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 July 31, 2002

                                       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)

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

                                   December 31
                            (former fiscal year end)

    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 August  31,  2002,  the  total  number  of  outstanding  shares of the
Registrant's common stock was 7,343,470.
<PAGE>

                                      INDEX

                                                                     PAGE NUMBER
                                                                     -----------

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets at
   July 31, 2002 and at October 31, 2001 (unaudited) ...................  3

Condensed Consolidated Statements of Operations and
   Comprehensive Loss for the Three and Nine Months
   Ended July 31, 2002 and June 30, 2001 (unaudited) ...................  4

Condensed Consolidated Statements of Cash Flows for the
   Nine Months Ended July 31, 2002 and June 30, 2001 (unaudited) .......  5

Notes to Condensed Consolidated Financial Statements ...................  6

Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations .................. 10

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

                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings .............................................. 23

Item 4. Submission of Matters to a Vote of Security Holders ............ 24

Item 6. Exhibits and Reports on Form 8-K ............................... 24

Signatures ............................................................. 26


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                         July 31,    October 31,
                                                           2002         2001
                                                        ---------     ---------

ASSETS
Current assets:
   Cash and cash equivalents                            $  12,408     $  21,871
   Short-term investments                                   5,249         3,036
   Accounts receivable, net                                 3,057         3,975
   Unbilled receivables                                       114           236
   Prepaid expenses and other  assets                       1,010           848
                                                        ---------     ---------
      Total current assets                                 21,838        29,966

Restricted cash                                             5,445         5,445
Property and equipment, net                                 4,512         6,257
Intangibles, net                                            2,469         3,898
Other assets                                                  129           216
                                                        ---------     ---------
      Total assets                                      $  34,393     $  45,782
                                                        =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                     $     726     $   1,062
   Accrued liabilities                                      4,029         6,177
   Accrued restructuring                                      544         1,420
   Deferred revenue                                         5,799         6,246
   Current portion of long-term debt                          167           237
                                                        ---------     ---------
      Total current liabilities                            11,265        15,142

Accrued restructuring, less current portion                 1,022         1,513
Long-term debt, less current portion                          170           337
                                                        ---------     ---------
      Total liabilities                                    12,457        16,992
                                                        ---------     ---------

Stockholders' equity
   Common stock                                                43            42
   Additional paid-in capital                             216,238       217,379
   Treasury stock                                            (109)       (1,383)
   Notes receivable from shareholders                         (23)         (301)
   Unearned stock-based compensation                         (981)       (2,585)
   Accumulated other comprehensive loss                      (174)         (210)
   Accumulated deficit                                   (193,058)     (184,152)
                                                        ---------     ---------
      Total stockholders' equity                           21,936        28,790

                                                        ---------     ---------
      Total liabilities and stockholders' equity        $  34,393     $  45,782
                                                        =========     =========

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           Three Months Ended             Nine Months Ended
                                                                           ------------------             -----------------
                                                                      July 31, 2002  June 30, 2001   July 31, 2002  June 30, 2001
                                                                      ----------------------------   ----------------------------
<S>                                                                        <C>          <C>             <C>          <C>
Revenue:
Software license                                                           $  2,167     $  5,991        $  8,409     $ 18,160
Services                                                                      2,464        5,102           7,173       19,374
                                                                           --------     --------        --------     --------
Total revenue                                                                 4,631       11,093          15,582       37,534
                                                                           --------     --------        --------     --------

Cost of revenue:
Software license                                                                 63          149             169          603
Services (exclusive of stock-based compensation of                            1,854        5,370           5,985       23,191
   $68 and $549 for the three months ended July 31,
   2002 and June 30, 2001, and $353 and $1,802 for the nine months
   ended July 31, 2002 and June 31, 2001, respectively)
                                                                           --------     --------        --------     --------
Total cost of revenue                                                         1,917        5,519           6,154       23,794
                                                                           --------     --------        --------     --------
Gross profit                                                                  2,714        5,574           9,428       13,740
                                                                           --------     --------        --------     --------

Operating expense:
Sales and marketing (exclusive of stock-based compensation                    1,716        8,657           7,048       33,562
   of $70 and $1,297 for the three months ended July 31,
   2002 and June 20, 2001, and $336 and $4,947 for the nine
   months ended July 31, 2002 and June 30, 2001, respectively)
Product development (exclusive of stock-based compensation                    1,228        2,650           4,106        9,509
   of $36 and $297 for the three months ended July 31, 2002
   and June 30, 2001, and $199 and $442 for the nine months ended
   July 31, 2002 and June 30, 2001, respectively)
General and administrative (exclusive of stock-based compensation             1,154        3,045           3,836       11,378
   of $90 and $83 for the three months ended July 31, 2002 and
   June 30, 2001, and $286 and $446 for the nine months ended
   July 31, 2002 and June 30, 2001, respectively)
Stock-based compensation                                                        204          717             766        3,786
Amortization of intangibles                                                     473        1,152           1,488        2,978
Restructuring and other non-recurring expenses (exclusive of the                428        3,504           1,316       12,106
   benefit of $60 and $1,509 for the three months ended July 31, 2002,
   and June 30, 2001, and $408 and $3,851 for the nine months and
   June 30, 2002, relating to the reversal of previously recorded
   stock-based compensation related to employees terminated in
   the restructuring)
                                                                           --------     --------        --------     --------
Total operating expense                                                       5,203       19,725          18,560       73,319

                                                                           --------     --------        --------     --------
Loss from operations                                                         (2,489)     (14,151)         (9,132)     (59,579)
Interest income, net                                                             91          489             334        2,691
Other income (expense), net                                                     (10)         (53)           (108)        (115)
                                                                           --------     --------        --------     --------
Net loss                                                                   ($ 2,408)    ($13,715)       ($ 8,906)    ($57,003)
                                                                           ========     ========        ========     ========

Unrealized gain (loss) on marketable securities                                 (11)         (37)             (8)          21
Foreign currency translation gain (loss)                                       (687)         (195)            44         (472)

                                                                           --------     --------        --------     --------
Comprehensive loss                                                         ($ 3,106)    ($13,947)       ($ 8,870)    ($57,454)
                                                                           ========     ========        ========     ========

Basic and diluted net loss per share                                       ($  0.34)    ($  2.05)       ($  1.27)    ($  8.61)
                                                                           ========     ========        ========     ========

Weighted-average common shares                                                7,145        6,694           7,024        6,619
                                                                           ========     ========        ========     ========
</TABLE>

