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                            UNITED STATES OF AMERICA

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------

                                    FORM 10-K
                                ----------------

    (Mark One)

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

                                       OR

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

                    For the ten months ended October 31, 2001

                         Commission file number: 0-29757
                                  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
                                 (510) 238-4100
         (Address including zip code, of principal executive offices and
               Registrant's telephone number including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 par value

    Indicate  by check mark  whether the  registrant:  (1) has filed all reports
required to be filed by Section 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 [ ]

    Indicate by check mark if disclosure of delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

    The  aggregate  market value of voting stock held by  non-affiliates  of the
registrant as of March 20, 2002 was $23,475,345  based on the last reported sale
price of the registrant's common stock as reported by the Nasdaq National Market
for the last trading day prior to that date.

    On March 20, 2002,  44,078,124 shares of the registrant's  common stock were
outstanding.

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                                  VERSATA, INC.

                                    FORM 10-K
                    For The Ten Months Ended October 31, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                            Page
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<S>  <C>                                                                                                                     <C>
                                                         PART I
Item 1.  Business........................................................................................................     3
Item 2.  Properties......................................................................................................    19
Item 3.  Legal Proceedings...............................................................................................    19
Item 4.  Submission of Matters to a Vote of Security Holders.............................................................    19
                                                         PART II
Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters............................................    20
Item 6.  Selected Financial Data and Supplementary Data..................................................................    20
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations...........................    21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................    31
Item 8.  Financial Statements and Supplementary Data.....................................................................    33
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................    33
                                                         PART III
Item 10. Directors and Executive Officers of the Registrant..............................................................    34
Item 11. Executive Compensation..........................................................................................    36
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................    40
Item 13. Certain Relationships and Related Transactions..................................................................    41
                                                         PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................    42
Signatures...............................................................................................................    44
</TABLE>

                                       2
<PAGE>

                           FORWARD-LOOKING STATEMENTS

In  addition  to  historical  information,  this  report on Form  10-K  contains
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform  Act of 1995.  These  statements  are  subject  to risks  and
uncertainties  and are based on the beliefs and assumptions of management of the
Company,   based  on  the  information  currently  available  to  the  Company's
management. These statements may contain words such as "expects," "anticipates,"
"intends,"  "plans,"  "believes,"  "estimates," or other words indicating future
results.  These  statements  are based on judgments with respect to, among other
things,  information  available to us, future  economic,  competitive and market
conditions  and future  business  decisions.  All are difficult or impossible to
predict  accurately  and many of which  are  beyond  our  control.  Accordingly,
although  we  believe  that  the  assumptions   underlying  the  forward-looking
statements are reasonable,  any such assumption could prove to be inaccurate and
therefore  there  can be no  assurance  that  the  results  contemplated  in the
forward-looking  statements  will be  realized.  Factors  that  could  cause  or
contribute to these differences include, but are not limited to, those discussed
in the  sections  entitled  "Risk  Factors That May Affect  Future  Results" and
"Management's  Discussion  and  Analysis of  Financial  Position  and Results of
Operation." We undertake no obligation to 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.

                                     PART I

Item 1. Business

Overview

    Versata,  Inc. was  incorporated  in California on August 27, 1991,  and was
reincorporated  in the State of Delaware on February  24,  2000.  Versata,  Inc.
("Versata" or the "Company") provides a way for companies to manage the logic in
their business systems at the business level, rather than at the code level.

    In today's  "e-Business"  world,  for a company to take a business idea from
conception to reality,  it must have a responsive  software  infrastructure that
provides the most  flexibility with the best  performance.  Out of this need has
arisen the Service Oriented  Architecture ("SOA") leveraging a Java 2 Enterprise
Edition ("J2EE") application server like IBM WebSphere or BEA WebLogic.  The SOA
is comprised of six layers:  presentation,  process,  transactions,  data logic,
integration,  & the back-office value chain (financial,  customer,  and resource
management   systems).   The  middle  layers  of  this  architecture,   process,
transactions,  & data  logic,  are called the  business  logic  layers.  Versata
provides the most  productive  solution for  creating,  managing,  reusing,  and
executing these business logic layers.

    Versata  fundamentally  changes the way that a company  manages its business
logic.  Traditional  development  & execution  approaches  follow  these  steps;
business analysts document the business logic as application requirements; these
requirements  are  then  used by the  programmers  to draw  models,  sketch  out
psuedo-code,  and  write  programs  that  are  intended  to  meet  the  original
specifications;  and,  these programs are then  integrated  with the rest of the
company's  infrastructure  resources  and deployed to a production  environment.
With Versata,  the middle-steps are eliminated:  the business analyst  specifies
the business  logic,  and that business logic is executed by the Versata server.
This  fundamental  difference  enables  companies  to react  faster to  business
demands  by  developing  applications  faster  and  change  applications  as the
business  changes.  This can be accomplished  using existing IT resources rather
than hiring expensive Java consultants.

    Versata's  solution is well suited for large,  enterprise  applications with
multiple  data sources and  database  tables,  multiple  user  interfaces,  with
complex  business  transactions  used by thousands of users.  Many  applications
built today are  departmental  in nature and don't require the power of Versata;
for those we recognize that  hand-coding  Java is an acceptable  solution.  But,
when the system is  mission-critical  to a  company's  operations  and  supports
thousands of transactions,  more power and  productivity is needed,  and this is
where Versata fits best.

    Our objective is to establish the Versata Logic Suite as an extension to the
leading  application  servers for managing a company's business logic. We intend
to do this by  extending  our  technology  leadership,  continuing  to grow  our
multi-channel distribution network, and leveraging our technology alliances.

    We market our products  primarily through a direct sales force in the United
States and in  Europe.  We also work with a network of  consulting  and  systems
integration  partners,  companies selling  pre-packaged  software  applications,
companies developing and

                                       3
<PAGE>

integrating  custom  software  applications,   and  companies  selling  software
applications over the Internet on a subscription services basis. These companies
are trained in  Versata's  technology  to provide the  knowledge  and  resources
necessary to rapidly deploy a Versata-based solution.

    An  important  element of our sales and  marketing  strategy  is to leverage
relationships  with key  technology  and business  partners.  Our most important
strategic relationship to date has been with IBM. Our strategic marketing, sales
and development  relationship  with IBM provided a single product  offering that
integrated  our software with IBM's  WebSphere(R)  Application  Server  Advanced
Edition on an OEM basis.  In  September  2000,  at our  request,  we changed our
relationship  with IBM by entering into a software  re-marketing  agreement with
IBM to allow them to resell some of our  products.  As a result,  IBM now offers
the Versata  Logic Suite  product  under the Versata  brand name  through  IBM's
Passport  Advantage  Program,  IBM's volume licensing  program.  Versata product
availability  on  Passport  Advantage  eliminates  special  handlings,  such  as
separate  contracts with Versata for license  maintenance  and support.  Versata
expects that this arrangement will improve  Versata's  visibility within IBM and
may help increase the volume of software sold through IBM.

    Versata has also entered into agreements with leading  technology  companies
such as ILOG and  MetaMatrix.  In addition,  we have  continued to invest in our
alliances  with BEA and Rational  Software.  Our network of technology  partners
provides complementary solutions to Versata's products.

    We also offer comprehensive professional services from training,  mentoring,
ROI analysis,  staff  augmentation  and project  management to complete  turnkey
solution services, as well as customer support.

Versata Solution

    We believe  Versata Logic Suite  provides the most  productive  solution for
delivering large, enterprise applications.  Versata's approach - the declarative
creation,  execution,  reuse,  and change of business  logic (the "heart" of the
application)  for  a  distributed  Java  infrastructure,  provides  a  strategic
advantage  for  enterprise  Information  Technology  (IT) shops.  We believe our
solution,  which  consists of a  comprehensive  suite of software and  services,
provides the following benefits to our customers:

Achieve better collaboration between business and IT organizations

    Our  products  allow  non-programmer,  business-domain  experts to  actively
participate  in  and  guide  the  translation  of  business   requirements  into
differentiated  e-business software  applications and processes.  Developers can
reduce  the  time  it  takes  to  implement   application  changes  and  provide
application  maintenance,  enabling  them to elevate their focus to new business
demands.

Reduce operating costs

    Our solution improves operational  efficiencies  associated with application
development  and  maintenance  by enhancing the  productivity  of a company's IT
resources.  First,  our  product  reduces  the  lines of code  that  needs to be
hand-written,  debugged, and tested. Second, the applications that are delivered
more accurately meet the user requirements,  so there are fewer change requests.
Third,   existing   programmers  can  be  transitioned  from  other  programming
technologies  like Visual Basic,  PowerBuilder,  or COBOL, so that companies can
take advantage of the existing business domain knowledge.  And, because they can
transition  existing  IT  programmers,  they can  reduce  the  number of outside
consultants that have to be hired.

Reduce project risks

    Our  solution  reduces  the risk by taking out the  error-prone  translation
cycles  that  occur  between  the  business  user,  business  analyst,  and  the
programmer. Rather than translating the requirements,  step-by-step, in Versata,
the requirements are directly executable.  In addition,  the use of an iterative
development  approach  enables the business users to identify issues sooner with
running incremental implementations,  which reduce the amount of re-writing that
occurs during the project development phase.

Reduce the risk of selecting the wrong technology

    Versata  implements and layers its  technology on top of industry  standards
and migrates existing business logic to new versions of these standards. This is
important   because   application   developers  won't  have  to  re-write  their
applications  as each  edition  of the J2EE,  EJB,  or other  standard  changes.
Versata  enables a company to invest in designing  and managing  their  business
logic without concern for the underlying technology.

                                       4
<PAGE>

Inject agility and flexibility into business efforts

    With the Versata  approach,  organizations  employ their business logic, the
business  rules  and  processes,  to  knit  complex  business  transactions  and
interactions  together.  This business logic penetrates far deeper into business
transactions  than simply the price,  availability  and size of a product.  They
reach into the manner,  behavior  patterns and conditions under which customers,
suppliers,  employees and intermediaries interact. Business logic is an integral
component  of and exists  throughout  the  framework  of commerce  and  business
transactions.

