                    ----      ----          ----      ----
Revenue:
  Software license                    52%       49%           48%       45%
  Services                            48%       51%           52%       55%
                                    ----      ----          ----      ----
Total revenue                        100%      100%          100%      100%

Cost of Revenue:
  Software license                     1%        2%            1%        2%
  Services                            51%       48%          -41%       52%
                                    ----      ----          ----      ----
Total cost of revenue                 52%       50%           60%       54%
                                    ----      ----          ----      ----
Gross profit                          48%       50%           40%       46%

Operating expense:
  Sales and marketing                 75%       69%           90%       81%
  Product development                 28%       16%           29%       16%
  General and administrative          45%       19%           35%       20%
  Stock-based compensation            15%       26%            5%       54%
  Amortization of intangibles         32%        1%           15%        2%
Restructuring and other expense       82%        1%           55%        1%
                                    ----      ----          ----      ----
Total operating expense              277%      131%          230%      175%

                                    ----      ----          ----      ----
Loss from operations                -229%      -81%         -191%     -127%
Interest expenses, net                 5%        8%            6%        9%
Other, net                            -3%        0%           -1%        0%
                                    ----      ----          ----      ----
Net loss                            -227%      -72%         -186%     -118%
                                    ====      ====          ====      ====

                                       13
<PAGE>
    Revenue

    Total revenue  consists of software  license  revenue and services  revenue.
Total revenue  decreased by $11.4 million,  or 65%, to $6.2 million in the third
quarter of 2001 from $17.6  million in the same period  last year.  For the nine
months ended September 30, 2001,  total revenue  decreased by $13.5 million,  or
32% to $28.1  million  from $41.6  million in the same  period  last year.  This
decrease is  principally  attributable  to the  decrease  in IT spending  due to
overall market conditions, as well as our reduction of our services capacity.

    Software License Revenue

    Software license revenue  decreased by $5.3 million,  or 62% to $3.3 million
in the third  quarter of 2001 from $8.6 in the same  period  last year.  For the
nine months ended September 30, 2001, software license revenue decreased by $5.4
million,  or 29%, to $13.4  million  from $18.8  million in the same period last
year. The decrease is a result of decreased IT spending.

    Services Revenue

    Services revenue  decreased by $6.1 million,  or 67%, to $2.9 million in the
third  quarter of 2001 from $9.0  million in the same period last year.  For the
nine months  ended  September  30,  2001,  services  revenue  decreased  by $8.1
million,  or 35.4% to $14.7  million from $22.8  million in the same period last
year.  This  trend for  professional  services,  and more  specifically  for our
consulting unit,  represents our ongoing efforts to reduce our volatility within
this  business  by pushing  work to our  partner  organization.  This trend will
continue during the fourth quarter, but is substantially completed at this time.

    Cost of Revenue

Total cost of revenue decreased by $5.5 million,  or 63%, to $3.2 million in the
third  quarter of 2001 from $8.8  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 nine months
ended September 30, 2001,  total cost of revenue  decreased by $5.2 million,  or
23%, to $17.1 million,  from $22.3 million in the same period last year. This is
due to a decrease in services  personnel,  and the change in our sales mix. Cost
of services revenue may continue to exceed services revenue in future periods as
we continue to transition our services  capacity to our partner  organization or
if services revenues decrease in future periods.

    Cost of Software License Revenue

    Cost of software license revenue decreased by $297,000 or 79%, to $79,000 in
the third  quarter of 2001 from  $376,000 in the same period last year.  For the
nine months ended September 30, 2001, cost of software license revenue decreased
by $406,000, or 51%, to $385,000 from $791,000 in the same period last year.

    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
$5.2  million,  or 62%, to $3.2  million in the third  quarter of 2001 from $8.4
million in the same period last year.  This decrease 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 nine
months ended  September  30,  2001,  cost of service  revenue  decreased by $4.8
million,  or 22%, to $16.7  million  from $21.5  million in the same period last
year.  During the third quarter of 2001,  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 $5.7 million,  or 25%, to $17.3 million in
the third quarter of 2001 from $23.1  million in the same period last year.  For
the nine months ended September 30, 2001,  operating  expenses decreased by $7.3
million,  or 10%, to $64.8  million  from $72.1  million in the same period last
year.  The majority of the decreases were due to our  cost-cutting  initiatives,
offset by an increase in restructuring and other expenses.