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


                                       4
<PAGE>

                                  VERSATA, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended
                                                                                ---------------------------
                                                                                July 31,           June 30,
                                                                                  2002               2001
                                                                                --------           --------
<S>                                                                             <C>                <C>
Cash flows from operating activities:
    Net loss                                                                    $ (8,906)          $(57,003)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
           Depreciation and amortization                                           3,220              5,250
           Provision for doubtful accounts                                           227              2,931
           Write-down of leashold improvements and office furniture
             due to restructuring                                                   --                2,894

          Stock-based compensation expense                                           766              3,786
           Cancellation of promissory note                                           263                598
          Change in operating assets and liabilities:

           Accounts receivable                                                       785             (1,550)
           Unbilled receivables                                                      122              1,494
           Prepaid expenses and other assets                                        (162)             1,250
           Restricted cash                                                           --                (162)
           Other assets                                                               15              1,033
           Accounts payable and accrued liabilities                               (2,516)            (4,128)
           Accrued restructuring                                                  (1,438)             1,956
           Deferred revenue                                                         (447)             1,108
                                                                                --------           --------
                       Net cash used in operating activities                      (8,071)           (40,543)
                                                                                --------           --------

Cash flows from investing activities:

    Net change in short-term investments                                          (2,216)            29,725
    Purchase of property and equipment                                               (35)           (11,572)
    Proceeds from sale of property and equipment                                    --                  283
    Increase in notes receivable from related parties                               --                   26

    Net cash used in connection with acquisition, net of cash acquired              --               (1,884)
                                                                                --------           --------
                       Net cash (used in) provided by investing activities        (2,251)            16,578
                                                                                --------           --------

Cash flows from financing activities:
     Principal payments on capital lease obligations and equipment loan             (166)              (177)
     Proceeds from issuance of common stock under employee stock
       purchase plan                                                                --                1,429
     Proceeds from exercise of stock options and warrants                            107                330
     Repurchase of common stock from stockholders                                                       (24)
     Purchase of treasury stock from former officer                                 --                 (464)
     Proceeds from sale of common stock held by former officer                       976               --
     Net payments from stockholders on notes receivable                                0                746
     Loans provided to stockholders                                                  (94)              (375)
                                                                                --------           --------
                       Net cash provided by financing activities                     823              1,929
                                                                                --------           --------

Effects of exchange rate changes on cash                                              36               (195)
                                                                                --------           --------
                          Decrease in cash and cash equivalents                   (9,463)           (22,231)

Cash and cash equivalents at beginning of period                                $ 21,871           $ 42,837
                                                                                --------           --------
Cash and cash equivalents at end of period                                      $ 12,408           $ 20,142
                                                                                ========           ========

Supplemental disclosures of cash flow information
                                                                                --------           --------
Cash paid during the period for interest                                        $     64           $     76
                                                                                ========           ========
Supplemental schedule of noncash investing and financing activities
                                                                                                   --------
Issuance of common stock in connection with acquisition                            --              $  4,503
                                                                                --------           ========
Assumption of stock options in connection with acquisition                         --              $  2,098
                                                                                ========           ========
Notes receivable canceled in exchange for repurchase of common stock
from stockholders                                                                  --              $  1,518
                                                                                ========           ========
Acquisition of treasury stock in exchange for cancellation of note                 --              $    919
                                                                                ========           ========
</TABLE>

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


                                       5
<PAGE>

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

1. The Company

     Versata  was  incorporated  in  California  on  August  27,  1991,  and was
reincorporated  in the State of Delaware on February  24,  2000.  Versata,  Inc.
provides  a  business  logic  management   system  that  enables  the  creation,
execution,  change and re-use of business logic (the "heart" of the application)
for  companies  to build  large,  distributed  applications  in the J2EE (Java 2
Enterprise  Edition)  infrastructure.   Versata,  Inc.  provides  a  declarative
approach for transaction and process logic,  which enables  companies to deliver
business logic as a key strategic asset of their enterprise architecture.

     On December  31,  2001,  Versata  announced a change in its fiscal year and
from  December  31 to October  31. The change was  effective  for the  ten-month
period ended October 31, 2001.  Versata had previously  released results for the
three months ended March 31, June 30 and September 20 of 2001.  The  comparisons
in this quarterly report will be for the three and nine month periods ended July
31, 2002 and June 30, 2001.  The Company will not be  restating  prior  quarters
results  as this is not  practicable  and  cannot be cost  justified.  Versata's
business is not seasonal, and we believe that the results as previously reported
are comparable.

On May 17,  2002,  Versata  stockholders  approved a reverse  split of Versata's
common stock, and on May 24, 2002 the Company  implemented a one for six reverse
stock split.  Although  there were no  guarantees,  the reverse  stock split was
implemented  to allow the Company's  common stock to trade above $1.00 per share
minimum bid price as required by NASDAQ  Marketplace  Rules,  and therefore,  to
help the Company to  continue  its listing on the NASDAQ  National  Market.  All
shares and per share  amounts were restated to give effect to this reverse stock
split. On August 16, 2002, Versata received notification from the NASDAQ Listing
Qualification   Panel  that  the  Company  was  in  full   compliance  with  the
requirements  necessary for continued  listing on the NASDAQ national Market. In
accordance  with the  decision,  the Company  will  remain  listed on the NASDAQ
National Market and the hearing file was closed.

     Management   believes  our  cash  and  cash   equivalents   and  short-term
investments  will be sufficient to meet 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.

2. Interim Financial Information and Basis of Presentation

     The accompanying  unaudited condensed  consolidated financial statements as
of July 31, 2002, and for the three and nine months ended July 31, 2002 and June
30, 2001, 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,
located in North America, Europe,  Australia,  and India. Versata,  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 as of
July 31, 2002,  and the  operating  results for the three and nine month periods
ended July 31, 2002 and June 30, 2001, respectively, and cash flows for the nine
months  ended July 31, 2002 and June 30,  2001,  respectively.  These  unaudited
condensed  consolidated  financial statements should be read in conjunction with
the Company's audited  consolidated  financial  statements and notes for the ten
month period ended October 31, 2001.


                                       6
<PAGE>

3. Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal  of  Long-Lived   Assets".  SFAS  No.  144  supersedes  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be  Disposed  Of." SFAS No. 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 adopted of SFAS No. 144 effective November 1, 2001. The
adoption  did  not  have a  significant  impact  on the  Company's  consolidated
financial statements.