    Our  products  enable  organizations  to map  their  business  policies  and
processes  in the  language  of  easy-to-understand  business  rules and process
models (i.e.,  "An account balance cannot exceed a customer's  credit limit" and
"When orders exceed $30,000,  send to sales manager for approval").  The Versata
"declarative business logic" approach embeds business rules and business process
into the core foundation of software applications,  making it easier and quicker
to a) build those software applications and b) make system-wide changes to these
software applications once the application has been launched.

    By driving key business logic,  the core business rules and processes,  into
the foundation of application development  activities,  our products address the
market need created by expensive,  elongated  business  application  development
cycles, difficulty of changing/updating  applications to reflect business needs,
business  manager/  IT  developer   collaboration   issues,  and  complexity  of
implementing large-scale, distributed Java applications.

    In addition,  we believe, our products facilitate rapid response to business
challenges,  enabling constant  innovation of processes and applications to stay
in step with technology - and ahead of competition. When changes are required to
a business  application,  the Versata  approach  allows users to  systematically
implement  those changes by modifying a few business  rules or process  models -
versus first finding, then changing,  thousands of lines of programmer-developed
code.  Non-programmers and business-domain experts can also actively participate
in and  guide the  translation  of  business  requirements  into  differentiated
e-business software applications and processes.

Improve IT development staff

    By making it much less  complex to create and  modify  complicated  business
applications,   Versata  enables   companies  to  make  their  programmers  more
productive  in  a  Java-technology  environment.  Efficiencies  associated  with
developers are achieved  through  savings in time,  re-training  and outsourcing
costs.  In addition,  we believe our solution  optimizes  the use of a company's
more advanced Java developers.  Rather than wasting time hand-coding  every line
of an  application,  they can be focused on the really  difficult  tasks such as
custom integration and legacy interaction.

Speed time to market

    Our solutions  help companies  shave time off  application  development  and
maintenance. And, in the rapidly changing economy, early-to-market companies are
rewarded  with  increasing  returns  on  investment.  In  addition,  we  believe
companies  using our solutions  can rapidly  reduce their  application  backlog,
enabling IT to keep up with the constant  demand from the  business  side of the
house.

Leverage standard, high-performance platforms

    Our products are based on open industry standards (J2EE, EJB, XML, etc.) and
industry leading platforms such as IBM WebSphere  Application Server and BEA Web
Logic Server.

    Our products interact with a number of sources including leading  relational
database  systems,  legacy software  applications,  and various  standards-based
middleware solutions.  In this way, our solution makes it possible for companies
to  build  and  deploy  new  business  applications  using  existing  technology
infrastructure  and systems,  and with  confidence  that our products will prove
compatible with other infrastructures that might be installed in the future.

Strategy

    Our  mission  is to lead  Global  2000  companies  seeking  to build  large,
distributed  applications  within a J2EE infrastructure to conclude that Versata
is an essential  part of their  Distributed  Java  infrastructure  (J2EE and Web
Services)   alongside  their  Application  Server  and  Integrated   Development
Environment (IDE) of choice. This strategy is based on five pillars:

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<PAGE>

Provide an Integrated Business Logic Offering

    A key  differentiator  for Versata is the  integration  of  transaction  and
process logic in a declarative  environment.  Both transaction and process logic
contribute to the value  provided by Versata of allowing the business user to be
involved from the ground up,  mapping his business  problems  effectively to the
application,  and being able to see,  monitor and manage the logic as a business
asset. This integrated offering is the Versata Logic Suite.

Offer Versata Logic Suite as a J2EE Infrastructure Component Plug-in

    While  many of our  customers  use and derive  value  from our  presentation
layer,  we are now selling to  companies  more  literate in J2EE,  with  already
established  Java  Server  Pages (JSP) tools for the front end. We are seen as a
mainstream  J2EE vendor and as a plug-in  component  to a company's  distributed
Java infrastructure.  A part of reaching mainstream J2EE vendor status is market
visibility,  which we will  continue to enhance by  participation  in  standards
groups, conferences, and other venues.

Target WebSphere Accounts who are Developing Large Applications

    We believe companies  developing large  applications best realize our value.
Such companies are most likely found in large enterprises or Federal, State, and
Local government  agencies.  IBM has strong  relationships in these accounts and
has an  inclusive  strategy  with its "open"  source  WebSphere  Studio  Tooling
initiative.  We intend to target IBM WebSphere customers who plan to build large
applications  or are building a smaller  application as the first of many within
an IT SOA.

Narrow the Market Focus

     Approximately  121 companies have deployed  complex  applications  with our
solutions.  These  deployments  span 24 industry  sectors,  with no  predominant
industry emerging. In 2002 we intend to narrow the market focus in three ways:

     o   Continue a sales and marketing  focus on Independent  Software  Vendors
         (ISVs) with the integrated Versata Logic Suite offering.

     o   Develop whole product  offerings for up to two Target Markets - we plan
         to develop an offering for a specific  Line-of Business (LoB) within an
         industry to gain a foothold into an account and industry,  with our end
         objective   being  to  be  included  as  a  key  element  in  the  J2EE
         infrastructure.

     o   Continually  seek to leverage  individual  account  opportunities  into
         tactical sales programs involving industries and/or solutions. Examples
         include legacy  integration  with WRQ, State and Local  government with
         American  Management  Systems,  Inc. and Courts  applications  with the
         State of Utah.

    Further,  we intend to emphasize  in the sales  process the  requirement  of
reaching the economic  buyer.  In addition,  we intent to initiate a longer term
strategy aimed at positioning  Versata as a "Business Logic Management  System,"
used by the business user to create,  monitor,  and manage  business  Logic as a
corporate  strategic asset. With this strategy Versata does not leave behind the
IT  organization  in the  pursuit  of the  Business  user.  The  message  is the
capability  to  interact  at the  Business  Level,  and execute at the IT level.
Without execution,  the value diminishes to simply documentation (e.g., Computer
Aided Software  Engineering  (CASE)).  Without  operating at the business level,
system  operation  remains  the sole  purview  of IT.  Combining  both  empowers
business users, and builds bridges between IT and business users.

Customers

    In 2001,  we licensed our products to 61  customers  worldwide  for use in a
wide  range of  e-business  software  applications  in diverse  markets  such as
financial  services  and  insurance,  telecommunications,   energy,  government,
manufacturing,  health  care,  and  retail,  and 30 of which were new  customers
including Bank of America,  Fiserv, Inc., Mercator Software,  Inc., Northeastern
University,  Interpath,  and WRQ, Inc. In addition, 31 repeat customers licensed
more  software  from Versata  including  Federal  Home Loan Bank of  Pittsburgh,
American Management Systems, IBM, and Micro General Corporation.

    We intend to continue our sales  efforts to increase  both the number of new
customers  and the  percentage  of  repeat  customers.  We  target  Global  2000
companies in the U.S. or their equivalents  abroad.  El Paso Energy  Corporation
accounted for 12% of our revenue

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for the year ended December 31, 1999; no single customer accounted for more than
10%  of  total  revenues  for  the  year  ended   December  31,  2000.   British
Telecommunication  accounted for 17% and Micro General Corporation accounted for
16% of our total  revenues  for the ten  months  ended  October  31,  2001.  The
following are examples of the application of Versata's  products by selected new
and repeat customers during the ten months ended 2001:

     o   American  Management  Systems (AMS),  with revenues of $1.28 billion in
         2000,  manages complex IT, eBusiness and systems  integration  projects
         for 43 state governments, many federal agencies and hundreds of Fortune
         500  companies.  AMS used our  technology  to  develop  and  deploy the
         financial and tax applications in its Advantage suite,  which is a host
         of fully  integrated Web  applications  for state and local  government
         administrative functions.

     o   British  Telecommunications  plc (BT) has increased  its  investment in
         Versata  software and  maintenance to continue  developing new customer
         service  applications  to be deployed  across BT's  operations.  In the
         multi-year  strategic  deal, BT is employing our unique  business logic
         approach in automating  the business  logic that drives the  customers'
         experience with BT's operations. The Versata Logic Server is serving as
         a strategic  component of BT's core customer service  architecture that
         includes  the BEA  WebLogic  platform.  By  significantly  reducing the
         complexity of developing and maintaining  Java-based  applications,  BT
         believes  that Versata will allow them to enhance  customer  service by
         increasing  response  time,  reducing  costs  and  bringing  to  market
         additional  customer  products and services.  Because of our ability to
         create  and  change  applications  in real  time,  BT's  initial  pilot
         projects  have  already  shown  significant   time-to-market   benefits
         compared to standard Java development methods, enabling applications to
         be delivered faster and gain commercial competitive advantage quicker.

     o   Mercator  Software  announced the release of their  Process  Integrator
         1.0, based on the Versata process and workflow technology in January of
         2002.  Their  Process  Integrator   graphically  models  and  automates
         business  processes that  coordinate  human  activities with enterprise
         applications,  corporate data, Internet resources,  and trading partner
         interactions.  It is part of Mercator Software's  intelligent  business
         integration  solutions unifying any internal  operations and connecting
         them with partners and customers while  leveraging  current  technology
         investments.   Over  7,000   businesses,   including  more  than  1,100
         enterprise    customers    in    financial    services,     healthcare,
         telecommunications,   energy,  utilities,  manufacturing,  retail,  and
         distribution, use Mercator software to maximize their performance.

     o   United Bank of California  (UBOC),  the third largest chartered bank in
         California,  has used the Versata Logic Server to build their  customer
         relationship  management system that will allow over 700 UBOC employees
         at 115 branches throughout  California to significantly enhance service
         to their  retail  and  small  business  customers.  UBOC's  new  system
         leverages  the unique  business  logic-based  technology of the Versata
         Logic Server. UBOC believes Versata allowed them to deploy its customer
         relationship  management system more quickly than other methods. United
         California  Bank  was  looking  to  transition  to the new  Web-centric
         technologies-Java,   HTML  and  application   servers-while  leveraging
         existing application infrastructures. To accomplish this, UBOC used the
         Versata Logic Server to automate the business  logic behind the system.
         The  system  was  rolled out using  Versata's  CORBA  edition,  but was
         recently  upgraded to the IBM WebSphere  EJB edition.  The UBOC project
         began the  project at the end of 1999.  Representative  of how it helps
         speed  customers  to market,  UBOC  was  able  to rollout  phase one in
         just over two months. In June 2000, a contact management  system,  part
         of the overall customer relationship management system, was rolled out.
         Along the way  additional  components,  such as a  customer  survey and
         mortgage applications,  were quickly and easily added, highlighting the
         flexibility of working with Versata's rules-based technology.