                                       14
<PAGE>
    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 $7.4 million, or 61%, to $4.7million in
the third quarter of 2001 from $12.1  million in the same period last year.  For
the nine months ended September 30, 2001, sales and marketing expenses decreased
by $8.5 million,  or 25%, to $25.3 million from $33.8 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  and third  quarters  of 2001.  While  our  recent
restructurings  and additional  cost  reductions in 2001 will continue to reduce
Sales and Marketing expenses, these expenses may increase over the long term.

    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 decreased by $1.0 million, or 36%, to $1.7 million
in the third quarter of 2001 from $2.7 million in the same period last year. For
the nine months ended September 30, 2001, product  development expense increased
by $1.5  million,  or 23%, to $8.3  million from $6.8 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.
We  anticipate  that  additional  restructurings  in 2001  will  reduce  product
development costs over the short term, although these expenses may increase over
the long term.

    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 decreased by $461,000,
or 14%, to $2.8  million in the third  quarter of 2001 from $3.3  million in the
same period last year.  The decrease in the third  quarter was  primarily due to
the recent reductions in the number of general and administrative employees. For
the nine months ended  September 30, 2001,  general and  administrative  expense
increased by $1.5 million, or 18%, to $9.8 million from $8.3 million in the same
period last year. The increase  during the nine months ended  September 30, 2001
relates to increases in the first  quarter of 2001 compared to the first quarter
of 2000, and was primarily  attributable to internal  growth,  acquisitions  and
other  costs to support a publicly  traded  company.  We expect  that our recent
restructuring  of our  operatoins  will reduce our  general  and  administrative
expenses over the short term,  although these expenss may increase over the long
term.

    Stock-Based Compensation

    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.  The  impact of  variably
accounting for the stock  appreciation right assumed on the acquisition of Verve
is also included in this caption.  Employee stock-based  compensation expense is
amortized  on an  accelerated  basis  over the  vesting  period  of the  related
options,  generally 50 months.  Stock-based  compensation  expense also includes
expenses for stock granted to consultants in exchange for services.  Stock-based
compensation  expense decreased by $3.6 million, or 79%, to $0.9 million for the
third  quarter of 2001 from an expense of $4.5  million in the same  period last
year.  For the nine months ended  September 30, 2001,  stock-based  compensation
expense  decreased by $20.8 million,  or 93%, to $1.5 million from $22.3 million
in the same period last year.  The decreases are related to the impact of option
cancellations for terminated employees.  Additional unvested outstanding options
will  continue to vest over the next 32 months,  which will result in additional
compensation  expense of approximately  $1.3 million in the aggregate in periods
subsequent  to September  30, 2001.  This future  expense will be reduced in the
event of related option cancellations for employee terminations in the future.


                                       15
<PAGE>
    Amortization of Intangibles

    Amortization of intangibles  expense increased by $1.8 million,  or 753%, to
$2.0 million for the third quarter of 2001 from $233,000 in the same period last
year. For the nine months ended September 30, 2001,  amortization of intangibles
expense increased by $3.6 million, or 549%, to $4.3 million from $660,000 at the
same period last year. These increases are related to Versata writing off in the
third  quarter of 2001,  $835,000  in  intangibles  for two  services  companies
acquired in 2000, as well as the additional  amortization expense resulting from
the  acquisition  of Verve,  Inc. in November  2000.  After doing the  requisite
impairment  tests on the intangible  assets arising from the  acquisition of the
two services  companies,  it was determined that the value of these  intangibles
was impaired, as we are reducing our services capacity.

