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 April 30, 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  May  31,  2002,  the  total  number  of  outstanding  shares  of the
Registrant's common stock was 7,343,206.

<PAGE>

                                      INDEX

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

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets at April 30, 2002
and at October 31, 2001 (unaudited)..................................     3

Condensed  Consolidated  Statements of Operations and
Comprehensive  Loss for the Three and Six Months Ended
April 30, 2002 and March 31, 2001 (unaudited)........................     4

Condensed Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 2002 and March 31, 2001 (unaudited) ......     5

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

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................     9

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

                           PART II. OTHER INFORMATION

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

Item 2. Changes in Securities and Use of Proceeds....................    23

Item 6. Exhibits and Reports on Form 8-K.............................    23

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


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                         April 30,   October 31,
                                                           2002         2001
                                                        -----------------------

ASSETS
Current assets:
   Cash and cash equivalents                            $  15,759     $  21,871
   Short-term investments
                                                            3,301         3,036
   Accounts receivable, net                                 2,797         3,975
   Unbilled receivables                                       147           236
   Prepaid expenses and other  assets                       1,565           848
                                                        -----------------------
      Total current assets                                 23,569        29,966

Restricted cash                                             5,445         5,445
Property and equipment, net                                 5,095         6,257
Intangibles, net                                            2,948         3,898
Other assets                                                  201           216
                                                        -----------------------
      Total assets                                      $  37,258     $  45,782
                                                        =======================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                     $     979     $   1,062
   Accrued liabilities
                                                            4,720         6,177
   Accrued restructuring
                                                              534         1,420
   Deferred revenue                                         6,080         6,246
   Current portion of long-term debt                          133           237
                                                        -----------------------
      Total current liabilities                            12,446        15,142

Accrued restructuring, less current portion                 1,095         1,513
Long-term debt, less current portion                          243           337
                                                        -----------------------
      Total liabilities                                    13,784        16,992
                                                        -----------------------

Stockholders' equity
   Common stock
                                                               43            42
   Additional paid-in capital
                                                          216,292       217,379
   Treasury stock
                                                             (109)       (1,383)
   Notes receivable from shareholders
                                                              (23)         (301)
   Unearned stock-based compensation
                                                           (1,240)       (2,585)
   Accumulated other comprehensive loss
                                                             (946)         (210)
   Accumulated deficit
                                                         (190,543)     (184,152)
                                                        -----------------------
      Total stockholders' equity
                                                           23,474        28,791

                                                        -----------------------
      Total liabilities and stockholders' equity        $  37,258     $  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         Six Months Ended
                                                                                    ---------------------     ---------------------
                                                                                    April 30,    March 31,    April 30,    March 31,
                                                                                      2002         2001         2002         2001
                                                                                    ---------------------     ---------------------
<S>                                                                                 <C>          <C>          <C>          <C>
Revenue:
Software license                                                                    $  2,161     $  4,140     $  6,242     $ 12,169
Services                                                                               2,381        6,892        4,709       13,887
                                                                                    ---------------------     ---------------------
Total revenue                                                                          4,542       11,032       10,951       26,056
                                                                                    ---------------------     ---------------------

Cost of revenue:
Software license                                                                          38          157          106          454
Services (exclusive of stock-based compensation of                                     2,037        8,388        4,131       17,436
   $109 and $782 for the three months ended April 30, 2002
   and March 31, 2001, and $285 and $1,253 for the six months
    ended April 30, 2002 and March 31, 2001, respectively)
                                                                                    ---------------------     ---------------------
Total cost of revenue                                                                  2,075        8,545        4,237       17,890
                                                                                    ---------------------     ---------------------
Gross profit                                                                           2,467        2,487        6,714        8,166
                                                                                    ---------------------     ---------------------

Operating expense:
Sales and marketing (exclusive of stock-based compensation                             2,331       11,940        5,332       24,905
   of $138 and $1,758 for the three months ended April 30,
   2002 and March 31, 2001, and $266 and $3,650 for the six
    months ended April 30, 2002 and March 31, 2001, respectively)
Product development (exclusive of stock-based compensation                             1,369        3,895        2,878        6,859
   of $110 and $(460) for the three months ended April 30, 2001
   and March 31, 2001, and $163 and $145 for the six months ended
   April 30, 2002 and March 31, 2001, respectively)
General and administrative (exclusive of stock-based compensation                      1,388        3,992        2,682        8,333
   of $58 and $121 for the three months ended April 30, 2002 and
   March 31, 2001, and $196 and $363 for the six months ended
   April 30, 2002 and March 31, 2001, respectively)
Stock-based compensation                                                                 350         (141)         562        3,069
Amortization of intangibles                                                              538        1,145        1,015        1,826
Restructuring  and other  non-recurring expenses (exclusive of the                       579        6,909          888        8,602
   benefit of $65 and $2,342 for the three months ended April 30, 2002
   and March 31, 2001 and $348 and $2,342 for the six months April 30,
   2002 and March 31, 2001, respectively, relating to the reversal of
   previously recorded stock-based compensation related to employees
   terminated in the restructuring)
                                                                                    ---------------------     ---------------------
Total operating expense                                                                6,555       27,740       13,357       53,594