In November 2001, the FASB Emerging Issues Task Force ("EITF") issued EITF Topic
D-103,  Income  Statement   Characterization  of  Reimbursements   Received  for
out-of-pocket  Expenses  Incurred,  renamed issue 01-14 in January  2002,  which
requires  companies  to report  reimbursements  of  "out-of-pocket"  expenses as
revenue and the corresponding  expenses incurred as costs of revenues within the
income  statement.  We adopted this provision during the current fiscal year and
added $158,000 and $375,000 in services revenue and cost of services revenue for
the  three and nine  months  ended  July 31,  2002,  respectively.  We have also
reclassified  $234,000 and $619,000 for the three and nine months ended June 30,
2001. Prior to the adoption of Issue 01-14, these costs were netted.

In June 2002,  the  Financial  Accounting  Standards  Board issued SFAS No. 146,
Accounting  for Exit or Disposal  Activities,  or SFAS 146.  SFAS 146  addresses
significant  issues  regarding the  recognition,  measurement,  and reporting of
costs  that  are  associated  with  exit  and  disposal  activities,   including
restructuring  activities that are currently  accounted for under EITF No. 94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including Certain Costs Incurred in a Restructuring).  The
scope of SFAS 146 also includes  costs related to terminating a contract that is
not  a  capital  lease  and   termination   benefits  that   employees  who  are
involuntarily   terminated  receive  under  the  terms  of  a  one-time  benefit
arrangement  that  is  not  an  ongoing  benefit  arrangement  or an  individual
deferred-compensation  contract. SFAS 146 will be effective for exit or disposal
activities that are initiated  after December 31, 2002 and early  application is
encouraged.  We will adopt SFAS 146 during the quarter  ending January 31, 2003.
The  provisions  of EITF No. 94-3 shall  continue to apply for an exit  activity
initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the
adoption  of SFAS 146.  The  effect  on  adoption  of SFAS 146 will  change on a
prospective basis the timing of when  restructuring  charges are recorded from a
commitment date approach to when the liability is incurred.

4. Restructuring and Other Non-Recurring Expenses

     During  the  three  months   ending  July  31,  2002,   we  continued   our
restructuring  efforts,  and  reduced  our  US-based  workforce  by twenty  four
employees. All departments were impacted by this reduction.

     For the nine months ending July 31, 2002, our restructuring costs included,
in addition to the reductions above:

     o   a  settlement  of a note  receivable  with  a  former  executive  which
         resulted  in  a  charge  of  $192,000   to   restructuring   and  other
         non-recurring costs.

     o   additional staff reductions totaling forty two employees; impacting all
         Company  departments and including  nineteen positions in the Americas;
         seventeen positions in India and six positions in Europe.


                                       7
<PAGE>

     The  following  table  summarizes  the  Company's  restructuring  and other
nonrecurring expenses, by geographic region (in thousands):

<TABLE>
<CAPTION>
                                                    Employee   Office Closure and  Other Costs         Total
                                                   Severance    Subleasing Costs

<S>                                                 <C>              <C>              <C>              <C>
Accrual balance, October 31, 2001                      905            1,845              346            3,096
                                                    ------           ------           ------           ------
United States additions                                205             --               --                205
Europe, Middle East, Africa (EMEA)
   additions                                           104             --               --                104
                                                    ------           ------           ------           ------
Consolidated expense                                   309             --               --                309

Cash payment in the first quarter, 2002              1,014              592              129            1,735
                                                    ------           ------           ------           ------

Accrual balance, January 31, 2002                   $  200           $1,253           $  217           $1,670
                                                    ------           ------           ------           ------

United States additions                                238               41              192              471
Europe, Middle East, Africa (EMEA)
   additions                                            78               30             --                108
                                                    ------           ------           ------           ------

Consolidated expense                                   316               71              192              579

Noncash portion in the second quarter, 2002           --               --                192              192
Cash payments in the second quarter, 2002              405             --                 23              428
                                                    ------           ------           ------           ------
Accrual balance, April 30, 2002                     $  111           $1,324           $  194           $1,629
                                                    ------           ------           ------           ------

United States additions                                400             --               --                400
Europe, Middle East, Africa (EMEA)
   additions                                            28             --               --                 28
                                                    ------           ------           ------           ------
Consolidated expense                                   428             --               --                428

Noncash portion in the third quarter, 2002
Cash payments in the third quarter, 2002               290               70              131              491
                                                    ------           ------           ------           ------
Accrual balance, July 31, 2002                      $  249           $1,254           $   63           $1,566
                                                    ------           ------           ------           ------
</TABLE>

    Subsequent to October 31, 2001, there have not been any significant  changes
to the Company's  estimate of the total costs of prior  restructuring  and other
nonrecurring activities.

5.  Impairment of Intangible Assets

    During the  ten-month  period  ended  October  31,  2001,  we  performed  an
impairment  assessment of the identifiable  intangibles and goodwill recorded in
connection  with the  acquisition  of Verve,  Inc. The  assessment was performed
primarily due to the significant  sustained decline in the Company's stock price
since the valuation  date of the shares issued in the Verve,  Inc.  acquisition,
resulting  in the net book value of its assets  prior to the  impairment  charge
significantly exceeding the Company's market capitalization, the overall decline
in the industry growth rates, and projected  operating results. As a result, the
Company recorded a $4.1 million  impairment  charge to reduce goodwill and other
identifiable  intangibles.  The charge was based upon the  estimated  discounted
cash flows over the remaining  useful life of the goodwill using a discount rate
of 20%. The assumptions  supporting the cash flows, including the discount rate,
were determined  using the Company's best estimates as of such date. There is no
remaining goodwill balance at July 31, 2002.


                                       8
<PAGE>

    In July 2001,  the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards No. 141 ("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.  In  addition,  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 the  impairment  of  existing  goodwill  and other
intangibles.  Versata  adopted  SFAS No. 142  effective  November  1, 2001.  The
adoption of SFAS No. 142 did not have a significant  impact on our  consolidated
financial  statements as we had no goodwill recorded on our balance sheet on the
date of adoption.

The following table presents  comparative  information  showing the effects that
non-amortization  of goodwill would have had on the statements of operations for
the three and nine month periods ended June 30, 2001 (in  thousands,  except per
share amounts).