     o   National Wildfire  Coordination  Group (NWCG) has begun deployment of a
         new automated  dispatching system that operates using the Versata Logic
         Server. NWCG agencies include: Bureau of Indian Affairs, Bureau of Land
         Management, Fish and Wildlife Service, National Park Service, US Forest
         Service,  Tribal Council, and State Forestry Agencies.  The name of the
         application  is ROSS,  which stands for National  Interagency  Resource
         Ordering and Status System. ROSS provides automated support to dispatch
         and coordination  offices for all member agencies of the NWCG. The ROSS
         application  will  automate the current  manual  resource  ordering and
         status process.  It is estimated that due to improvements in efficiency
         alone,  the cost savings will amount to more than $15.7 million a year.
         The  ROSS  Project  is the  first  information  systems  project  to be
         sponsored by the NWCG and is also the first and largest  wildland  fire
         management  information  systems project of its kind in the nation.  In
         addition  to  wildland  fires,  the  ROSS  application  will be used in
         support of flood, hurricane,  earthquake,  volcanic, and other national
         disaster  relief  efforts.  Nearly  400  interagency  dispatch  offices
         throughout  the nation  will  operate  the ROSS  application.  The ROSS
         application,  built using the Versata Logic Server (by Lockheed  Martin
         Information Support Services), is being used in the Rocky Mountain Area
         and at the National Interagency Coordination Center (in Boise, ID).

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<PAGE>

Products

    The Versata Logic Suite provides the most productive solution for delivering
large, enterprise  applications.  Versata's approach - the declarative creation,
execution,   reuse  and  change  of  business  logic  for  a  distributed   Java
infrastructure,  within  IBM  WebSphere  and BEA  WebLogic  servers,  provides a
strategic advantage for enterprise  Information Technology (IT) shops. Following
is a current list of Versata products:

Products                                     Description

Main Products:

Versata Logic Server                         The Versata  Logic  Server (VLS) is
                                             an  application  server  extension,
                                             which manages and executes business
                                             logic.   The  VLS   has  two   core
                                             engines,   the  Transaction   Logic
                                             Engine   and  the   Process   Logic
                                             Engine.

                                             The   Versata   Transaction   Logic
                                             Engine   enables   business   rules
                                             execution     for     transactional
                                             business  logic and provides a J2EE
                                             framework   for   the    necessary,
                                             reusable     services    such    as
                                             cross-object            navigation,
                                             transaction             sequencing,
                                             event-action   synchronization  and
                                             more.

                                             The Versata Process Logic Engine is
                                             the runtime  component  that enacts
                                             business processes,  routes work to
                                             participants,      and     provides
                                             integration  points  with  external
                                             enterprise systems. By facilitating
                                             on-the-fly     process     changes,
                                             involving external customers in the
                                             processes,  and delivering the work
                                             to the  right  place  at the  right
                                             time  the  Process   Logic   Engine
                                             enables   customers   to   maximize
                                             business execution.

Versata Interaction Server                   The  Versata   Interaction   Server
                                             (VIS) is a  stand-alone  version of
                                             the Versata  Process  Logic  Engine
                                             and is a process  automation engine
                                             and design environment that extends
                                             core  business   processes   across
                                             people,  systems  and time.  VIS is
                                             sold  exclusively  through  our ISV
                                             Sales  Channel.  VIS is principally
                                             concerned  with the way  activities
                                             are planned, sequenced,  delivered,
                                             and   performed   over  time.   VIS
                                             automates  process across  software
                                             applications  without  programming.
                                             Like VLS, VIS runs  stand-alone  or
                                             on  standard   application   server
                                             platforms-- including IBM and BEA.

Supporting Products:

Versata Logic Studio                         The Versata Logic Studio houses the
                                             designers for both the  Transaction
                                             Logic and  Process  Logic  Engines.
                                             The  Transaction  Logic  components
                                             start from data object designs with
                                             business     logic     and     rule
                                             specifications.  The  Logic  Studio
                                             then  compiles and deploys the data
                                             objects as transactional components
                                             (EJB's)  into  the  pre-built  J2EE
                                             pattern framework hosted within the
                                             Versata Logic  Server.  The Process
                                             Logic      components,      defined
                                             graphically  in the language of the
                                             business   analysts   as   activity
                                             diagrams or work-flows, contain the
                                             sequences      of       activities,
                                             sub-processes  and transitions that
                                             define the  sequence,  delivery and
                                             execution     of      transactional
                                             interactions  over time, people and
                                             systems.

Versata Presentation Server and              The  Versata   Presentation  Server
Presentation Designer                        provides   a   rich    presentation
                                             interface to VLS. It supports  both
                                             HTML  and  Java  clients  including
                                             browsers,   applets  in   browsers,
                                             standalone       applets,       and
                                             applications  as they interact with
                                             the  Versata  Logic  Server.   This
                                             includes   server-side   state  and
                                             session management and presentation
                                             services for HTML clients.

                                             The Versata  Presentation  Designer
                                             provides       an        automated,
                                             template-based    environment   for
                                             designing HTML or Java clients.

Versata JSP Integration Toolkit              The Versata JSP Integration Toolkit
                                             will  allow for Java  Server  Pages
                                             (JSP)  developers to access Versata
                                             resources  via  several   different
                                             methods:  in-line  Java  within the
                                             HTML of the JSP page,  Java  Beans,
                                             or custom tags.

                                       8
<PAGE>

Versata Design Adapter for Rational Rose     The  Versata   Design  Adapter  for
                                             Rational  Rose  allows for  greater
                                             integration  with the Rose modeling
                                             environment    during   development
                                             time. The Unified Modeling Language
                                             (UML)   is  the   industry-standard
                                             language      for       specifying,
                                             visualizing,    constructing,   and
                                             documenting         object-oriented
                                             applications    by    providing   a
                                             graphical   representation  of  the
                                             business    objects    and    their
                                             relationship   to  other   business
                                             objects. The Versata Design Adapter
                                             for Rational Rose  synchronizes the
                                             view of the application(s) business
                                             objects  represented as a UML Class
                                             Diagram   (an   analysis/high-level
                                             design  view) in Rational  Rose and
                                             their         design/implementation
                                             representation in the Versata Logic
                                             Studio.

Services

    An important component of our overall solution is our ability to provide our
customers with comprehensive professional services -- from training,  mentoring,
customer   support,   staff   augmentation  and  project   management  or  rapid
requirements  development to complete  turnkey solution  services.  Through this
comprehensive suite of services,  we enable our customers to automate e-business
software  applications without regard for internal staffing  constraints.  As of
October 31, 2001,  our  services  organization  consisted  of 63  professionals,
comprised of our consulting services  organization and contractors,  14 of which
were in customer support and 5 in training.

Consulting Services

     We provide mentoring, staff augmentation and project management services to
assist customers in developing and deploying large, enterprise applications with
multiple  data sources and  database  tables,  multiple  user  interfaces,  with
complex  business  transactions  used by thousands of users.  Many  applications
built today are  departmental  in nature and don't require the power of Versata;
for those we recognize that  hand-coding  Java is an acceptable  solution.  But,
when the system is  mission-critical  to a  company's  operations  and  supports
thousands of transactions,  more power is needed and this is where we believe we
fit best.

    Our services  include system  architecture,  data  modeling,  system design,
software application development,  testing,  configuration and installation, and
performance  tuning.  These services can be provided at our customers'  sites as
well as via remote  electronic  connection,  offering our  customers the balance
between personal interaction and speed of responsiveness.

Training Services

    We offer our customers  introductory and advanced training in the use of our
products.  These training services are offered in several geographic  locations,
either as standard  public  training  classes  located  throughout  the U.S. and
Europe or on-site private training  classes.  We price these services per course
or on a per day basis.

Customer Support

    We believe  that a high level of customer  support  services is essential to
our success.  We offer a range of customer support services  including  business
hour telephone and e-mail support from our Oakland, Australia, German and United
Kingdom facilities, 24-hour-a-day/seven-day-a-week production system support and
on-site  support on  request.  We also  provide our  customers  with access to a
developers  knowledge base news group,  discussion groups and other repositories
of information  regarding our products.  Our customers typically purchase annual
customer  support  contracts at prices  dependent  upon their  desired  level of
customer service.

Services Partners

    In addition to our internal  services  organization,  we have  relationships
with resellers, professional service organizations and global system integrators
that offer  consulting,  training and customer  support  services  including IBM
Global Services,  Online Business Systems,  Cap Gemini, Atos Origin, and Logica,
to  cooperate  in the  deployment  of our  products  to  customers.  Our service
partners  are  encouraged  to attend and  complete a series of Versata  training
courses.  These relationships expose the customer base of these companies to our
software and we intend to develop them further.

Sales and Marketing

                                       9
<PAGE>

Sales

    We sell our  products  through a  multi-channel  distribution  model,  which
includes both direct and indirect  channel  sales.  As of October 31, 2001,  our
sales  organization  consisted of 49  professionals  throughout  North  America,
Europe and the Pacific  Rim. Our direct  sales teams  typically  include a sales
representative,  a solutions  architect and are supported by a regional  service
manager.

    At the end of  October  31,  2001,  we had 22  quota-carrying  sales  teams,
including 17 direct teams and 5 indirect channel focused teams.

    We utilize sales teams consisting of both sales and technical  professionals
to create organization-specific proposals, presentations and demonstrations that
address  the  specific  needs of each  potential  customer.  Our sales model can
include a proof of concept and/or return on investment (ROI) approach to winning
competitive sales opportunities.  In many of these competitive  situations,  the
tangible results of our proof of concept/ ROI  substantiate  the  time-to-market
advantage,  ability to support business flexibility and ease of use, which often
lead to a full project implementation.