                                                                                    ---------------------     ---------------------
Loss from operations                                                                  (4,088)     (25,253)      (6,643)     (45,428)
Interest income, net                                                                     106          909          243        2,202
Other income (expense), net                                                              (30)                      (98)         (62)
                                                                                    ---------------------     ---------------------
Net loss                                                                             ($4,012)    ($24,344)     ($6,498)    ($43,288)
                                                                                    =====================     =====================

Unrealized gain (loss) on marketable securities
                                                                                           5           23            3           58
Foreign currency translation gain (loss)
                                                                                        (106)        (408)         731         (277)

                                                                                    ---------------------     ---------------------
Comprehensive loss                                                                   ($4,113)    ($24,729)     ($5,764)    ($43,507)
                                                                                    =====================     =====================

Basic and diluted net loss per share                                                  ($0.56)      ($3.67)      ($0.92)      ($6.58)
                                                                                    =====================     =====================

Weighted-average common shares                                                         7,102        6,637        7,086        6,582
                                                                                    =====================     =====================
</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>
                                                                                                              Six Months Ended
                                                                                                         --------------------------
                                                                                                         April 30,        March 31,
                                                                                                           2002              2001
                                                                                                         --------------------------
<S>                                                                                                      <C>               <C>
Cash flows from operating activities:
    Net loss                                                                                             $ (6,498)         $(43,288)
    Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                                    2,038             3,231
           Provision for doubtful accounts                                                                    176             2,559
           Write-down of leasehold improvements and office furniture due to
           restructuring                                                                                       --             2,894
           Stock-based compensation expense                                                                   562             3,069
           Cancellation of promissory note                                                                    263                --
           Change in operating assets and liabilities:
              Trade accounts receivable, gross                                                              1,124             1,339
              Unbilled receivables                                                                             89             1,438
              Prepaid expenses and other assets                                                              (717)              670
              Restricted cash                                                                                  --               (73)
              Other assets                                                                                     15             1,023
              Accounts payable and accrued liabilities                                                     (1,572)            4,241
              Accrued restructuring                                                                        (1,375)               --
              Deferred revenue                                                                               (166)             (931)
                                                                                                         --------          --------
                       Net Cash used in operating activities                                               (6,061)          (23,828)
                                                                                                         --------          --------

Cash flows from investing activities:

    Net change in short-term investments                                                                     (273)           23,185
    Purchase of property and equipment                                                                         22           (11,315)
    Increase in notes receivable from related parties                                                          --                22
    Net cash used in connection with acquisition, net of cash acquired                                         --            (1,884)
                                                                                                         --------          --------
                       Net cash (used in) provided by investing activities                                   (251)           10,008
                                                                                                         --------          --------

Cash flows from financing activities:
     Principal payments on capital lease obligations and equipment loan                                      (127)             (132)
     Proceeds from issuance of common stock under employee stock purchase plan                                 --             1,429
     Proceeds from exercise of stock options and warrants                                                      99               302
     Proceeds from sale of common stock held by former officer                                                976                --
     Net Payments from stockholders on notes receivable                                                         --              746
     Loans provided to stockholders                                                                           (94)             (375)
                                                                                                         --------          --------
                       Net cash provided by financing activities                                              854             1,970
                                                                                                         --------          --------

Effects of exchange rate changes and other                                                                   (654)             (324)

                                                                                                         --------          --------
                       Decrease in cash and cash equivalents                                               (6,112)          (12,174)

Cash and cash equivalents at beginning of period                                                         $ 21,871          $ 42,837
                                                                                                         --------          --------
Cash and cash equivalents at end of period                                                               $ 15,759          $ 30,663
                                                                                                         ========          ========
Supplemental Disclosures of Cash Flow information
                                                                                                         --------          --------
Cash paid during the period for interest                                                                 $     52          $     62
                                                                                                         ========          ========
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
                                                                                                                           ========
</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,  Inc. 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 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 six month  periods  ended April 30,
2002 and March 31,  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.  Versata's  common stock will trade under the symbol  "VATAD" as an
interim  symbol  to denote  its new  status  for 20  trading  days.  Thereafter,
Versata's common stock will resume trading under its current symbol "VATA".  All
shares and per share amounts were restated to effect this reverse stock split.

     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 April 30,  2002,  and for the three and six months  ended  April 30, 2002 and
March 31, 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,  Inc.,   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 April 30, 2002,  and the operating  results for the three and six
month  periods ended April 30, 2002 and March 31, 2001,  respectively,  and cash
flows for the six months ended April 30, 2002 and March 31, 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 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  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.