<TABLE>
<CAPTION>
                                                           Three Months Ended                    Nine Months Ended
                                                     July 31, 2002     June 30, 2001     July 31, 2002    June 30, 2001
<S>                                                  <C>                <C>                <C>               <C>
Reported net loss                                    $     (2,408)      $   (13,715)       $  (8,906)        $  (57,003)
Goodwill amortization                                      --                   628             --                1,538
                                                     ------------       -----------        ---------         ----------
Adjusted net loss                                    $     (2,408)      $   (13,087)       $  (8,906)        $  (55,465)
Basic and diluted net loss per share                        (0.34)            (2.05)           (1.27)             (8.61)
Goodwill amortization                                      --                  0.09             --                 0.23
                                                     ------------       -----------        ---------         ----------
Adjusted basic and diluted net loss per share        $      (0.34)      $     (1.96)       $   (1.27)        $    (8.38)
</TABLE>

Intangible  assets  consist of purchased  technology of $5.7  million,  which is
being amortized on a straight-line basis over the expected life of 3 years.

6.  Net Loss Per Share

    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, and incremental  common or preferred shares issuable upon the exercise of
stock options and warrants.

         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,  except per
share amounts):

<TABLE>
<CAPTION>
                                                      Three Months Ended              Nine Months Ended
                                                 ----------------------------    ----------------------------
                                                 July 31, 2002   June 30, 2001   July 31, 2002   June 30, 2001
                                                 ----------------------------    ----------------------------
<S>                                               <C>             <C>              <C>           <C>
Numerator:
       Net Loss                                      ($2,408)      ($13,715)        ($8,906)      ($57,003)
                                                  ----------      ---------        --------      ---------

Denominator:
       Weighted average shares outstanding             7,342          7,150           7,286          6,959
       Weighted average unvested shares of
         common stock subject to repurchase             (197)          (456)           (262)          (340)
                                                  ----------      ---------        --------      ---------

       Denominator for basic and diluted
         calculation                                   7,145          6,694           7,024          6,619

Basic and diluted net loss per share              $    (0.34)     $   (2.05)       $  (1.27)     $   (8.61)
                                                  ==========      =========        ========      =========
</TABLE>


                                       9
<PAGE>

7. 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  sought an  unspecified
amount of damages on behalf of persons who  purchased our stock during the class
period.  In July 2002, we reached an agreement  with the plaintiffs in principle
to settle the class action lawsuit to avoid protracted and expensive  litigation
and the  uncertainty of trial.  The agreement for settlement does not constitute
any admission of wrongdoing on the part of Versata or the individual defendants.
Our  settlement  calls for a payment of $9.75  million in cash by our  insurance
carriers and the issuance of 200,000 shares of our common stock.  The settlement
agreement is subject to execution of  definitive  settlement  document and Court
approval. Additional class members may opt out of the settlement and bring their
own suits, which could result in additional costs to the Company and distraction
to  management.  Accordingly,  we expensed the minimum  obligation  equal to the
deductible amount of directors' and officers' liability insurance of $350,000 in
April  2001.  Additional  amounts,  if any,  will be  recognized  when  they are
probable and estimable.

State Derivative Action

Since June 11, 2001,  two  derivative  actions were filed on our behalf  against
certain  current and former  officers and directors in Superior Court of Alameda
County,  California.  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  the  Company  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 consolidated  derivative action until the earlier of the
filing  of an answer by  Versata  in the  Federal  action or  dismissal  of that
action.  In July 2002, in  conjunction  with the  settlement  of the  securities
litigation  discussed  above,  we reached an agreement to settle the  derivative
action.  The  agreement  for  settlement  does not  constitute  any admission of
wrongdoing on the part of Versata or the individual  defendants.  Our settlement
calls for a certain  corporate  therapeutics to be implemented or continue to be
implemented by the Company.  The settlement agreement is subject to execution of
definitive settlement document and Court approval

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS
        OF OPERATIONS

The  following  discussion  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  1955.  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 projceted 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.

    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 in late 1995 through
early 1998.  In September  1996,  we began  development  of our first  Web-based
software  product,  which we began shipping  commercially  in September 1997. In
September  1998, we introduced the first  generation of what is now our suite of
software products.  To date, we have licensed our products and provided services
to approximately 500 customers around the world.


                                       10
<PAGE>

    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 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.

    On December  31,  2001,  Versata  announced a change in its fiscal year from
December 31 to October 31. The change was  effective  for the  ten-month  period
ended October 31, 2001.  Versata had previously  released  results for the three
months ended March 31, June 30 and September 30 of 2001. The comparisons in this
quarterly  report  will be for the three and nine month  periods  ended July 31,
2002 and June 30, 2001. We will not be restating prior quarters  results as this
is not  practicable  and cannot be cost  justified.  Versata's  business  is not
seasonal, and we believe that the results as previously reported are comparable.

    Net revenues from  international  sales represented 27% and 22% of our total
revenue for the three and nine months ended July 31, 2002 and 42% and 31% of our
total revenue for the three and nine months ended June 30, 2001.

    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,  distribution  and  electronic
delivery 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.  In accordance with Topic
D-103,  we have also begun  charging  reimbursable  expenses to cost of services
revenue.  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 $193.1 million and $184.2 million at July 31, 2002 and at
October 31, 2001, respectively.

    In January 2002, we eliminated  40 positions,  or 23% of our  workforce.  We
expensed $309,000 to restructuring and other non-recurring  expenses relating to
this reduction.

    We eliminated  another two positions in April of 2002, and expensed $579,000
to restructuring and other expenses.

    In May 2002, we  eliminated  another 24 positions and expensed an additional
$428,000 in restructuring and other non-recurring expenses.


                                       11
<PAGE>

Segment Information

     Versata identifies its operating segments based on the business activities,
management responsibility and geographical location. For both periods presented,
Versata operated in a single business  segment,  primarily in the United States.
Revenue  for  geographic  regions  reported  below is based upon the  customers'
locations.  Following  is a summary  of the  geographic  information  related to
revenues (in thousands):

<TABLE>
<CAPTION>
                                           Three Months Ended                      Nine Months Ended
                                  -----------------------------------     ----------------------------------
                                     July 31, 2002      June 30, 2001       July 31, 2002      June 30, 2001
                                  --------------------------------------------------------------------------
<S>                                    <C>                <C>                <C>                <C>
Software license revenue:
              United States            $   1,441          $   2,474          $    6,504         $   10,554
              Europe                         726              3,517               1,905              6,924
              Other international             --                 --                  --                682
                                       ---------          ---------          ----------         ----------
                                           2,167              5,991               8,409             18,160

Services revenue:
              United States            $   1,921          $   3,980          $    5,661         $   15,464
              Europe                         543              1,122               1,512              3,137
              Other international             --                 --                  --                773
                                       ---------          ---------          ----------         ----------
                                           2,464              5,102               7,173             19,374

Total revenue:
              United States            $   3,362          $   6,454          $   12,165         $   26,018
              Europe                       1,269              4,639               3,417             10,061
              Other international             --                 --                  --              1,455
                                       ---------          ---------          ----------         ----------
                                       $   4,631         $   11,093          $   15,582         $   37,534
                                       =========         ==========          ==========         ==========
</TABLE>

    Long-lived assets, consisting of intangibles and property and equipment, are
based on the location of the assets,  or, for  intangibles,  the location of the
entity owning the intangible  asset.  As of July 31, 2002, and October 31, 2001,
approximately  $6.5  million and $9.4  million,  respectively,  of  intangibles,
property and equipment were located in the United States, $337,000 and $644,000,
respectively,  were located in Europe,  and $95,000 and $107,000,  respectively,
were located elsewhere.