    We  complement  our direct sales force with channel  sales  through  various
types of  relationships  that either  sell,  or help us sell,  our  products and
services. These include:

o    IBM. A significant  sales channel is our strategic  relationship  with IBM.
     This  includes a re-selling  agreement in which the Versata  Logic Suite is
     available through IBM's Passport Advantage Program,  IBM's volume licensing
     program.  Versata product availability on Passport Advantage eliminates the
     special  handlings,  such as separate  contracts  with  Versata for license
     maintenance and support. Versata expects that this arrangement will improve
     Versata's  visibility  within  IBM and may  help  increase  the  volume  of
     software sold through IBM.

o    System  Integrator   Partners.   Our  system  integrator  partners  include
     companies that custom develop and integrate software applications,  such as
     global system integrators as well as regional  consulting  partners.  These
     partners refer our products to new customers and then typically provide the
     customers with  consulting  and system  integration  services.  Our Systems
     Integrator  partners include IBM Global Services,  Online Business Systems,
     Cap Gemini,  EDS, Atos Origin,  Logica,  KPMG, American Management Systems,
     and Lockheed Martin Services. In 2002, we intend to expand our relationship
     with System Integrator Partners.

o    Independent Software Vendors and Application Service Providers  (ISV/ASPs).
     Our partners that sell pre-packaged software  applications,  often referred
     to as independent  software vendors,  and our application  service provider
     partners use our software to create and maintain their integrated  software
     products.  We  typically  receive a royalty  from these  partners for every
     software sale that integrates the Versata products.  Some of these partners
     included Mercator  Software,  WRQ, Inc.,  Fiserv  Solutions,  Inc., and Cap
     Gemini.

o    International Distributors.  Our international distributors include vendors
     that sell business software  products to companies in Europe,  Middle East,
     and Australia.

    With the addition of Versata's new product release, Versata Logic Suite 5.5,
the first product on the market to combine  business logic for both  transaction
processing  and process  automation,  we believe our sales teams will be able to
sell a  comprehensive  solution  that will enable our clients to increase  their
return  on  investment.

     We have rolled out a new third party sales force  automation  system.  This
system will provide our sales force and  management  with real time account data
and allow us to better manage our sales cycles. This software will also allow us
to do customized marketing to our current and prospective customers.

Marketing

    We support  our sales  efforts  through a variety of  marketing  initiatives
implemented  through both our corporate  headquarters and our regional  offices.
Our  marketing  organization,  which  consisted of 9 employees as of October 31,
2001,  focuses on creating market  awareness for the Versata System,  generating
sales leads, forming relationships with leading technology companies,  promoting
our e-business  automation  leadership and educating industry analysts about our
solution. We conduct a variety of marketing initiatives worldwide to educate our
target  market.  We have  engaged  in  marketing  activities  such  as  business
seminars,  trade shows,  press  relations,  industry analyst  programs,  ongoing
public relations, advisory councils, direct mailings and telemarketing, managing
and  maintaining  our Website,  and  producing  and  distributing  sales support
materials. Our marketing organization also serves an integral

                                       10
<PAGE>

role in acquiring, organizing and prioritizing customer and industry feedback in
order to help provide  product  direction to our development  organizations.  We
formalized  this  customer-driven  approach  by  establishing  advisory  council
meetings  to provide  forums for  discussing  customer  needs and  requirements.
Advisory council meetings provide a useful forum in which to share  information,
test product concepts and collect data on customer and industry needs. We intend
to continue to pursue these programs in the future.

Product Development

    The Internet  infrastructure  industry is  characterized  by extremely rapid
technological  change, which requires constant attention to computing technology
trends, shifting consumer demand, and rapid product innovation.

    Most of the Versata's  software products are developed  internally.  We also
license software technology from third parties.  Internal development enables us
to maintain closer technical  control over the products and gives us the freedom
to designate which  modifications  and  enhancements are most important and when
they should be  implemented.  Product  documentation  is also generally  created
internally.  We believe that a crucial factor in the success of a new product is
getting  it to market  quickly  without  compromising  product  quality.  Before
releasing new software,  the product  undergoes  extensive quality assurance and
testing.

    Product development expenses,  excluding stock-based  compensation,  totaled
approximately  $3.3 million for the year ended  December 31, 1998;  $4.8 million
for the year ended  December 31, 1999;  $9.7 million for the year ended December
31, 2000; and $8.8 million for the ten months ended October 31, 2001.

    As of October 31,  2001,  Versata  employed 52  technical  professionals  in
product  development  including  quality  assurance and technical  documentation
positions.  The  Versata  product  development  team  has  benefited  from a low
turnover  rate  despite  the  intensely  competitive  environment  for  software
engineers.

Competition

    The  Internet  infrastructure  software  market  is  intensely  competitive,
subject to  technological  changes  and  significantly  affected  by new product
introductions  and other market activities of industry  participants.  We expect
the  competition  in this industry to persist and  intensify in the future.  Our
primary competition comes from companies developing their software  applications
internally  using  traditional  programming  approaches.  We also compete with a
number of other sources including:

    o    vendors of application server development products and services such as
         IBM, BEA Systems,  Inc., Microsoft,  Sun Microsystems,  Inc. and Oracle
         Corporation;

    o    vendors  of  traditional  workflow  and  process  applications  such as
         FileNet, Saviion and Fujitsu;

    o    vendors  of  Web  integrated  development  environments  such  as  IBM,
         Borland, and WebGain; and

    o    companies  that market  business  application  software  such as Oracle
         Corporation, PeopleSoft, and SAP.

    We   believe that the principal competitive factors in our market are:

    o    product functionality and features;

    o    ease of product implementation;

    o    responsiveness to business and technical changes;

    o    performance, scalability and availability;

    o   use of standards-based technology;

    o    ease of integration  with  customers'  existing  legacy data,  software
         applications and middleware computing infrastructure;

    o    quality of professional services offerings;

                                       11
<PAGE>

    o    quality of customer support services;

    o    price; and

    o    Company reputation.

    Although we believe that we currently compete favorably with respect to most
of these  factors,  our market is just reaching the  mainstream  customer and is
evolving  rapidly.  We may not be  able to  maintain  our  competitive  position
against  current  and  potential  competitors,  especially  those  with  greater
financial, sales, marketing,  professional services, technical support, training
and other  resources.  The risks  associated  with  competition  are more  fully
discussed in the "Risk Factors"  section  contained below in this Item 1 of this
Report.

Intellectual Property and Licensing

Intellectual Property

    We rely on a combination of patent, copyright,  trademark, trade secret laws
and licensing  arrangements to establish and protect our intellectual  property.
These legal protections afford only limited  protection for our technology,  and
we  cannot  provide  any  assurance  that  other   companies  will  not  develop
technologies  that are  similar or  superior  to our  technology.  If we fail to
protect our proprietary technology, our business could be seriously harmed.

    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.  It is
possible that other companies could successfully challenge the validity or scope
of our patents and that our patents may not provide a  competitive  advantage to
us. 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.  We enforce our  trademark,  service mark and trade name rights.  We
have used and applied to register certain trademarks to distinguish our products
from those of its  competitors in the U.S. and abroad.  Furthermore,  as part of
our proprietary protection procedures,  we enter into non-disclosure  agreements
with our  employees,  customers,  distributors  and  business  partners and into
license  agreements  with  respect  to our  software,  documentation  and  other
proprietary information. We further seek to avoid disclosure of our intellectual
property by restricting  access to our source code.  Despite these  precautions,
third parties could copy or otherwise  obtain and use our products or technology
without authorization, or develop similar technology independently. In addition,
the laws of many countries do not protect our proprietary  rights to as great an
extent as do the laws of the U.S.

    Currently,  we are not  aware  of any  pending  claims  that  our  products,
trademarks or other proprietary  rights infringe upon the proprietary  rights of
third parties. While we rely on patent, copyright,  trademark, trade secret laws
and contractual restrictions to protect our technology,  we believe that factors
such as the creativity and  technological  skills of our personnel,  new product
developments,  frequent product  enhancements and reliable  customer service and
product  maintenance  are more  essential  to  establishing  and  maintaining  a
technology leadership position.  See the "Risk Factors" section under Item 1 for
a discussion of the risks associated with proprietary rights.

Third Party Licensing

    We integrate  third-party software into our products.  While we believe that
alternative  sources of such  third-party  software is available  and based upon
past experience and standard industry practice such licenses  generally could be
obtained on commercially  reasonable terms, any significant  interruption in the
supply of such products could adversely  impact our sales of our Products unless
and until we could secure another supplier.

International Operations

    We have established international subsidiaries, namely in the British Virgin
Islands,  Canada,  United Kingdom,  Hong Kong, Germany,  Australia,  France, and
India. All but one of our subsidiaries is wholly owned.

Employees

                                       12
<PAGE>

    As of October 31, 2001,  we had 200 employees  and 6  contractors.  Of these
individuals,  58 employees  and 4  contractors were in sales and  marketing,  52
employees  were in  development  and  engineering  services,  63 employees and 1
contractor were in professional  services and customer support, and 30 employees
and 1  contractor  were in finance and  administration.  Our  employees  are not
represented by any collective bargaining unit, and we believe our relations with
employees are satisfactory.

Risk Factors That May Affect Future Results

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

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

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

                                       13
<PAGE>

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 2001. Our Company's  stock price is affected by a number of factors,
some of which are beyond our control including:

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

    o    the competitive landscape;

    o    technological innovations by us or our competitors;

    o    changes in earnings estimates or recommendations by analysts;

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

    o    general economic and market conditions;

    o    additions or departures of key personnel;

    o    estimates and projections by the investment community; and

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

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

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

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

    o    relatively long sales cycles for our products;

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

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

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

    o    changes in customer budgets;

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

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

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

                                       14
<PAGE>

    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.  Revenue shortfalls below our expectations could have an immediate
and significant adverse effect on our results of operations.

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

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

    o    competition in the Internet infrastructure software market;

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

    o    the overall trend toward industry consolidation;

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

    o    variations in mix of products sold; and

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

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

The Private Securities Class Action Lawsuits 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  lawsuit.  In  addition,  two
derivative  actions on behalf of our Company were filed against  certain current
and former  officers and  directors in the  Superior  Court for Alameda  County,
California.  Depending on the outcome of such litigation,  we may be required to
pay substantial damages or settlement costs, which could have a material adverse
effect on our financial  condition or results of  operations.  Regardless of the
outcome of these matters,  we may incur substantial  defense costs and that such
actions may cause a diversion of management time and attention.