     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 Task Force ("EITF") reached a consensus
on EITF  Issue  01-09,  "Accounting  for  Consideration  Given by a Vendor  to a
Customer or a Reseller of the Vendor's  Products,"  which is a  codification  of
EITF 00-14,  00-22 and 00-25.  This issue  presumes  that  consideration  from a
vendor to a customer or reseller of the  vendor's  products to be a reduction of
the  selling  prices  of  the  vendor's  products  and,  therefore,   should  be
characterized  as a reduction of revenue when  recognized in the vendor's income
statement  and could  lead to  negative  revenue  under  certain  circumstances.
Revenue  reduction  is  required  unless  consideration  relates  to a  separate
identifiable benefit and the benefit's fair value can be established. This issue
should be applied no later than in annual or interim  financial  statements  for
periods  beginning  after December 15, 2001,  which is our second quarter ending
April 30, 2002. The adoption did not have a significant  impact on the Company's
consolidated financial statements.

     In  November   2001,  the  FASB  issued  Topic  D-103,   Income   Statement
Characterization of Reimbursements Received for out-of-pocket Expenses Incurred,
which  will  require  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 second quarter
of 2002, which resulted in increased  services revenue of $375,000,  and cost of
services revenue of $375,000.

4. Restructuring and Other Non-Recurring Expenses

     During  the  three  months  ended   January  31,  2002,  we  continued  our
restructuring  efforts.  The reduction impacted all departments and included the
closure of the India office.  As a result, we reduced our staff by 40 employees,
or 23% of the workforce.  There were 17 positions eliminated in the Americas, 17
in India, and 6 in our European offices.

     We reduced our staff by 2 employees during the three months ended April 30,
2002.  One employee was from the marketing  department and one from the services
department.

     In April 2002, we settled a note receivable  with a former  executive which
resulted in us writing off  $192,000 to  restructuring  and other  non-recurring
expenses.

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

<TABLE>
<CAPTION>
                                                                   Employee      Office Closure and
                                                                   Severance      Subleasing Costs      Other Costs          Total
                                                                   ---------     ------------------     -----------         -------
<S>                                                                 <C>                <C>                <C>               <C>
October 2001

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 payments 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 31, 2002                                     $   111            $ 1,324            $   194           $ 1,629
                                                                    -------            -------            -------           -------
</TABLE>


                                       7
<PAGE>

     Subsequent to April 30, 2002,  there have not been any significant  changes
to the Company's  estimate of the total costs of prior  restructuring  and other
nonrecurring activities.

5. 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 April 30, 2002.

     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  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 six month periods ended March 31, 2001 (in  thousands,  except
per share amounts).

<TABLE>
<CAPTION>
                                     Three Months Ended                      Six Months Ended
                               April 30, 2002    March 31, 2001     April 30, 2002    March 31, 2001
<S>                            <C>               <C>                <C>               <C>
Reported net loss              $       (4,012)   $      (24,344)    $       (6,498)   $     (43,288)
Goodwill amortization          $            -    $          622                  -    $         916
                               --------------------------------     -------------------------------
Adjusted net income            $       (4,012)   $      (23,722)    $       (6,498)   $     (42,372)

Basic and diluted net loss
  per share                    $        (0.56)   $        (3.67)    $        (0.92)   $       (6.58)
Goodwill amortization          $            -    $         0.09     $            -    $        0.14
                               --------------------------------     -------------------------------
Adjusted basic and diluted
  net loss per share           $        (0.56)   $        (3.58)    $        (0.92)   $       (6.44)
</TABLE>

Remaining  intangible  assets  consist of purchase  technology  of $5.7 million,
which is being  amortized on a  straight-line  basis of the  expected  life of 3
years

6. Net Loss Per Share

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

     The  following  table sets forth the  computation  of basic and diluted net
loss per share (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                                 Three Months Ended                     Six Months Ended
                                                         ----------------------------------     ---------------------------------
                                                         April 30, 2002      March 31, 2001     April 30, 2002     March 31, 2001
                                                         --------------      --------------     --------------     --------------
<S>                                                          <C>                <C>                <C>                <C>
Numerator:
       Net loss                                              ($ 4,012)          ($24,344)          ($ 6,498)          ($43,288)
                                                             --------           --------           --------           --------

Denominator:
       Weighted average shares outstanding                      7,371              6,888
                                                                                                      7,380              6,863
       Weighted average unvested shares of                       (269)              (251)              (294)              (281)
       common stock subject to repurchase
                                                             --------           --------           --------           --------

       Denominator for basic and diluted                        7,102              6,637              7,086              6,582
       calculation                                           --------           --------           --------           --------

Basic and diluted net loss per share                           ($0.56)            ($3.67)            ($0.92)            ($6.58)
                                                             ========           ========           ========           ========
</TABLE>

Item 7. Legal Proceedings

Securities Class Action

     In April and March 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 in the United States
District Court for the Northern  District of California and lead  plaintiffs and
lead counsels were appointed.  On October 19, 2001 the lead plaintiffs  filed an
amended class action complaint naming us, certain of


                                       8
<PAGE>

our former  officers and a current  director,  as defendants.  The  consolidated
amended  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 consolidated  amended complaint seeks an unspecified
amount of damages on behalf of persons who  purchased our stock during the class
period.  On May 23, 2002 the Court granted in part and denied in part the motion
to dismiss the  consolidated  amended  complaint by dismissing the section 10(b)
and section 20(a) claims in its entirety,  and  dismissing  all but a portion of
the  section  11 and  section  15  claims.  We intend to  defend  these  actions
vigorously.  We expensed  the  deductible  amount of  directors'  and  officers'
liability insurance of $350,000 in April 2001.