                                       12
<PAGE>

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:

                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                    Three Months Ended                    Nine Months Ended
                               -----------------------------     ---------------------------------
                               July 31, 2002    June 30, 2001      July 31, 2002     June 30, 2001
                               --------------   -------------    --------------      -------------

<S>                                     <C>            <C>                <C>                <C>
Revenue:
  Software license                       47%            54%                54%                48%
  Services                               53%            46%                46%                52%
                               --------------   ------------     --------------      -------------
Total revenue                           100%           100%               100%               100%

Cost of revenue:
  Software license                        1%             1%                 1%                 2%
  Services                               40%            48%                38%                61%
                               --------------   ------------     --------------      -------------
Total cost of revenue                    41%            49%                39%                63%
                               --------------   ------------     --------------      -------------
Gross profit                             59%            51%                61%                37%

Operating expense:
  Sales and marketing                    37%            78%                45%                89%
  Product development                    27%            24%                26%                25%
  General and administrative             25%            27%                25%                30%
  Stock-based compensation                4%             6%                 5%                10%
  Amortization of intangibles            10%            10%                10%                 8%
  Restructuring and other
    non-recurring expense                 9%            32%                 8%                32%
                               --------------   ------------     --------------      -------------
Total operating expense                 112%           177%               119%               194%

Loss from operations                    (54)%         (128)%              (59)%             (159)%
Interest expenses, net                    2%             4%                 2%                 7%
Other income (expense), net              --             --                 (1)%               --
                               --------------   ------------     --------------      -------------
Net loss                                (52)%         (124)%              (58)%             (152)%
                               ==============   ============     ==============      =============
</TABLE>

Revenue

    Total revenue  consists of software  license  revenue and services  revenue.
Total revenue  decreased by $6.5  million,  or 58%, to $4.6 million in the three
months  ended July 31, 2002 from $11.1  million for the three  months ended June
30, 2001.  For the nine months ended July 31, 2002,  total revenue  decreased by
$22.0  million,  or 58%, to $15.6 million from $37.5 million for the nine months
ended June 30, 2002.

Software License Revenue

    Software license revenue  decreased by $3.8 million,  or 64% to $2.2 million
in the three  months  ended July 31, 2002 from $6.0 million for the three months
ended June 30, 2001. For the nine months ended July 31, 2002,  software  license
revenue  decreased by $9.8  million,  or 54%, to $8.4 million from $18.2 million
for  the  nine  months  ended  July  31,  2002.   The  decrease  is  principally
attributable to a decrease in IT spending and overall market conditions.


                                       13
<PAGE>

Services Revenue

    Services revenue  decreased by $2.6 million,  or 52%, to $2.5 million in the
three  months  ended July 31, 2002 from $5.1  million for the three months ended
June 30, 2001. For the nine months ended July 31, 2002,  total services  revenue
decreased by $12.2  million,  or 63% to $7.2 million from $19.4  million for the
nine months ended June 30, 2001. This trend for professional  services, and more
specifically for our consulting  unit,  represents our ongoing efforts to reduce
our volatility  within this business by employing our partner  organizations and
accepting only profitable assignments.  Our services revenue is also impacted by
the level of our new software sales, which have decreased.

     We  adopted  EITF  Issue  01-14,   Income  Statement   Characterization  of
Reimbursements  Received for  out-of-pocket  Expenses  Incurred,  which requires
companies to report  reimbursements of  "out-of-pocket"  expenses as revenue and
the  corresponding  expenses  incurred  as costs of  revenues  within the income
statement,  this fiscal year. In so doing, we increased  revenue by $158,000 and
$375,000  for the three and nine months  ended July 31,  2002,  and $234,000 and
$619,000 for the three and nine months ended June 30, 2001.

Cost of Revenue

    Total cost of revenue decreased by $3.6 million,  or 65%, to $1.9 million in
the three  months  ended July 31, 2002 from $5.5  million  for the three  months
ended June 30,  2001.  For the nine months  ended July 31,  2002,  total cost of
revenue  decreased by $17.6  million,  or 74% to $6.2 million from $23.8 million
for the nine months ended June 30, 2001.  This decrease was mainly  attributable
to  management's  restructuring  plan  initiated  early 2001,  which resulted in
savings in personnel,  subcontracting,  and office costs.  We achieved  positive
margins in our  services  organization  for the third  quarter in a row, for the
nine months  ended July 31,  2002,  though it is not  guaranteed  that this will
continue.

Cost of Software License Revenue

    Cost of license  revenue  consists of royalties  paid to third party vendors
for use of their  product  embedded in ours.  Cost of software  license  revenue
decreased  by $86,000,  or 58%, to $63,000 for the three  months  ended July 31,
2002 from $149,000 for the three months ended June 30, 2001. For the nine months
ended July 31, 2002, cost of license  revenue went down by $434,000,  or 72%, to
$169,000 from $603,000 for the nine months ended July 31, 2001.  The decrease is
a result of declining revenues and the result of us selling non  royalty-bearing
product.

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
$3.3  million,  or 65%, to $1.9 million for the three months ended July 31, 2002
from $5.4 million for the three months ended June 30, 2001.  For the nine months
ended July 31, 2002,  cost of services  revenue went down by $17.2  million,  or
74%, to $6.0 million from $23.2 million for the nine months ended June 30, 2001.
This  decrease  is as a result of the  restructuring  initiatives  initiated  by
management in January 2001 in response to the revenue declines.

     Cost of services  revenue  includes  $158,000 and $375,000 in  reimbursable
expenses  for the three and nine months  ended July 31,  2002,  and $234,000 and
$619,000 in  reimbursable  expenses for the three and nine months ended June 30,
2001 in accordance EITF Issue 01-14.