    Restructuring and other expenses

    Restructuring  and other expenses  primarily  relate to severance and office
consolidation  costs.  In March  2001,  we  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 three  quarters of 2001 by  eliminating  certain  employee  positions  and
reducing  office  space and related  overhead  expenses  beginning in the second
quarter of 2001.  With the  reduction  of 46 more  positions in October of 2001.
Obligations  related to subleasing  may continue until 2008 as estimated and are
accrued  for  as  of  September  30,  2001.  We  had  nonrecurring  expenses  of
$5.1million  in the third  quarter of 2001 and $15.6 million for the nine months
ended September 30, 2001. We will incur charges of approximately $1.7 million in
the  fourth  quarter  of 2001 as a result of the  reduction  in force in October
2001.

    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 $303,000 for the
third  quarter of 2001,  a decrease of $1.2  million  compared  to net  interest
income of $1.5 million for the third quarter of 2000.  For the nine months ended
September 30, 2001,  net interest  income was $1.7  million,  a decrease of $2.1
million from net  interest  income of $3.8 million 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
September 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 September 30, 2001, we had $31.7
million in cash and cash equivalents, restricted cash and short-term investments
and $18.2 million in working capital.  Net cash used in operating activities was
$41.8  million in the first nine  months of 2001 and $28.7  million in the first
nine 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.

    Net cash  provided by investing  activities  was $18.9  million in the first
nine months of 2001 and net cash used in investing  activities was $46.1 million
in the first nine months of 2000.  The  increase in cash  provided by  investing
activities  during  the  first  nine  months  of  2001  primarily  reflects  the
maturities of short-term  investments  of $27.9 million in the first nine months
of 2001 compared to purchases of investments of $40.0 million in 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 $2.8 million in the first nine
months of 2001 and $102.1 million in the first nine 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 nine 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
for the remainder of 2001 to suspend employee participation under the plan.

    We believe that our cash and cash  equivalents  and  short-term  investments
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 event
additional  financing is required,  we may not be able to raise it on acceptable
terms or at all.


                                       16
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Weakening  of  World  Wide   Economic   Conditions   Realized  in  the  Internet
Infrastructure Software Market May Result in Decreased Revenues or Lower Revenue
Growth Rates.

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

The Internet  Infrastructure  Software  Market is Highly  Competitive and We May
Lose Market Share to Larger Competitors With Greater Resources.

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

New Versions  and  Releases of Our  Products  May Contain  Errors or Defects and
Result in Loss of Revenue.

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

Our Failure to Accurately Forecast Sales May Lead to a Disappointment of  Market
Expectations.

    Our  Company  uses a  "pipeline"  system,  a common  industry  practice,  to
forecast  sales and trends in our  business.  Our sales  personnel  monitor  the
status of all  proposals,  such as the date when they  estimate  that a customer
will make a purchase  decision and the  potential  dollar amount of the sale. We
aggregate 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.


                                       17
<PAGE>
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 in 2001. 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;

     o    estimates and projections by the investment community; and

     o    fluctuations in our stock trading volume, which is 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;

     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 half 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 half 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.


                                       18
<PAGE>
    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 and State Derivative Action 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  former  officers  and a director  have been named as
defendants  in a private  securities  class action  lawsuits.  In addition,  two
derivative  actions on behalf of our Company were filed against  certain current
and former  officers and directors in California  state court.  Depending on the
outcome of such  litigation,  we may be required to pay  substantial  damages or
settlement  costs,  which could have a material  adverse effect on our financial
condition or results of operations.  Regardless of the outcome of these matters,
we may  incur  substantial  defense  costs  and that  such  actions  may cause a
diversion of management time and attention.

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

Any  Potential  Delisting  of Versata's  Common  Stock From the Nasdaq  National
Market Could Harm Our Business.

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

    Our Company's  common stock has not  maintained a minimum bid price of $1.00
over the last  consecutive  30 trading  days as required by the Nasdaq  National
Market.  On September 27, 2001,  Nasdaq  implemented a moratorium on the minimum
bid price and market value of public float requirements for continued listing on
the Nasdaq Stock Market.  The  moratorium,  which applies to all companies  that
were previously subject to these requirements,  suspends such requirements until
January 2, 2002. Accordingly, Nasdaq will not consider our Company's closing bid
prices or market value of public float before January 2, 2002.