State Derivative Action

     In June 2001, shareholders filed derivative actions ostensibly on behalf of
us 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.  An  additional  derivative  complaint  filed  May 2002 will be
consolidated  with the earlier  actions,  and thus is subject to the November 7,
2002 stay of proceedings.

     With the exception of the $350,000 discussed above, no estimate can be made
of the ultimate  loss or possible  range of ultimate  loss  associated  with the
resolution of these contingencies.

     The private  securities class action lawsuits and state derivative  actions
against  us and  certain  of our  offices  and  directors  could have a material
adverse effect on our business, financial conditions and results of operations.

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 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  1995.  These
statements  may  contain  words  such as  "expects,"  "anticipates,"  "intends,"
"plans,"  "believes,"  "estimates,"  or other words  indicating  future results.
These  forward-looking   statements  include,  without  limitation,   statements
regarding future revenue,  espenses, and risks. These forward-looking statements
are based on management's current expectations, assumptions, and projections and
entail  various risks and  uncertainties  including  those set forth below under
"Risk Factors That May Affect Future  Results,"  that could cause actual results
to differ  materially  from those projected in the  forward-looking  statements.
Versata  undertakes  no  obligation  to revise or  publicly  revise or  publicly
release the results of any revision to these forward looking  statements.  Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on the forward-looking statements.

OVERVIEW

     We provide  software  and  services  that  accelerate  and simplify the way
business logic is developed and maintained for enterprise applications. Business
logic is an umbrella term  referring to the aggregated set of business rules and
business processes that govern and define a business' operations. Business logic
is a critical part of today's new generation of enterprise  applications,  which
are  increasingly  built in the Java 2  Enterprise  Edition  (J2EE)  programming
language.

     From our  incorporation  in August 1991 through  December  1994,  we were a
professional  services company and generated  revenue from technical  consulting
projects.  In January  1995,  we  commenced  development  efforts on our initial
software  products,  from which we  generated  revenue from 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.

     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 six month  periods  ended April 30,
2002 and March 31, 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.

     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.


                                       9
<PAGE>

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.

     Net revenues from international  sales represented 20% of our total revenue
for both the three and six months  ended  April 30,  2002 and 27% and 17% of our
total revenue for the three and six months ended March 31, 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. 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 $190.5  million and $184.2 million at April 30, 2002 and
at October 31, 2001, respectively.

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

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

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                       Six Months Ended
                                                         --------------------------------        ---------------------------------
                                                         April 30,2002     March 31, 2001        April 30,2002      March 31, 2001
                                                         -------------     --------------        -------------      --------------
<S>                                                         <C>                 <C>                 <C>                 <C>
Software license revenue:
               United States                                $ 1,747             $ 2,339             $ 5,063             $ 8,080
               Europe                                           414               1,661               1,179               3,407
               Other international                               --                 140                  --                 682
                                                            -------             -------             -------             -------
                                                              2,161               4,140               6,242              12,169

Services revenue:
               United States                                $ 1,865             $ 5,292             $ 3,740             $11,099
               Europe                                           516               1,263                 969               2,015
               Other international                               xx                 337                  --                 773
                                                            -------             -------             -------             -------
                                                              2,381               6,892               4,709              13,887

Total revenue:
               United States                                $ 3,612             $ 7,631             $ 8,803             $19,179
               Europe                                           930               2,924               2,148               5,422
               Other international                               --                 477                  --               1,455
                                                            -------             -------             -------             -------
                                                            $ 4,542             $11,032             $10,951             $26,056
                                                            =======             =======             =======             =======
</TABLE>


                                       10
<PAGE>

     Long-lived assets,  consisting of intangibles,  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 April 30, 2002, and October 31, 2001,
approximately $7,533,000 and $9,404,000 respectively,  of intangibles,  property
and  equipment  were  located  in  the  United  States,  $411,000  and  $644,000
respectively,  were located in Europe,  and $99,000 and $107,000,  respectively,
were located elsewhere.