Operating Expenses

    Operating expenses  decreased $14.5 million,  or 74%, to $5.2 million in the
three months  ended July 31, 2002 from $19.7  million for the three months ended
June 30,  2001.  For the nine months  ended July 31,  2002,  operating  expenses
decreased by $54.8 million,  or 75%, to $18.6 million from $73.3 million for the
nine months  ended June 30,  2001.  The  majority of the decrease was due to our
cost-cutting initiatives and reductions in our workforce.

Sales and Marketing

    Sales and marketing expense consists of salaries,  commissions,  and expense
from our sales offices,  travel and entertainment  expense,  marketing programs,
and recruitment expenses. Sales and marketing expense decreased by $6.9 million,
or 80%,  to $1.7  million  in the three  months  ended  July 31,  2002 from $8.7
million for the three months ended June 30, 2001. For the nine months


                                       14
<PAGE>

ended July 31, 2002, sales and marketing expenses decreased by $26.5 million, or
79%, to $7.0 million from $33.6 million for the nine months ended June 30, 2001.
These  decreases were largely  attributable  to a $4.1 million and $13.9 million
reduction  in salary and benefit  expense  for the three and nine months  ending
July 31, 2002 due to the reduction in workforce during 2001. In addition,  these
expenses were lower as a result of decreased  spending on marketing programs and
other  expenses of $1.1  million and $4.7  million for the three and nine months
ending July 31, 2002.

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 $1.4 million,  or
54%, to $1.2  million in the three  months ended July 31, 2002 from $2.7 million
for the three  months  ended June 30,  2001.  For the nine months ended July 31,
2002,  product  development  costs  decreased by $5.4  million,  or 57%, to $4.1
million from $9.5 million for the nine months ended June 30, 2001.  All software
development costs are expensed in the period incurred.  The decrease in costs is
mainly attributable to the reduction in workforce in 2001. We anticipate reduced
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 bad debt
expense.  General and administrative  expense decreased by $1.9 million, or 62%,
to $1.2  million in the three  months  ended July 31, 2002 from $3.0 million for
the three months  ended June 30, 2001.  For the nine months ended July 31, 2002,
general and  administrative  costs  decreased by $7.5  million,  or 66%, to $3.8
million  from  $11.4  million  for the three  months  ended June 30,  2001.  The
decrease  was due to a reduction  in salary and benefit  expense of $933,000 and
$2.8 million for the three and nine months ending July 31, 2002 versus the three
and nine months  ending June 30, 2001  related to the recent  reductions  in the
number of general and  administrative  employees.  Versata terminated 17 general
and administrative employees, from 32 employees at June 2001 to 15 at July 2002.
In  addition,  bad debt  expense  decreased by $321,000 and $2.1 million for the
three and nine  months  ending  July 31,  2002  versus the three and nine months
ending June 30, 2001 as a result of our lower sales volume.

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.   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 $513,000,  or 72%, to
$204,000 for the three  months  ended July 31, 2002 from  $717,000 for the three
months ended June 30, 2001. For the nine months ended July 31, 2002, stock-based
compensation  expense  decreased  $3.0  million,  or 80%, to $766,000  from $3.8
million for the nine months ended June 30, 2001. Additional unvested outstanding
options  will  continue  to vest over the next 22 months,  which will  result in
additional  compensation  expense of approximately  $981,000 in the aggregate in
periods  subsequent to July 31, 2002. This future expense will be reduced in the
event of related option cancellations for employee terminations.

Amortization of Intangibles

    Amortization  expense  decreased  by  $679,000,  or 59%, to $473,000 for the
three  months  ended July 31, 2002 from $1.2  million for the three months ended
June 30,  2001.  For the  nine  months  ended  July 31,  2002,  amortization  of
intangibles decreased by $1.5 million, or 50%, to $1.5 million from $3.0 million
for the nine  months  ended  June 30,  2001.  This  decrease  is the  result  of
Versata's goodwill impairment charge of $4.1 million recognized in October 2001.

Restructuring and Other Non-Recurring Expenses

   During the three months ended July 31, 2002, we continued  our  restructuring
efforts,  which resulted in a reduction of 24 employees.  Restructuring  expense
for the three months ended July 31, 2002 was  $428,000,  down $3.1  million,  or
88%,  from $3.5 million for the three  months ended June 30, 2001.  For the nine
months ended July 31, 2002,  restructuring  expenses decreased $10.8 million, or
89%, to $1.3 million from $12.1 million for the nine months ended June 30, 2001.
The reduction occurred as most of the initial expense taken for office closures,
fixed asset  write-offs,  and larger  reductions in force which occurred  during
fiscal 2001.


                                       15
<PAGE>

Interest Income, Net

    Interest  income,  net, is primarily  comprised of interest  income from our
cash and investments. We had net interest income of $91,000 for the three months
ended July 31, 2002, a decrease of  $398,000,  or 81%,  compared to net interest
income of $489,000 for the three months ended June 30, 2001. For the nine months
ended July 31, 2002,  interest income,  net, decreased $2.4 million,  or 88%, to
$334,000  from  $2.7  million  for the nine  months  ended  June 30,  2001.  The
reduction in interest  income is  primarily  due to our reduced cash balance and
lower interest rates earned.

Provision for Income Taxes

    We have incurred  operating  losses for all periods from  inception  through
July 31, 2002. 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
aggregate  net proceeds of $167.2  million.  We have also funded our  operations
through equipment  financing.  As of July 31, 2002, we had $17.7 million in cash
and cash  equivalents  and short-term  investments  and $10.6 million in working
capital.  Net cash used in  operating  activities  was $8.1  million in the nine
months ended July 31, 2002, and $40.6 million for the nine months ended June 30,
2001.  Net cash flows used by operating  activities  in each period  reflect net
losses,  offset  by  non-cash  expenses  including   stock-based   compensation,
depreciation and amortization,  and provision for doubtful accounts.  The use of
operating cash was also impacted by changes in working capital.

    Net cash used in investing activities purchase was $2.2 million for the nine
months  ending July 31, 2002.  The decrease is primarily  due to the maturity of
short-term investments.  For the nine months ending June 2001, net cash provided
by investing activities was $29.7 million.

    Net cash  provided by financing  activities  was $823,000 in the nine months
ended July 31, 2002,  as compared to $1.9 million for the nine months ended June
30, 2001.  The decrease  from last year is due to proceeds  from the issuance of
stock under the employee stock purchase plan in 2001. Versata suspended employee
participation in this plan in August 2001.