    If Versata's common stock's minimum closing bid price per share is less than
$1.00 for a period  of 30  consecutive  trading  days  after  January  2,  2002,
Versata's  shares may be delisted  following a 90 day notice period,  subject to
Versata's  right to  appeal.  If 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 September 30, 2001, we had an accumulated deficit

                                       19
<PAGE>
of $173.6 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.

    We may require  additional  financing for our  operations.  We have not been
operating on a profitable  basis and have relied on the 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.

If the Versata  Products 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
products and related services in the future. The market for the Versata products
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 products 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

                                       20
<PAGE>
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 further  downturn  in our  software  license  revenue  such as it
occurred during 2001 or a decline in the percentage of customers who renew their
annual  support  agreements,  our services  revenue could become flat or further
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,  particularly IBM. 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 Suite and  Versata  Interaction  Suite in their
products.  It is possible that we will not be able to increase the efficiency of
our  direct  sales  force or other  distribution  channels,  or  secure  license
agreements with additional ISVs on commercially reasonable terms. Moreover, even
if we succeed in these endeavors,  it still may not increase our revenues. If we
invest   resources  in  these  types  of  expansion  and  our  revenues  do  not
correspondingly  increase,  our business,  results of  operations  and financial
condition will be materially and adversely affected.

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

Our Business is Subject to Risks From International Operations.

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

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

    We expect to experience  significant  fluctuations  in our future  quarterly
revenues and operating  results as a result of many factors,  including:  recent
adverse  economic  conditions,  which may increase the likelihood that customers
will unexpectedly orders resulting in revenue shortfalls,  difficulty predicting
the size and timing of customer orders,  particularly as a greater percentage of
our  revenues  has


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<PAGE>
shifted from service revenues to license revenues;  the difficulty in predicting
the  mix  of  distribution  channels,  the  acceptance  of the  introduction  or
enhancement  of our products or our  competitors'  products,  and changes in our
competitors'  product offerings and pricing  policies;  whether we are unable to
develop,  introduce  and market new products on a timely  basis;  and  potential
fluctuations  in demand or prices of our products and  services.  As a result of
all of these factors,  we believe that quarterly  revenues and operating results
are  difficult to forecast and  period-to-period  comparisons  of our results of
operations  are not  necessarily  meaningful  and should  not be relied  upon as
indications of trends or future performance.

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  52% of our  revenue in the third  quarter of 2001 was derived
from the license of software  products.  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.


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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

INTEREST RATE RISKS. Our 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.  Based  on our  balance  of  short-term
investments  at September 30, 2001 our interest  risk,  based on a  hypothetical
increase  in interest  rates of 50 basis  points for the  financial  instruments
included in our portfolio,  would be a decrease of  approximately  $9,700 in the
value of our portfolio.

FOREIGN  CURRENCY  RISKS.  As of  September  30,  2001,  Versata  had  operating
subsidiaries located in the United Kingdom,  Canada, India, Germany,  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 September 30, 2001,  foreign
currency  fluctuations have not had a material impact on our financial  position
or results of operations.


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<PAGE>
                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings

Securities Class Action

Since April 11, 2001,  several  securities  class action  complaints  were filed
against us, and certain of our current and former  officers  and  directors.  In
August 2001 the class action lawsuits were consolidated  before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs  filed an amended class action complaint naming us,
certain  of our former  officers  and a current  director,  as  defendants.  The
amended class action  complaint  alleges  claims under section 10(b) and section
20(a) of the Securities  Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
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,  two  derivative  actions were filed on our behalf  against
certain current and former officers and directors in California state court. The
complaints also name us as a nominal  defendant.  The complaints 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 us to make false financial statements and seek, among other
things,  compensatory  damages.  We have filed a motion for a stay of the action
and,  alternatively,  of discovery.  No ruling has yet been made with respect to
that motion.

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.

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) Use of Proceeds


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<PAGE>
    We have 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.

(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 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.

(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:

    We did not file any reports on Form 8-K/A  during the quarter for which this
report was filed.

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<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 14, 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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