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:

                                  VERSATA, INC.
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                    Three Months Ended                     Six Months Ended
                                                             ---------------------------------     ---------------------------------
                                                             April 30, 2002     March 31, 2001     April 30, 2002     March 31, 2001
                                                             --------------     --------------     --------------     --------------
<S>                                                                   <C>                <C>                <C>                <C>
Revenue:
  Software license                                                     48%                38%                57%                47%
  Services                                                             52%                62%                43%                53%
                                                                ---------          ---------          ---------         ----------
Total revenue                                                         100%               100%               100%               100%

Cost of Revenue:
  Software license                                                      1%                 1%                 1%                 2%
  Services                                                             45%                76%                38%                67%
                                                                ---------          ---------          ---------         ----------
Total cost of revenue                                                  46%                77%                39%                69%
                                                                ---------          ---------          ---------         ----------
Gross profit                                                           54%                23%                61%                31%

Operating expense:
  Sales and marketing                                                  51%               108%                49%                96%
  Product development                                                  30%                35%                26%                26%
  General and administrative                                           31%                36%                24%                32%
  Stock-based compensation                                              8%               -1%                  5%                12%
  Amortization of intangibles                                          12%                10%                 9%                 7%
Restructuring and other expense                                        13%                63%                 8%                33%
                                                                ---------          ---------          ---------         ----------
Total operating expense                                               145%               251%               122%               206%

Loss from operations                                                  -90%              -229%               -61%              -174%
Interest expenses, net                                                  2%                 8%                 2%                 8%
Other, net                                                            -1%                 --                 -1%                --
                                                                ---------          ---------          ---------         ----------
Net loss                                                              -89%              -221%               -59%              -166%
                                                                =========          =========          =========         ==========
</TABLE>

Revenue

     Total revenue  consists of software  license revenue and services  revenue.
Total revenue  decreased by $6.5  million,  or 59%, to $4.5 million in the three
months ended April 30, 2002 from $11.0  million for the three months ended March
31, 2001.  For the six months ended April 30, 2002,  total revenue  decreased by
$15.1  million,  or 58%, to $11.0  million from $26.1 million for the six months
ended March 31, 2002.


                                       11
<PAGE>

Software License Revenue

     Software license revenue decreased by $2.0 million,  or 48% to $2.2 million
in the three  months ended April 30, 2002 from $4.1 million for the three months
ended March 31, 2001. For the six months ended April 30, 2002,  software license
revenue  decreased by $5.9  million,  or 49%, to $6.2 million from $12.2 million
for  the  six  months  ended  March  31,  2002.   The  decrease  is  principally
attributable to a decrease in IT spending and overall market conditions.

Services Revenue

     Services revenue decreased by $4.5 million,  or 65%, to $2.4 million in the
three  months  ended April 30, 2002 from $6.9 million for the three months ended
March 31, 2001. For the six months ended April 30, 2002,  total services revenue
decreased by $9.2 million, or 66% to $4.7 million from $13.9 million for the six
months  ended March 31, 2002.  This trend for  professional  services,  and more
specifically for our consulting  unit,  represents our ongoing efforts to reduce
our  volatility  within this  business by  referring  work to third  parties and
accepting only profitable assignments.  Our services revenue is also impacted by
the level of our new software sales.

Cost of Revenue

     Total cost of revenue decreased by $6.5 million, or 76%, to $2.1 million in
the three  months  ended April 30, 2002 from $8.5  million for the three  months
ended March 31, 2001.  For the six months  ended April 30,  2002,  total cost of
revenue  decreased by $13.7  million,  or 76% to $4.2 million from $17.9 million
for the six months ended March 31, 2002.  This decrease was mainly  attributable
to management's restructuring plan initiated in the three months ended March 31,
2001, which resulted in savings in personnel,  subcontracting, and office costs.
We achieved  positive gross margins in our services  organization for the second
quarter in a row and for the six months ended April 30, 2002.

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  $119,000,  or 76%, to $38,000 for the three months ended April 30,
2002 from $157,000 for the three months ended March 31, 2001. For the six months
ended April 30, 2002, cost of license revenue went down by $348,000,  or 77%, to
$106,000 from $454,000 for the six months ended March 31, 2001.  The decrease is
a result of declining revenues and the result of us selling non  royalty-bearing
products.

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
$6.4 million,  or 76%, to $2.0 million for the three months ended April 30, 2002
from $8.4 million for the three months ended March 31, 2001.  For the six months
ended April 30, 2002,  cost of services  revenue went down by $13.3 million,  or
76%, to $4.1  million in April 2002 from $17.4  million for the six months ended
March 31, 2001.  This decrease is as a result of the  restructuring  initiatives
initiated  by  management  in January  2001 in response to changes in the market
place.

Operating Expenses

     Operating expenses decreased $21.2 million,  or 76%, to $6.6 million in the
three months ended April 30, 2002 from $27.7  million for the three months ended
March 31,  2001.  For the six months ended April 30,  2002,  operating  expenses
decreased by $40.2 million,  or 75%, to $13.4 million from $53.6 million for the
six months  ended March 31,  2001.  The  majority of the decrease was due to our
cost-cutting initiatives and reductions in force.