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

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

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

    Our Company's  common stock has not  maintained a minimum bid price of $1.00
over the last  consecutive  30 trading  days as required by the Nasdaq  National
Market.  On February 19, 2002 we received a notice on the minimum bid price non-
compliance  from Nasdaq  National  Market.  We have until May 20, 2002 to regain
compliance or be subject to delisting  procedures  subject to Versata's right to

                                       15
<PAGE>

appeal.  The company does not intend to have the stock delisted and is reviewing
its options, which may include, subject to our stockholders' approval, a reverse
stock split which our board of directors has approved.

    If any appeal we file receives an unfavorable  determination  by NASD and we
are unsuccessful with our reverse stock split, our common stock would be removed
from listing on the Nasdaq  National  Market that could have a material  adverse
effect on us and on the price of our common stock.

We Have Incurred Increasing  Operating Losses Since Our Inception and are Likely
to Incur Net Losses and Negative Cash Flows for the Foreseeable Future.

    We have  experienced  operating  losses in each  quarterly and annual period
since  inception.  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 October 31, 2001, we
had an accumulated  deficit of $184.2 million.  Although we have an objective of
achieving  profitability as soon as practical, we cannot assure you that we will
be successful.  In order to achieve and maintain profitability,  we will need to
increase revenues while decreasing expenses.

We May Require Future Additional Funding to Stay in Business.

    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.

    Rapid technological advances in software development,  evolving standards in
software  technology and frequent new product  introductions  and  enhancements,
characterize  the  markets for our  products.  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

                                       16
<PAGE>

products,  product  enhancements  and  related  services  in a  timely  and cost
effective  manner.  We expect to continue  to commit  significant  resources  to
market and further develop our products and related  services and to enhance the
brand awareness of our software and services.

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

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

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

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

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

                                       17
<PAGE>

    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.

Recent terrorist  activities and related military and security  operations could
adversely affect our revenues and operations.

     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.  These events  temporarily  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 Technology is a Key Component of Sales,  Our Business
May Suffer If We Cannot Protect Our Intellectual Property.

    Approximately  47% of our revenue for the ten months ended October 31, 2001,
was derived from the license of software  products.  We rely on a combination of
contractual provisions, confidentiality procedures, and patent, trademark, trade
secret and copyright laws to protect the proprietary  aspects of our technology.
We currently have a U.S. patent relating to our automated  development tool that
uses a  drag-and-drop  metaphor.  This patent is scheduled to expire on April 9,
2016. In addition,  we have a U.S. patent pending relating to our business rules
automation  in  database  application  development  and  maintenance.  We cannot
predict whether this patent application will result in an issued patent, or if a
patent is issued, whether it will provide any meaningful  protection.  Moreover,
these legal protections afford only limited protection, and competitors may gain
access  to our  intellectual  property,  which  may  result  in the  loss of our
customers.

    Despite our efforts to protect our proprietary rights,  unauthorized parties
may attempt to copy aspects of our products or to obtain and use our proprietary
information.  Litigation may be necessary to enforce our  intellectual  property
rights,  to protect our trade secrets and to determine the validity and scope of
the  proprietary  rights of others.  Any litigation  could result in substantial
costs and diversion

                                       18
<PAGE>

of resources with no assurance of success and could  seriously harm our business
and operating results. In addition,  we sell our products  internationally,  and
the laws of many countries do not protect our  proprietary  rights as well as do
the laws of the United  States.  Our patent and future  patents,  if any, may be
successfully challenged or may not provide us with any competitive advantages.

Item 2. Properties

    Our  principal   executive  and   administrative   offices  are  located  in
approximately 75,000 square feet of office space in Oakland,  California, and we
have subleased  approximately 50,000 square fee of this space,  including 25,000
square  feet of which is  subleased  for the  remaining  term of our lease.  Our
monthly net lease payments on the Oakland  facility are  approximately  $90,000.
This  lease  expires  in August  2008.  We also  maintain  leased  offices or an
"executive suite" in Hamburg,  Frankfurt, and Neuss (Germany), London and Paris.
We believe  that our  existing  facilities  are adequate to meet our current and
projected  needs,  or that  suitable  additional  or  substitute  space  will be
available as needed.

Item 3. Legal Proceedings

Securities Class Action

    Since April 11, 2001,  several securities class action complaints were filed
against us, and certain of our current and former  officers  and  directors.  In
August 2001, the class action lawsuits were consolidated before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs  filed an amended class action complaint naming us,
certain  of our former  officers  and a current  director,  as  defendants.  The
amended class action  complaint  alleges  claims under section 10(b) and section
20(a) of the Securities  Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
It is premature to come to any  conclusions as to the  allegations and potential
damages.  We intend to defend  these  actions  vigorously.  The  hearing for our
motion to dismiss the action is set for May 10, 2002. We expensed the deductible
amount of  directors'  and  officers'  liability  insurance of $350,000 in April
2001.

State Derivative Action

    Since June 11, 2001, two derivative actions were filed on our behalf against
certain  current and former  officers and directors in Superior Court of Alameda
County,  California.  The complaints  also name us as a nominal  defendant.  The
complaints allege that the defendants  breached their fiduciary  duties,  abused
their  control of the  corporation,  and engaged in gross  mismanagement  of the
corporation,  by  allegedly  making or  permitting  the  Company  to make  false
financial  statements and seek,  among other things,  compensatory  damages.  On
November 7, 2001, the state court issued an Order granting  Versata's  Motion to
Stay Proceedings in the consolidated  derivative action until the earlier of the
filing  of an answer by  Versata  in the  Federal  action or  dismissal  of that
action.

    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.

Litigation and other claims

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

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

    None.

                                       19
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters


    (a) Price Range of Common Stock

    Our common  stock is listed on the Nasdaq  National  Market under the symbol
"VATA." Public trading of our common stock commenced on March 3, 2000.  Prior to
that date,  there was no public market for our common stock. The following table
sets forth, for the periods indicated,  the high and low sale price per share of
our common stock on the Nasdaq National Market:

                                                                High       Low
                                                                ----       ---
       Ten Months Ended October 31, 2001:
         First  Quarter (from  January 1 through  March 31,    $  9.38    $ 0.20
       2001..............................................
         Second  Quarter  (from  April 1  through  June 30,       1.75      0.20
       2001).............................................
         Third Quarter (July 1 through September 30, 2001)        0.85      0.20

                                                                High       Low
                                                                ----       ---
       Year Ended December 31, 2000:
         First Quarter (from March 3, 2000)..............      $100.94    $52.13
         Second Quarter..................................        60.19     12.00
         Third Quarter...................................        47.50     19.13
         Fourth Quarter..................................        26.38      3.88

    We believe that a number of factors may cause the market price of our common
stock to fluctuate. See "Item 1. Business-- Risk Factors." As of March 20, 2002,
there were 461 holders of record of our common stock.

    We have never paid or declared  any cash  dividends  on our common  stock or
other securities and do not anticipate  paying cash dividends in the foreseeable
future.  We currently intend to retain all future  earnings,  if any, for use in
the operations of our business.

    (b) Use of Proceeds from Sales of Registered Securities

    On March 2, 2000 the Securities and Exchange  Commission  declared effective
our  Registration  Statement  on Form S-1 (File No.  333-92451)  relating to our
initial public offering of our common stock.  The 4,427,500 shares offered by us
under the  Registration  Statement were sold at a price of $24.00 per share. The
aggregate  proceeds to the Company  from the  offering  were  $97,100,000  after
deducting the underwriting  discounts and commissions of $7,438,200 and expenses
incurred in  connection  with the  offering  of  approximately  $1,721,800.  The
Company closed its initial public offering on March 8, 2000.

    Versata has invested the net proceeds  from its initial  public  offering in
interest-bearing  investment-grade  instruments. The net proceeds generated from
the offering  have been used  primarily to fund the Company's  working  capital,
capital expenditures and general corporate needs. In addition,  the Company paid
approximately $1,176,000 in connection with the acquisition of Verve, Inc.

Recent Sales of Unregistered Securities

     None.

Item 6. Selected Financial Data and Supplementary Data

    You should read the following  selected  financial data in conjunction  with
the  consolidated  financial  statements  and  related  notes and  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations."  The
statement of operations  data for the years ended  December 31, 2000,  1999, and
1998 and for the ten months ended  October 31, 2001,  and the balance sheet data
at December  31, 1999 and 2000 and October 31, 2001 are derived from the audited
financial  statements included elsewhere in this Transition Report on Form 10-K.
The statement of operations data for the years ended December 31, 1996, 1997 and
1998, and the balance sheet data at December 31, 1996,  1997,  1998 and 1999 are
derived from audited financial statements not included in this Transition Report
on Form 10-K.

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                             Ten Months                           Year Ended December 31,
                                                Ended      --------------------------------------------------------------------
                                             October 31,        2000            1999          1998         1997         1996
                                             ------------   -----------     -----------    ----------  -----------   ----------
                                               2001 (a)
                                               --------
                                                                                       (In thousands)
<S>                                         <C>             <C>             <C>            <C>         <C>           <C>
     Consolidated Statement of
       Operations Data:
     Revenue............................    $   29,380      $   56,608      $   12,582     $   3,950   $    1,406    $   1,124
                                            ----------      ----------      ----------     ---------   ----------    ---------
     Loss from operations...............       (64,317)        (72,903)        (21,496)       (7,883)     (10,012)      (9,203)
     Net loss...........................       (62,876)        (67,901)        (21,800)       (8,134)      (9,844)      (9,013)
     Net loss attributable to common
       Stockholders.....................       (62,876)(c)     (67,901)        (32,600)       (8,134)      (9,844)      (9,013)
                                            ----------      ----------      ----------     ---------   ----------    ---------

     Basic and diluted net loss per
       share............................    $    (1.56)     $    (2.06)     $    (9.18)    $   (3.99)  $    (5.72)   $   (6.05)
                                            ==========      ==========      ==========     =========   ==========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                 As of                           As of December 31,
                                                            ------------------------------------------------------
                                                October         2000           1999      1998       1997      1996
                                                --------    -----------     ---------  --------   --------  ------
                                                31, 2001
                                                --------
                                                                               (In thousands)
<S>                                         <C>          <C>             <C>        <C>        <C>       <C>
     Balance Sheet Data:
     Cash and cash equivalents............. $    21,871   $   39,272(b)  $  20,655  $  5,767   $  2,388  $  1,332
     Working capital.......................      14,824       57,958        16,215     3,878        835        54
     Total assets..........................      45,782      119,839        33,660     8,468      4,235     3,374
     Total long-term liabilities...........       1,850          218           320       498      1,175       612
     Stockholders' equity..................      28,790       87,545        19,418     4,356        889       820

<FN>
     ----------

(a)      In December  2001,  we changed our fiscal  year-end from December 31 to
         October 31.