    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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

    Versata's  discussion and analysis of its financial condition and results of
operations are based upon Versata's  consolidated  financial  statements,  which
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America.  The preparation of these financial  statements
requires  Versata to make  estimates  and  judgments  that  affect the  reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  On an on-going basis,  Versata evaluates its
estimates.  Versata bases its estimates on historical  experience and on various
other  assumptions that are believed to be reasonable  under the  circumstances.
Actual results may differ from these estimates  under  different  assumptions or
conditions.

    We believe the following are critical accounting policies and estimates used
in the preparation of our condensed consolidated financial statements.

Revenue Recognition

    We derive revenue from two sources as follows: (i) sale of software licenses
to end users, value added resellers (VARs),  distributors,  system  integrators,
independent  software  vendors,  and  application  service  providers;  and (ii)
services which include consulting, training, and post-contract customer support.
We recognize  revenue in accordance  with Statement of Position 97-2,  "Software
Revenue  Recognition." We record 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, we provide 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, we recognize revenue for the delivered elements based upon
the residual method.  Undelivered  elements  consist  primarily of


                                       16
<PAGE>

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.  We recognize  revenue allocated to post-contract
customer  support  ratably over the period of the contracts,  which is generally
twelve months. For revenue related to consulting services,  we recognize revenue
as the related  services are performed.  In instances  where services are deemed
essential to the software, both the software license fee and consulting fees are
recognized using the percentage-of-completion method of contract accounting.

Determining Functional Currencies for the Purpose of Consolidation

    We  have  several  foreign   subsidiaries,   which  together  accounted  for
approximately  27% of our net revenues for the three months ended July 31, 2002,
and 6% of our assets and liabilities as of July 31, 2002.

      In preparing our  consolidated  financial  statements,  we are required to
translate the financial statements of the foreign subsidiaries from the currency
in which they keep their accounting records,  generally the local currency, into
United States dollars.  This process results in exchange gains and losses which,
under the relevant accounting guidance, are either included within the statement
of  operations  or as a  separate  part  of our net  equity  under  the  caption
"cumulative translation adjustment."

    If any subsidiary's  functional currency is deemed to be the local currency,
then  any gain or loss  associated  with the  translation  of that  subsidiary's
financial statements is included in cumulative  translation  adjustments.  If we
dispose of any of our subsidiaries,  any cumulative  translation gains or losses
would be realized in our statement of operations. If we determine that there has
been a change in the  functional  currency of a subsidiary  to the United States
dollar,  any translation  gains or losses arising after the date of change would
be included within our statement of operations.

    The  magnitude of these gains or losses is dependent  upon  movements in the
exchange rates of the foreign  currencies in which we transact  business against
the United States  dollar.  These  currencies  include the United  Kingdom Pound
Sterling,  the Euro,  the Indian Rupee,  Australian  and Canadian  dollars.  Any
future  translation  gains or losses  could be  significantly  higher than those
noted in each of these quarters.  In addition,  if we determine that a change in
the functional  currency of one of our subsidiaries has occurred at any point in
time, we would be required to include any  translation  gains or losses from the
date of change in our statement of operations.

Allowance for Doubtful Accounts

    We  must  make  estimates  as to  the  overall  collectibility  of  accounts
receivable  and provide an  allowance  for amounts  deemed to be  uncollectible.
Specifically,  we  analyze  our  accounts  receivable  and  historical  bad debt
pattern, customer concentrations,  customer credit-worthiness,  current economic
trends and changes in its customer payment terms when evaluating the adequacy of
our allowance for doubtful accounts.

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 and continues in 2002,  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


                                       17
<PAGE>

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 2001 and first  quarter of 2002 could cause our Company to improperly
plan or  budget  and  thereby  adversely  affect  our  business  or  results  of
operations.  In  particular,  the  current  slowdown  in the  economy is causing
purchasing  decisions to be delayed,  reduced in amount or cancelled  which will
therefore reduce the overall license  pipeline  conversion rates in a particular
period of time.

The Price of Our Common Stock is Volatile and It May Fluctuate Significantly.

    The market price of our common stock has  fluctuated  significantly  and has
declined  sharply  since our  initial  public  offering  in March  2000 and more
recently in 2002. 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.


                                       18
<PAGE>

    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  three  months  ended  July 31,  2002,  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.  Revenue  shortfalls below our expectations  could
have an immediate and significant adverse effect on our results of operations.

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

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

    o    competition in the Internet infrastructure software market;

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

    o    the overall trend toward industry consolidation;

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

    o    variations in mix of products sold; and


                                       19
<PAGE>

    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.

    Although we have  reached an  agreement  in  principle to settle the private
securities  class action  lawsuit  against our Company and certain of our former
officers and a director and the two derivative  actions brought on behalf of our
Company against certain current and former officers and directors, the agreement
is still  subject to  execution of a  definitive  settlement  document and Court
approval. Additional class members may opt out of the settlement and bring their
own suits, which could result in additional costs to the Company and distraction
to management.

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 July 31, 2002, we had an  accumulated  deficit of
$193.1 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


                                       20
<PAGE>

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 Microsystems makes significant changes to the Java
language  or its  proprietary  technology,  or  fails  to  correct  defects  and
limitations in these  products,  our ability to continue  improving and shipping
our products  could be impaired.  In the future,  our customers also may require
the ability to deploy our products on platforms for which technically acceptable
Java  implementations  either do not exist or are not available on  commercially
reasonable terms.

We Depend On Increased  Business  From Our Current and New  Customers  and If We
Fail to Generate  Repeat and Expanded  Business or Grow Our Customer  Base,  Our
Product and Services Revenue Will Likely Decline.

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

    If we fail to add new  customers  who license  our  products,  our  services
revenue will also likely  decline.  Our service revenue is derived from fees for
professional  services and customer  support related to our products.  The total
amount of services  and support  fees we receive in any period  depends in large
part on the size and number of software licenses that we have previously sold as
well as our customers  electing to renew their customer support  agreements.  In
the event of a further  downturn  in our  software  license  revenue  such as it
occurred during 2001 and more recently in 2002 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


                                       21
<PAGE>

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.

    As a result of the recent  terrorist  activities  and related  military  and
security operations,  economic activity throughout the United States and much of
the world was substantially disrupted. This significantly adversely impacted our
operations and our ability to generate revenues. Any future terrorist activities
or any continued military or security operations involving the U.S. could have a
similar or worse effect on our operating  results,  particularly if such attacks
or  operations  occur in the last  month or weeks of our  fiscal  quarter or are
significant enough to further weaken the U.S. or global economy.  In particular,
such  activities  and  operations  could  result in  reductions  in  information
technology  spending,  and deferrals,  reductions or  cancellations  of customer
orders for our products and services.