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 $9.6 million,
or 80%,  to $2.3  million in the three  months  ended  April 30, 2002 from $11.9
million for the three  months  ended March 31,  2001.  For the six months  ended
April 30, 2002, sales and marketing expenses decreased by $19.6 million, or 79%,
to $5.3  million  from $24.9  million for the six months  ended March 31,  2001.
These  decreases  were largely  attributable  to a $4.1 million and $7.8 million
reduction in salary and benefit expense due


                                       12
<PAGE>

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 $2.8  million and $4.9  million for the three and six months  ended April 30,
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 $2.5 million,  or
65%, to $1.4  million in the three months ended April 30, 2002 from $3.9 million
for the three months  ended March 31,  2001.  For the six months ended April 30,
2002,  product  development  costs  decreased by $4.0  million,  or 58%, to $2.9
million from $6.9 million for the six months ended March 31, 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 had reduced
consulting costs of $877,000 and $1.4 million for the three and six months ended
April 30, 2002. 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 $2.6 million, or 65%,
to $1.4  million in the three  months ended April 30, 2002 from $4.0 million for
the three months ended March 31, 2001.  For the six months ended April 30, 2002,
general and  administrative  costs  decreased by $5.7  million,  or 68%, to $2.7
million  from $8.3  million  for the three  months  ended  March 31,  2001.  The
decrease  was due to a reduction  in salary and benefit  expense of $748,000 and
$1.5  million for the three and six months  ended April 30, 2002  related to the
recent  reductions  in the number of general and  administrative  employees.  In
addition,  bad debt expense decreased by $654,000 and $1.8 million for the three
and six months  ended April 30,  2002 as a result of our lower sales  volume and
better collection efforts.

Stock-Based Compensation

     Stock-based  compensation  expense  includes the  amortization  of unearned
employee  stock-based  compensation,  offset by reversals of previously expensed
amounts  for  cancellations  of the  related  options.  The  impact of  variable
accounting  for the stock  appreciation  assumed on the  acquisition of Verve is
also  included in this caption.  Employee  stock-based  compensation  expense is
amortized  on an  accelerated  basis  over the  vesting  period  of the  related
options,  generally 50 months.  Stock-based  compensation  expense also includes
expenses for stock granted to consultants in exchange for services.  Stock-based
compensation  expense increased by $491,000,  or 348%, to $350,000 for the three
months  ended April 30,  2002 from a credit to the  expense of $141,000  for the
three months  ended March 31,  2001.  The increase is related to the impact of a
large  number of option  cancellations  for  terminated  employees  in the three
months  ended  March  31,  2001.  For the  six  months  ended  April  30,  2002,
stock-based  compensation  expense  decreased $2.5 million,  or 82%, to $562,000
from $3.1 million for the six months ended March 31, 2001.  Additional  unvested
outstanding  options will  continue to vest over the next 25 months,  which will
result in additional  compensation  expense of approximately $1.2 million in the
aggregate in periods  subsequent to April 30, 2002.  This future expense will be
reduced in the event of related option cancellations for employee terminations.

Amortization of Intangibles

     Amortization  expense  decreased by  $607,000,  or 53%, to $538,000 for the
three  months  ended April 30, 2002 from $1.1 million for the three months ended
March 31,  2001.  For the six  months  ended  April 30,  2002,  amortization  of
intangibles decreased by $811,000, or 44%, to $1.0 million from $1.8 million for
the six months  ended March 31, 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  April  30,   2002,   we  continued   our
restructuring   efforts,  which  resulted  in  a  reduction  of  two  employees.
Restructuring  expenses for the three months ended April 30, 2002 were $579,000,
down $6.3  million,  or 92%,  from $6.9 million for the three months ended March
31, 2001. We also settled with a former executive, which resulted in our writing
off his note with a balance due of $192,000.  For the six months ended April 30,
2002,  restructuring  expenses decreased $7.7 million,  or 90%, to $888,000 from
$8.6  million  for the three  months  ended March 31,  2001.  The  reduction  is
principally due to the larger extent of the 2001 networking.


                                       13
<PAGE>

Interest Income, Net

     Interest  income,  net, is primarily  comprised of interest income from our
cash and  investments.  We had net  interest  income of  $106,000  for the three
months ended April 30, 2002,  a decrease of  $803,000,  or 88%,  compared to net
interest  income of $909,000 for the three months ended March 31, 2001.  For the
six months ended April 30, 2002,  interest income,  net, decreased $2.0 million,
or 89%, to $243,000 from $2.2 million for the three months ended March 31, 2001.
The reduction in interest income is primarily due to our reduced cash balance.

Provision for Income Taxes

     We have incurred  operating  losses for all periods from inception  through
April 30, 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 April 30, 2002, we had $24.5 million in cash
and cash  equivalents,  restricted  cash and  short-term  investments  and $11.1
million in  working  capital.  Net cash used in  operating  activities  was $6.1
million in the six months  ended April 30, 2002,  and $23.8  million for the six
months ended March 31, 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  was  $251,000  for the six  months
ending  April  30,  2002.  The  decrease  in cash used in  investing  activities
primarily  reflects the purchases of short-term  investments  of $273,000 in the
six months ended April 30, 2002  compared to the  maturities of  investments  of
$23.2  million for the six months ended March 31,  2001,  offset by purchases of
property and equipment of $11.3  million,  and cash paid for an  acquisition  of
$1.9 million .