(b)      Cash and cash  equivalents  rose as a result of net cash raised  during
         Initial  Public  Offering  of  $97.1  million,   offset  by  increasing
         operating expenses.

(c)      Net  loss  for  the  ten  months  ended   October  31,  2001   reflects
         restructuring  and other  non-recurring  expenses of $19.7  million and
         impairment charge of $4.1 million.
</FN>
</TABLE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

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 over 500 customers around the world.

                                       21
<PAGE>

    On December 31, 2001, Versata announced a change in its fiscal year end 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
transition  report will be for the  ten-month  period ended October 31, 2001 and
the twelve-month periods ended December 31, 2000, 1999 and 1998.

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

    As of October 31, 2001, we had deferred revenue of $6.2 million,  a decrease
of $2.5  million  from $8.7  million at  December  31,  2000.  The  decrease  is
principally attributable to slow sales during the period.

    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.

    While  revenues from  international  sales have  increased  during the years
ended December 31, 2000,  1999 and 1998 and for the ten months ended October 31,
2001, our revenues to date have been derived predominantly from customers in the
United States. Net revenues from  international  sales represented 31%, 22%, 14%
and 9% of our total revenue for the ten months ended  October 31, 2001,  and the
years ended December 31, 2000, 1999 and 1998, respectively.

    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 consists of salaries of professional
service personnel and payments to third party consultants  incurred in providing
customer support, training, and consulting services. Cost of services revenue as
a percentage of services revenue is likely to vary  significantly from period to
period  depending on overall  utilization  rates, the mix of services we provide
and whether these services are provided by us or by third-party contractors.

    Since our  inception,  we have  incurred  substantial  costs to develop  our
technology  and  products,  to  recruit  and  train  personnel  for our  product
development,  sales and marketing and professional services departments,  and to
establish our administrative  infrastructure.  To date, all software development
costs have been  expensed in the period  incurred.  Historically,  our operating
expenses have exceeded the revenue generated by our products and services.  As a
result,  we have incurred net losses in each quarter since  inception and had an
accumulated  deficit of $184.2 million as of October 31, 2001 and $121.3 million
and $53.4 million as of December 31, 2000, and December 31, 1999, respectively.

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

    In March 2001, we announced a  restructuring  effort to realign our expenses
with a business  plan geared to the changing  economy.  This  restructuring  was
designed to align the workforce  with customer  needs and focus on core business
products.  The  restructuring  plan  included  the  discontinuation  of  further
development  of  non-core  business  products,  facility  consolidations,  and a
reduction in total staff,  including  domestic and  international  employees and
contractors, including staff in our subsidiaries, of approximately 107 positions
across all  departments.  We expensed $6.9 million for  restructuring  and other
expenses in the three months ended March 31, 2001.

    In May 2001, we further reduced staff by approximately 50 positions,  across
all departments,  and closed additional field offices.  We expensed $3.5 million
for restructuring and other expenses in the three months ended June 30, 2001.

                                       22
<PAGE>

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

    In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally.

    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.

Results of Operations

    The following  table sets forth,  for the periods  indicated,  certain items
from the  consolidated  statements  of  operations  of  Versata  expressed  as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                            Ten Months                  Year Ended
                                                               Ended    -------------------------------------------
                                                              October      December    December 31,   December 31,
                                                             31, 2001      31, 2000        1999            1998
                                                             --------      --------        ----            ----
<S>                                                            <C>          <C>            <C>            <C>
        Revenue:
          Software license...............................        47.3%        47.4%          53.5%          48.7%
          Services.......................................        52.7         52.6           46.5           51.3
                                                            ---------    ---------     ----------     ----------
                  Total Revenue..........................       100.0        100.0          100.0          100.0
        Cost of revenue
          Software license...............................         0.7          1.9            4.0            5.9
          Services.......................................        59.8         53.9           48.6           56.9
                                                            ---------    ---------     ----------     ----------
                  Total cost of revenue..................        60.5         55.8           52.6           62.8
                                                            ---------    ---------     ----------     ----------
        Gross profit.....................................        39.5         44.2           47.4           37.2
                                                            ---------    ---------     ----------     ----------
        Operating expense:
          Sales and marketing............................        90.2         82.5          124.1          113.8
          Product development............................        29.9         17.2           37.9           82.9
          General and administrative.....................        36.0         22.4           24.8           34.9
          Stock-based compensation.......................         5.6         45.1           31.4            5.1
          Amortization of intangibles....................        29.6          2.4            -              -
          Impairment of investment.......................         -            1.8            -              -
          Restructuring and other nonrecurring expenses..        67.0          1.6            -              -
                                                            ---------    ---------     ----------     ----------
                  Total operating expense................       258.3        173.0          218.2          236.7
                                                            ---------    ---------     ----------     ----------
        Loss from operations.............................      (218.9)      (128.8)        (170.8)        (199.5)
        Other income (expense), net......................         4.9          8.9           (2.5)          (6.4)
                                                            ---------    ---------     ----------     ----------
        Net loss.........................................      (214.0)%     (119.9)%       (173.3)%       (205.9)%
                                                            =========    =========     ==========     ==========
</TABLE>

Ten Months Ended October 31, 2001  Compared to Twelve Months Ended  December 31,
2000

On December 31, 2001,  we announced a change in our fiscal year from December 31
to October 31. The change was effective  for the ten-month  period ended October
31, 2001. We had  previously  released  results for the three months ended March
31, June 30, and September 30 of 2001. The comparisons in the comments below are
comparing  the ten months  ended  October  31, 2001 to the twelve  months  ended
December 31, 2000.

Revenue

    Total  Revenue.  Total  revenue  consists  of software  license  revenue and
services  revenue.  Total  revenue  for the ten months  ended  October  31, 2001
decreased by $27.2 million,  or 48%, to $29.4 million from $56.6 million for the
year ended  December 31, 2000.  This decrease was  principally  attributable  to
decreased  Information  Technology (IT) spending and overall economic and market
conditions.  As a percentage of total revenue,  software license revenue was 47%
for the ten months  ended  October 31, 2001 and 47% for the year ended  December
31, 2000, respectively, while services revenue was 53% and 53%, respectively.

    Software  License  Revenue.  Software  license  revenue  decreased  by $12.9
million,  or 48%, from $26.8 million in 2000 to $13.9 million for the ten months
ended October 31, 2001. This decrease was primarily attributable to decreased IT
spending  and overall

                                       23
<PAGE>

economic  and  market  conditions.  License  revenue  from  international  sales
decreased by $1.2 million or approximately 17% from $7.0 million in 2000 to $5.8
million for the ten months ended October 31, 2001.

Services Revenue

    Services  Revenue.  Services revenue  decreased by $14.3 million,  or 48.0%,
from $29.8 million in 2000 to $15.5 million for the ten months ended October 31,
2001.  This  trend for  professional  services,  and more  specifically  for our
consulting unit,  represents our ongoing efforts to reduce our volatility within
this business by referring work to third parties and accepting  only  profitable
assignments.  The level of our new  software  sales also  impacts  our  services
revenue.

Cost of Revenue

    Total Cost of  Revenue.  Total cost of revenue  consists of cost of software
license revenue and cost of service revenue.  Total cost of revenue decreased by
$13.8  million,  or 44%, from $31.6 million in 2000 to $17.8 million for the ten
months ended October 31, 2001. This decrease was mainly  attributable to a lower
volume of sales for the ten months  ended  October  31,  2001 as compared to the
year ended December 31, 2000.

    Cost of Software License Revenue.  Cost of software license revenue consists
of royalty  payments  to third  parties  for  technology  incorporated  into our
product, the cost of manuals and product documentation, as well as packaging and
distribution  costs.  Cost of software license revenue  decreased by $882,000 or
81%,  from $1.1 million in 2000 to $206,000 for the ten months ended October 31,
2001.  These decreases were  attributable to lower direct costs  associated with
lower volume of sales.

    Cost of Services  Revenue.  Cost of service revenue consists of salaries and
overhead  costs 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 $13.0 million, or 42%, from $30.5
million in 2000 to $17.6 million in the ten months ended October 31, 2001.  This
decrease is as a result of the restructuring initiatives initiated by management
in January 2001 in response to the revenue declines.

Gross Profit

    Gross profit.  Gross profit  decreased by $13.4 million,  or 54%, from $25.0
million in 2000 to $11.6 million for the ten months ended October 31, 2001. As a
percentage of total  revenue,  gross margin  decreased by 4% from 44% in 2000 to
40% for the ten months  ended  October 31,  2001.  The  decrease in gross profit
results primarily from fixed costs, such as customer support personnel,  and the
higher  percentage of third-party  partners  employed on our jobs at higher cost
than company employees.

Operating Expenses

    Operating  expenses.  Operating expenses decreased by $22.0 million, or 22%,
from $97.9  million in 2000 to $75.9 million in the ten months ended October 31,
2001.  The majority of this  decrease was due to  cost-cutting  initiatives  and
reductions in force. As a percentage of revenue,  operating  expenses  increased
from  173.0%  in 2000 to 258.5%  for the ten  months  ended  October  31,  2001.
Excluding the restructuring and other nonrecurring expenses,  operating expenses
for the ten months  ended  October 31, 2001 were $56.2  million,  a 41% decrease
from $95.6 million in 2000.