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


                                       22
<PAGE>

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.

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
short-term  investments.  These securities have been classified as cash and 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 cash and cash
equivalents  and  short-term  investments  at July 31, 2002,  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 $13,532 in the value of our portfolio.

FOREIGN CURRENCY RISKS. As of July 31, 2002, Versata had operating  subsidiaries
located  in  the  United  Kingdom,  Canada,  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  July  31,  2002,   foreign   currency
fluctuations have not had a material impact on our financial position or results
of operations.

                                     PART II

                                OTHER INFORMATION

Item 1. Legal Proceedings

Securities Class Action

Since April 11, 2001,  several  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  sought an  unspecified
amount of damages on behalf of persons who  purchased our stock during the class
period.  In July 2002, we reached an agreement  with the plaintiffs in principle
to settle the class action  lawsuit in order to avoid  protracted  and expensive
litigation and the  uncertainty of trial.  The agreement for settlement does not
constitute  any admission of wrongdoing on the part of Versata or the individual
defendants.  Our settlement  calls for a payment of $9.75 million in cash by our
insurance  carriers and the issuance of 200,000 shares of our common stock.  The
settlement  agreement is subject to execution of definitive  settlement document
and Court approval.  Additional  class members may opt out of the settlement and
bring their own suits, which could result in additional costs to the Company and
distraction to management. Accordingly, we expensed the minimum obligation equal
to the  deductible  amount of directors'  and officers'  liability  insurance of
$350,000 in April 2001. Additional amounts, if any, will be recognized when they
are probable and etstimable.

State Derivative Action

Since June 11, 2001,  two  derivative  actions were filed on our behalf  against
certain  current and former  officers and directors in Superior Court of Alameda
County,  California.  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  the  Company  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 consolidated  derivative action until the earlier of the
filing  of an answer by  Versata  in the  Federal  action or  dismissal  of that
action.  In July 2002, in  conjunction  with the  settlement  of the  securities
litigation  discussed  above,  we reached an agreement to settle the  derivative
action.  The  agreement  for  settlement  does not  constitute  any admission of
wrongdoing on the part of Versata or the individual  defendants.  Our settlement
calls for a certain  corporate  therapeutics to be implemented or continue to be
implemented by the Company.  The settlement agreement is subject to execution of
definitive settlement document and Court approval.


                                       23
<PAGE>

Litigation and other claims

We are  also  subject  to legal  proceedings  and  claims,  either  asserted  or
unasserted, which arise in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal  matters will have a material
adverse  effect  on our  consolidated  results  of  operations  or  consolidated
financial position. We intend to defend these actions vigorously.

Item 4. Submission of Matters to a Vote of Security Holders

The annual Shareholder  Meeting of the Company was held on May 17, 2002. Proxies
for the meeting were  solicited  pursuant to  Regulation  14A under the Exchange
Act. On the proposal to elect one Class III Director of the Company,  35,849,493
shares of the Company's voting  securities voted on the matter, of which 35,767,
602 shares were voted for Mr. Robert  Davoli.  The Class II director and Class I
director positions were not up for re-election at the Shareholder  Meeting.  Mr.
Donald W. Feddersen,  a Class II director,  resigned his position from the board
of  directors  effective  at the annual  Shareholder  Meeting,  and Mr.  John W.
Larson's,  a Class III  Director of the Company,  term of office  expired at the
annual  Shareholder  Meeting.  Mr.  Kanwal Rekhi and Mr. Eugene Wong are Class I
directors and their term will expire at the annual  meeting  following the close
of the 2002  fiscal  year.  Mr.  Gary  Morgenthaler's,  Class II director of the
Company, term of office will expire at the annual meeting following the close of
the  2003  fiscal   year.   On  the   proposal  to  ratify  the   selection   of
PricewaterhouseCoopers  LLP, as independent  public  accountants for the Company
for the fiscal year ending  October 31,  2002,  24,418  shares of the  Company's
voting securities were abstaining,  35,809,104 shares voted for the proposal and
15,971  shares  voted  against  the  proposal.  On the  proposal  to  approve an
amendment  to  the  Company's   Second  Amended  and  Restated   Certificate  of
Incorporation  which effected a reverse split of our outstanding common stock at
a ratio of not less than 1-for-2 and not more than 1-for-6 and to authorize  the
Board of Directors to file such  amendment  prior to the next annual  meeting of
stockholder  of the Company to be held after the close of the 2002 fiscal  year,
94,512 shares of the Company's  voting  securities were  abstaining,  35,336,620
shares voted for the proposal and 418,361 shares voted against the proposal.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

6(a) The following exhibits are included herein:

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


     99.1         Certification  of  Chief  Executive  Officer  Pursuant  to  18
                  U.S.C.ss.1350,  as  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002

     99.2         Certification  of  Chief  Financial  Officer  Pursuant  to  18
                  U.S.C.ss.1350,  as  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002


                                       24
<PAGE>


6(b) Reports on Form 8-K:

The  registrant  did not file any  reports on Form 8-K  during the three  months
ended July 31, 2002.


                                       25
<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: September 13, 2002            By:  /s/ EUGENE WONG
                                    --------------------
                                    Eugene Wong
                                    Interim Chief Executive Officer and Director


                                    By:/s/  JAMES DOEHRMAN
                                    ----------------------
                                    James Doehrman
                                    Chief Operating Officer,
                                    Chief Financial Officer, Secretary
                                    and Executive Vice President


                CERTIFICATION OF INTERIM CHIEF EXECUTIVE OFFICER
                      REQUIRED PURSUANT TO RULES 13A-14 OR
                   15-D14 OF THE 1934 SECURITIES EXCHANGE ACT


I, Eugene Wong, certify that:


1. I have reviewed this quarterly report on Form 10-Q of Versata, Inc.;


2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;


3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.


Date: September 13, 2002            By:  /s/ EUGENE WONG
                                    --------------------
                                    Eugene Wong
                                    Interim Chief Executive Officer and Director


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                      REQUIRED PURSUANT TO RULES 13A-14 OR
                   15-D14 OF THE 1934 SECURITIES EXCHANGE ACT


I, James Doehrman, certify that:


1. I have reviewed this quarterly report on Form 10-Q of Versata, Inc.;


2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;


3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.


Date: September 13, 2002            By:  /s/ JAMES DOEHRMAN
                                    -----------------------
                                    James Doehrman
                                    Executive Vice President,
                                    Chief Operating Officer and
                                    Chief Financial Officer

                                       26