     Net cash  provided by financing  activities  was $854,000 in the six months
ended April 30, 2002, as compared to $2.0 million for the six months ended March
31, 2001.  The higher amount from last year is due to proceeds from the issuance
of stock under the employee  stock  purchase plan.  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.


                                       14
<PAGE>

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  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   account  for
approximately 20% of our net revenues for the three months ended April 30, 2002,
and 4% of our assets and 4% of our total liabilities as of April 30, 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.

Contingencies

     Because of the  uncertainties  related to both the amount and range of loss
on the remaining pending  litigation,  management is unable to make a reasonable
estimate of the  liability  that could result from an  unfavorable  outcome.  As
additional information becomes available, we will assess the potential liability
related to our pending  litigation and revise our  estimates.  Such revisions in
our estimates of the potential  liability could materially impact our results of
operation and  financial  position.  Management  has recorded an accrual for the
deductible amount of directors' and officers'  liability  insurance of $350,000.
See further discussion in note 7 to the financial statements

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.


                                       15
<PAGE>

     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
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;


                                       16
<PAGE>

     o    technological innovations by us or our competitors;

     o    changes in earnings estimates or recommendations by analysts;

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

     o    general economic and market conditions;

     o    additions or departures of key personnel;

     o    estimates and projections by the investment community; and

     o    fluctuations in our stock trading volume, which is particularly common
          among highly volatile securities of software companies.

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

Our Quarterly Revenues and Operating Results May Fluctuate in Future Periods.

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

     o    relatively long sales cycles for our products;

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

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

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

     o    changes in customer budgets;

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

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

     Accordingly,  our quarterly  results are difficult to predict until the end
of the quarter. Delays in product delivery or closing of sales near the end of a
quarter caused quarterly revenues and net income to fall significantly  short of
anticipated  levels in the three  months  ended  April 30,  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. As an example,  the dollar amounts of large orders
for our products have been increasing and therefore the operating  results for a
quarter could be materially  adversely  affected if a number of large orders are
either not received or are delayed,  due to cancellations,  delays, or deferrals
by  customers.  This  circumstance  occurred in the previous  quarters.  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.


                                       17
<PAGE>

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

     o    competition in the Internet infrastructure software market;

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

     o    the overall trend toward industry consolidation;

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

     o    variations in mix of products sold; and

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

     Any of the  above  factors  could  have a  material  adverse  impact on our
operations and financial  results.  The Private Securities Class Action Lawsuits
and State Derivative Action Against Us and Certain of Our Directors and Officers
Could Have a Material  Adverse Effect On Our Business,  Financial  Condition and
Results of Operations.

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

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

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

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

     On May 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.  Versata's  common stock will trade under the symbol  "VATAD" as an
interim  symbol  to denote  its new  status  for 20  trading  days.  Thereafter,
Versata's common stock will resume trading under its current symbol "VATA".

     On May 21, 2002 Versata received a Staff  Determination  Letter from Nasdaq
National  Market  indicating  that Versata has not regained  compliance with the
minimum  bid  price   requirements  for  continued  listing  set  forth  in  the
Marketplace  Rules  4450  (a)(5) and  4450(e)(2)  and that its  securities  are,
therefore,  subject to delisting from the Nasdaq  National  Market.  Versata has
appealed the Staff  Determination  and during this process  Versata's stock will
remain listed on the Nasdaq National Market.

     If our appeal receives an unfavorable  determination by Nasdaq,  our common
stock would be removed from listing on the Nasdaq National  Market,  which could
have a  material  adverse  effect  on us and on the price of our  common  stock.
Versata does not intend to have the stock delisted and is reviewing its options,
which may include,  subject to Nasdaq's  approval,  moving its securities to the
Nasdaq Small Cap Market.

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 April 30, 2002, we had an accumulated  deficit of


                                       18
<PAGE>

$190.5 million. Although we have an objective of achieving profitability as soon
as  practical,  we cannot  assure  you that we will be  successful.  In order to
achieve and  maintain  profitability,  we will need to increase  revenues  while
decreasing expenses.

We May Require Future Additional Funding to Stay in Business.

     We may require  additional  financing for our operations.  We have not been
operating on a profitable  basis and have relied on the sale of stock to finance
our operations. We may need to return to the capital markets in order to receive
additional financing.

     This  additional  financing may not be available to us on a timely basis if
at all,  or, if  available,  on terms  acceptable  to us.  Moreover,  additional
financing will cause dilution to existing stockholders.

If We Do Not Develop and  Enhance  New and  Existing  Products to Keep Pace With
Technological, Market and Industry Changes, Our Revenues May Decline.

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

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

     o    satisfy increasingly sophisticated customer requirements; and

     o    achieve market acceptance.

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

If the Versata  Products and Related Services Do Not Achieve  Widespread  Market
Acceptance, the Source of Substantially All of Our Revenue Will be at Risk.