    Sales  and  Marketing.   Sales  and  marketing  expense  includes  salaries,
commissions,  expense from our sales offices,  travel and entertainment expense,
marketing  programs  and  recruitment  expenses.  Sales and  marketing  expenses
decreased by $20.2 million,  or 43%, from $46.7 million in 2000 to $26.5 million
for the ten  months  ended  October  31,  2001.  These  decreases  were  largely
attributable  to a $4.8  million  reduction  in salary  expense and $3.3 million
reduction in travel and entertainment expense due to reduction in workforce.  In
addition,  these  expenses  decreased  as a  result  of  decreased  spending  on
marketing  programs  of  $4.1  million  and  $4.2  million  reduction  in  sales
commissions  related to the  decrease in revenue.  As a  percentage  of revenue,
sales and marketing  expense  increased  from 82.5% in 2000 to 90.2% for the ten
months ended  October 31, 2001 due to the fixed  nature of marketing  costs that
were not proportionate to lower sales volume.

    Product  Development.  Product development expenses include 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 $934,000, or
10%,  from $9.7 million in 2000 to $8.8 million for the ten months ended October
31, 2001. This decrease was

                                       24
<PAGE>

primarily  attributable  to  the  reduction  in  workforce,   including  use  of
third-party  consultants,  during the ten months ended  October 31,  2001.  As a
percentage of total revenue, product development expense increased from 17.2% in
2000 to 29.9% in the ten months ended October 31, 2001,  as product  development
expense was spread across a significantly smaller revenue base in the ten months
ended  October 31,  2001.  To date,  all  software  development  costs have been
expensed in the period incurred.

    General and Administrative.  General and administrative  expenses consist of
salaries  for  executive,  finance  and  administrative  personnel,  information
systems  costs  and  bad  debt  expense.  General  and  administrative  expenses
decreased by $2.1  million,  or 16%, from $12.7 million in 2000 to $10.6 million
for the ten months ended October 31, 2001.  This decrease was primarily due to a
reduction  in salary  expense of $290,000  related to  reduction  in force and a
decrease in bad debt  expense of $624,000 as a result of lower sales  volume and
focused  collection  efforts.  As a  percentage  of total  revenue,  general and
administrative expenses increased from 22.4% in 2000 to 36.0% for the ten months
ended  October 31,  2001,  as we continue to spread our  relatively  fixed costs
across a significantly  smaller revenue base during the ten months ended October
31, 2001.

    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 appreciations  rights 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.  We  incurred a non-cash  charge  of $1.7  million  for the ten months
ended  October  31,  2001 as compared  to $25.5  million in 2000.  The  decrease
primarily  relates  to  the  impact  of  option   cancellations  for  terminated
employees.  As of October 31, 2001, additional unvested outstanding options were
scheduled  to vest over the next 31  months,  which  will  result in  additional
compensation  expenses of approximately $2.6 million in the aggregate in periods
subsequent to October 31, 2001. This future expense will be reduced in the event
of related option cancellations for employee terminations in the future.

    Amortization  of Intangibles  and Impairment  Charge.  We incurred  non-cash
amortization  charges of $4.6 million for the ten months ended October 31, 2001.
This  included   straight-line   amortization  of  intangible  assets  from  the
acquisitions  of Verve,  Inc., our French  distributor,  and several  consulting
groups.  In addition,  we had an impairment  writedown under SFAS No.121 of $4.1
million.  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 estimate as of such date.  Intangible assets
(purchased technology) of approximately $3.9 million,  attributable to the Verve
acquisition,  will continue to be charged to operations  ratably over the period
of benefit, which is three years.

    Restructuring  and  Other  Nonrecurring  Expenses.  Restructuring  and other
nonrecurring  expenses  consists  of  severance,  expenses  relating  to  office
closures,  write-down  of fixed  assets,  and  other  one-time  charges.  We had
nonrecurring  expenses  of $19.7  million for the ten months  ended  October 31,
2001, and $1.9 million for the year ended December 31, 2000.

    Interest income (expense),  net. Interest income (expense), net is primarily
comprised of interest income from our cash and  investments,  offset by interest
paid on our equipment loan and capital lease obligations. We had interest income
of $1.8 million for the ten months ended October 31, 2001,  compared to interest
income of $5.2  million  for 2000.  This  decrease  was  principally  due to the
gradually reduced cash balance for the ten months ended October 31, 2001.

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

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenue

    Total  Revenue.  Total  revenue  consists  of software  license  revenue and
services  revenue.  Total revenue  increased by $44.0 million,  or 349.9%,  from
$12.6  million for the year ended  December  31, 1999 to $56.6  million in 2000.
This  increase  was  principally  attributable  to the  continued  growth in new
customers,   repeat  business  from  existing  customers  and  rapid  growth  in
international  markets.  As a  percentage  of total  revenue,  software  license
revenue  was  47.4% and 53.5% in 2000 and  1999,  respectively,  while  services
revenue was 52.6% and 46.5%, respectively.

    Software  License  Revenue.  Software  license  revenue  increased  by $20.1
million,  or 298.5%,  from $6.7 in 1999 to $26.8 million in 2000.  This increase
was primarily attributable to growth in both the number of licenses sold as well
as higher average sales prices realized for software licenses.  Software license
revenue also benefited from the expansion of our  distribution  channels through
the

                                       25
<PAGE>

addition of several consulting and system integration partners. Software license
revenue in the fourth  quarter in 2000  declined from the third quarter in 2000.
As a result  of the  rapid  growth  of our  international  operations,  software
license revenue from international  sales increased by $5.4 million or 335% from
$1.6 million in 1999 to $7.0 million in 2000.

    Services Revenue.  Services revenue  increased by $23.9 million,  or 409.0%,
from  $5.8  million  in 1999  to  $29.8  million  in  2000.  This  increase  was
attributable  to growth in the number of customers and support  contracts and is
also due to the expansion of our professional  services organization as a result
of our hiring additional consultants and acquiring two consulting firms in early
2000.  Service revenue declined  significantly in fourth quarter 2000 from third
quarter  2000.  Services  revenue  from  international  sales  increased by $5.1
million or approximately 2,380% from $215,000 in 1999 to $5.3 million in 2000.

Cost of Revenue

    Total Cost of  Revenue.  Total cost of revenue  consists of cost of software
license revenue and cost of service revenue.  Total cost of revenue increased by
$25.0  million,  or 377.4%,  from $6.6 million in 1999 to $31.6 million in 2000.
This increase was  attributable  to a larger volume of sales in 2000 as compared
to 1999.

    Cost of Software License Revenue.  Cost of software license revenue consists
of royalty  payments  to third  parties  for  technology  incorporated  into our
product, the cost of manuals and product documentation, as well as packaging and
distribution  costs.  Cost of software license revenue  increased by $589,000 or
118.0%,  from  $499,000 in 1999 to $1.1 million in 2000.  These  increases  were
attributable to a larger volume of sales in 2000 as compared to 1999.

    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
services revenue excludes  stock-based  compensation of $7.4 million in 2000 and
$515,000 in 1999 related to option grants to employees and  consultants  engaged
in services  activities.  Cost of service revenue increased by $24.4 million, or
398.5%,  from $6.1 million in 1999 to $30.5  million in 2000.  This increase was
principally  due to an increase in the number of our  consulting,  training  and
customer support  personnel and due to the expansion of our consulting  services
organization   through   additions  of  two  consulting  and  training  services
organizations during the first quarter of 2000.

Gross Profit

    Gross profit.  Gross profit  increased $19.0 million,  or 319.4%,  from $6.0
million in 1999 to $25.0  million in 2000.  As a  percentage  of total  revenue,
gross margin decreased slightly by 3.2% from 47.4% in 1999 to 44.2% in 2000. The
decrease in gross profit results  primarily from greater fixed costs in the cost
of services  such as customer  support  personnel  and certain  costs to fulfill
obligations related to a small number of fixed price engagements.

Operating Expenses

    Operating  expenses.  Operating  expenses  increased  by $70.5  million,  or
256.6%,  from $27.5  million in 1999 to $97.9  million in 2000.  The majority of
this  increase  was due to  increased  investments  in our sales  and  marketing
operations and an increase in the amortization of unearned non-cash  stock-based
compensation of $25.5 million. The balance of the increases was due to increased
investments   in   product    development   and   general   and   administrative
infrastructure.  As a percentage of revenue,  operating  expenses decreased from
218.2% in 1999 to 173.0%  in 2000,  as we  continued  to  spread  our  operating
expenses  across a  significantly  larger  revenue base.  Excluding the non-cash
charges  relating to stock-based  compensation  of $25.5 million,  impairment of
investment of $1.0 million,  and  nonrecurring  expenses of $937,000,  operating
expense in 2000 was $70.5 million, a 199.8% increase over $23.5 million in 1999.

    Sales and  Marketing.  Sales and  marketing  expenses  consist of  salaries,
commissions,  and sales offices,  travel and entertainment expense and marketing
programs. Sales and marketing expenses exclude stock-based compensation of $13.2
million in 2000 and $2.4 million in 1999  related to option  grants to employees
engaged  in  sales  and  marketing  activities.  Sales  and  marketing  expenses
increased  by $31.1  million,  or 199.3%,  from  $15.6  million in 1999 to $46.7
million in 2000. This increase was attributable to growth in the number of sales
employees  in North  America,  an increase  in  commissions  and travel  expense
resulting from an increase in revenue,  and expansion of our international sales
operations  during 2000. As a percentage of total  revenue,  sales and marketing
expense  decreased  from 124.1% in 1999 to 82.5% in 2000,  due to higher overall
sales productivity and a significantly larger revenue base in the year 2000.

                                       26
<PAGE>

    Product  Development.  Product development expenses include 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 excludes  stock-based
compensation  of $3.1  million in 2000 and  $815,000  in 1999  related to option
grants  to  employees  engaged  in  product  development   activities.   Product
development  expense  increased by $4.9 million,  or 104%,  from $4.8 million in
1999 to $9.7 million in 2000.  This  increase was primarily  attributable  to an
increase  in the  number of  personnel  in  Versata's  product  development  and
engineering organization.  As a percentage of total revenue, product development
expense  decreased  from 37.9% in 1999 to 17.2% in 2000, as product  development
expense was spread across a significantly  larger revenue base in the year 2000.
To date,  all  software  development  costs  have been  expensed  in the  period
incurred.