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

If Java  Technology  Does Not  Continue  to be  Widely  Adopted  for  E-business
Application Development, Our Business Will Suffer.

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


                                       19
<PAGE>

customers  also may require the ability to deploy our products on platforms  for
which technically acceptable Java implementations either do not exist or are not
available on commercially reasonable terms.

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

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

     If we fail to add new  customers  who license our  products,  our  services
revenue will also likely  decline.  Our service revenue is derived from fees for
professional  services and customer  support related to our products.  The total
amount of services  and support  fees we receive in any period  depends in large
part on the size and number of software licenses that we have previously sold as
well as our customers  electing to renew their customer support  agreements.  In
the event of a further  downturn  in our  software  license  revenue  such as it
occurred during 2001 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
systems integrators. We intend to seek distribution arrangements with additional
ISVs to embed our Versata  Logic Suite and  Versata  Interaction  Suite in their
products.  It is possible that we will not be able to increase the efficiency of
our  direct  sales  force or other  distribution  channels,  or  secure  license
agreements with additional ISVs on commercially reasonable terms. Moreover, even
if we succeed in these endeavors,  it still may not increase our revenues. If we
invest   resources  in  these  types  of  expansion  and  our  revenues  do  not
correspondingly  increase,  our business,  results of  operations  and financial
condition will be materially and adversely affected.

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

Our Business is Subject to Risks From International Operations.

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

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

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


                                       20
<PAGE>

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

     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 parts of computer  systems to
fail. In such circumstances, it may be difficult to determine which part failed,
and it is likely that customers will bring a lawsuit against several  suppliers.
Even if our software  was not at fault,  we could  suffer  material  expense and
material diversion of management time in defending any such lawsuits.

Since the  Licensing of Our  Automation  Technology is a Key Component of Sales,
Our Business May Suffer If We Cannot Protect Out Intellectual Property.

     Approximately  48% of our revenue in the first  quarter of 2002 was derived
from the license of software  products.  We rely on a combination of contractual
provisions,  confidentiality procedures, and patent, trademark, trade secret and
copyright  laws  to  protect  the  proprietary  aspects  of our  technology.  We
currently have a U.S.  patent  relating to our automated  development  tool that
uses a  drag-and-drop  metaphor.  This patent is scheduled to expire on April 9,
2016. In addition,  we have a U.S. patent pending relating to our business rules
automation  in  database  application  development  and  maintenance.  We cannot
predict whether this patent application will result in an issued patent, or if a
patent is issued, whether it will provide any meaningful  protection.  Moreover,
these legal protections  afford only limited protection and competitors may gain
access  to our  intellectual  property  which  may  result  in the  loss  of our
customers.

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


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<PAGE>

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

INTEREST RATE RISKS. 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 April 30, 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 $15,674 in the value of our portfolio.

FOREIGN CURRENCY RISKS. As of April 30, 2002, Versata had operating subsidiaries
located in the United Kingdom,  Canada, India, Germany,  Australia,  and France,
Canada and Australia.  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 April 30,
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

     In April and March 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 in the United States
District Court for the Northern  District of California and lead  plaintiffs and
lead counsels were appointed.  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 consolidated  amended  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
consolidated  amended complaint seeks an unspecified amount of damages on behalf
of persons who purchased our stock during the class period.  On May 23, 2002 the
Court granted in part and denied in part the motion to dismiss the  consolidated
amended  complaint by  dismissing  the section 10(b) and section 20(a) claims in
its entirety,  and dismissing all but a portion of the section 11 and section 15
claims. We intend to defend these actions vigorously. We expensed the deductible
amount of  directors'  and  officers'  liability  insurance of $350,000 in April
2001.

State Derivative Action

     In June 2001, shareholders filed derivative actions ostensibly on behalf of
us 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.  An  additional  derivative  complaint  filed  May 2002 will be
consolidated  with the earlier  actions,  and thus is subject to the November 7,
2002 stay of proceedings.

     With the exception of the $350,000 discussed above, no estimate can be made
of the ultimate  loss or possible  range of ultimate  loss  associated  with the
resolution of these contingencies.


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<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 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Use of Proceeds

     We have  invested  the net  proceeds  from  the  company's  initial  public
offering of common stock in  interest-bearing  investment grade instruments.  We
expect to use the net proceeds primarily to fund working capital, technology and
product  development  and sales and  marketing.  None of the net proceeds of our
initial public offering were paid to any of our directors or officers, or to any
person owning 10% or more of any class of our equity securities.

Item 6. EXHIBITS

(a) The following exhibits are included herein:

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

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

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

*    Management contract or compensatory plan or arrangement.

**   Previously filed.

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


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<PAGE>

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

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

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

Item 6(b) Reports on Form 8-K:

     None.


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<PAGE>

                                  VERSATA, INC.

                                   SIGNATURES

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

VERSATA, INC.

Date: June 14, 2002                  /s/  EUGENE WONG
                                     -------------------------------------------
                                          Interim Chief Executive Officer

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


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