    General and Administrative.  General and administrative  expenses consist of
salaries  for  executive,  finance  and  administrative  personnel,  information
systems costs and allowance for doubtful  accounts.  General and  administrative
expenses exclude  stock-based  compensation of $1.8 million in 2000 and $274,000
in  1999  related  to  option  grants  to  employees   engaged  in  general  and
administrative activities. General and administrative expenses increased by $9.6
million,  or 305.6%,  from $3.1 million in 1999 to $12.7  million in 2000.  This
increase was primarily attributable to a growing number of employees, as well as
an  increase  in the  provision  for bad debts of  $300,000  as our  revenue and
accounts  receivable  grew.  As a  percentage  of  total  revenue,  general  and
administrative  expense  decreased  from  24.8% in 1999 to 22.4% in 2000,  as we
continued to spread our costs across a significantly  larger revenue base in the
2000 period.

    Stock-Based  Compensation.  Stock-based  compensation  expenses  include the
amortization  of unearned  employee  stock-based  compensation  and expenses for
stock  granted to  consultants  in exchange for services.  Employee  stock-based
compensation  expenses are  amortized on an  accelerated  basis over the vesting
period of the  related  options,  generally  50 months.  We  incurred a non-cash
charge of $25.5  million  for year ended  December  31, 2000 as compared to $4.0
million in 1999.  The  increase  relates to the  issuance of stock  options with
exercise prices below fair market value on the date of grant throughout 1999 and
the first quarter of 2000.

    Amortization of Intangibles. We incurred non-cash charges of $1.3 million in
2000 for the amortization of intangibles related to the acquisitions of Pragma 6
in the fourth  quarter of 1999,  the  acquisitions  of McGilly and Webink in the
first quarter of 2000 and the  acquisition of Verve,  Inc. in the fourth quarter
of 2000. There were no such charges in the comparable periods in 1999.

    Impairment of Investment. Impairment of investment consists of an impairment
charge for an investment in the preferred stock of a privately held  corporation
of $1.0 million.

    Restructuring  and  Other  Nonrecurring   Expenses.   Nonrecurring  expenses
primarily  consist of  expenses  relating  to office  relocation  costs.  We had
nonrecurring expenses of $900,000 in 2000. There were no such charges in 1999.

    Interest income (expense),  net. Interest income (expense), net is primarily
comprised of interest income from our cash and  investments,  offset by interest
paid on our  equipment  loan and  capital  lease  obligations.  We had  interest
expense of $304,000 in 1999 compared to net interest  income of $5.1 million for
year ended  December 31, 2000.  This  increase was  principally  due to interest
income  earned from  higher  cash  balances  resulting  from our initial  public
offering in the first quarter of 2000.

Provision for Income Taxes

    We have incurred  operating  losses for all periods from  inception  through
December 31, 2000. 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.

Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

Revenue

    Total  revenue.  Total  revenue  consists  of software  license  revenue and
services revenue.  Total revenue increased by $8.6 million, or 218.5%, from $4.0
million  in  1998  to  $12.6  million  in  1999.  This  increase  was  primarily
attributable to an increase in our customer base and in the average sales prices
of the  software  we sold,  which was  largely  the result of the  release of an
upgrade of our software  product in  September  1998.  As a percentage  of total
revenue,  software  license  revenue  was  53.5%  and  48.7% in 1999  and  1998,
respectively, while services revenue was 46.5% and 51.3%, respectively.

                                       27
<PAGE>

    Software  License  Revenue.  Software  license  revenue  increased  by  $4.8
million,  or 249.7%,  from $1.9  million in 1998 to $6.7  million in 1999.  This
increase  was  primarily  attributable  to growth in both the number of licenses
sold as well as higher  average  sales prices  realized  for software  licenses.
Software  license revenue also benefited from the expansion of our  distribution
channels,  through the addition of consulting partners,  systems integrators and
value added resellers. As a result of an increase in the number of international
distributors selling our product,  revenue from international sales increased by
$1.3  million,  or 428.1%,  from  $295,000 in 1998 to $1.6 million in 1999. As a
percentage of software license revenue, international sales increased from 15.3%
in 1998 to 23.2% in 1999.

    Services  Revenue.  Services revenue  increased by $3.8 million,  or 188.9%,
from  $2.0  million  in  1998  to  $5.8  million  in  1999.  This  increase  was
attributable to growth in the number of our customers and support contracts from
direct sales efforts. Services revenue from international customers increased by
$154,000, or 252.5%, from $61,000 in 1998 to $215,000 in 1999.

Cost of Revenue

    Total cost of  revenue.  Total cost of revenue  consists of cost of software
license revenue and cost of services revenue. Total cost of revenue increased by
$4.1 million, or 166.7%, from $2.5 million in 1998 to $6.6 million in 1999. This
increase  was  attributable  to a larger  volume of sales in the current year as
compared to the same period last year.

    Cost of Software License Revenue.  Cost of software license revenue consists
of royalty  payments  to third  parties  for  technology  incorporated  into our
product, the cost of manuals and product documentation, as well as packaging and
distribution  costs. Cost of software license revenue increased by $265,000,  or
113.2%,   from  $234,000  in  1998  to  $499,000  in  1999.  This  increase  was
attributable  to a larger  volume  of sales  orders  in 1999.  Gross  profit  on
software license revenue increased by $4.5 million, or 268.6%, from $1.7 million
in 1998 to $6.2  million  in 1999.  Gross  profit as a  percentage  of  software
license  revenue  increased  from 87.8% in 1998 to 92.6% in 1999.  This increase
reflected our lower third-party  royalty fees associated with the new version of
our software released in September 1998.

    Cost of Services  Revenue.  Cost of services revenue consists of salaries of
professional services personnel and payments to third-party consultants incurred
in providing  customer  support,  training,  and  consulting  services.  Cost of
services  revenue  excludes  stock  based  compensation  of $515,000 in 1999 and
$64,000 in 1998 related to option grants to employees and consultants engaged in
services  activities.  Cost of services  revenue  increased by $3.9 million,  or
172.2%,  from $2.2  million in 1998 to $6.1 million in 1999.  This  increase was
principally  due to an increase in the number of our  consulting,  training  and
customer  support  personnel  from 15 at December 31, 1998 to 57 at December 31,
1999, reflecting the increase in consulting services that we provided in 1999.

Gross Profit

    Gross profit.  Gross profit  increased  $4.5 million,  or 306.1%,  from $1.5
million in 1998 to $6.0 million in 1999. As a percentage of total revenue, gross
margin  increased  from  37.2% to 47.4% in 1998  and  1999,  respectively.  This
increase  reflects the  efficiencies  gained in  connection  with an increase in
revenue base and higher average rates charged for the services.

Operating Expenses

    Operating  expenses.  Operating  expenses  increased  by $18.1  million,  or
193.6%,  from $9.4 million in 1998 to $27.5  million in 1999.  This increase was
principally  due to increased  investment in our sales and marketing  operations
and  amortization of unearned  stock-based  compensation  of $4.0 million.  As a
percentage  of  revenue,  operating  expenses  decreased  from 236.7% in 1998 to
218.2% in 1999,  as we spread  our  operating  expenses  across a  significantly
larger revenue base in 1999.

    Sales and  Marketing.  Sales and  marketing  expenses  consist of  salaries,
commissions,  sales  offices,  travel and  entertainment  expense and  marketing
programs.  Sales and marketing  expenses  exclude  stock-based  compensation  of
$74,000 in 1998 and $2.4 million in 1999  related to option  grants to employees
engaged  in  sales  and  marketing  activities.  Sales  and  marketing  expenses
increased  by $11.1  million,  or  247.3%,  from $4.5  million  in 1998 to $15.6
million in 1999. Of this increase,  $6.5 million was due to increases in payroll
and related costs, travel costs and costs related to the growth in the number of
sales and  marketing  personnel,  $1.3  million was due to  increased  marketing
programs to increase market awareness of our products,  and $1.2 million was due
to increased commissions as a result of higher sales volumes. As a percentage of
total  revenue,  sales and marketing  expense  increased  from 113.8% in 1998 to
124.1% in 1999.

                                       28
<PAGE>

    Product  Development.  Product development expenses include 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 excludes  stock-based
compensation of $49,000 in 1998 and $815,000 in 1999 related to option grants to
employees engaged in product development activities. Product development expense
increased by $1.5 million,  or 45.6%,  from $3.3 million in 1998 to $4.8 million
in 1999. This increase was primarily  attributable to increases in the number of
personnel to support product development and engineering activities,  from 20 at
December 31, 1998 to 32 at December 31, 1999. As a percentage of total  revenue,
product  development  expense  decreased from 82.9% in 1998 to 37.9% in 1999, as
product  development  expense was spread across a  significantly  larger revenue
base in the 1999 period.

    General and Administrative.  General and administrative  expenses consist of
salaries  for  executive,  administrative  and  finance  personnel,  information
systems costs,  professional  service fees and allowance for doubtful  accounts.
General and administrative expenses exclude stock-based  compensation of $15,000
in 1998 and  $274,000 in 1999 related to option  grants to employees  engaged in
general  and  administrative  activities.  General and  administrative  expenses
increased by $1.7 million,  or 126.6%, from $1.4 million in 1998 to $3.1 million
in 1999. This increase was primarily  attributable to the increases in legal and
accounting fees and in our allowance for doubtful  accounts,  which we increased
to $886,000 as of December 31, 1999.  This increase  occurred in response to the
broadening of our customer base and related increase in our accounts  receivable
balance.  As a percentage of total revenue,  general and administrative  expense
decreased from 34.9% in 1998 to 24.8% in 1999, as our costs were spread across a
significantly larger revenue base in 1999.

    Stock-Based  Compensation.  Stock-based  compensation  expenses  include the
amortization  of unearned  employee  stock-based  compensation  and expenses for
stock  granted to  consultants  in exchange for services.  Employee  stock-based
compensation  expenses are  amortized on an  accelerated  basis over the vesting
period  of  the  related  options,   generally  50  months.   Total  stock-based
compensation  expenses for 1999 was $4.0  million  compared to $202,000 in 1998.
These  increases  relates to additional  issuance of stock options with exercise
prices below fair market value on the date of grant in 1999.

Interest Income (Expense), Net

    Interest income (expense),  net.  Interest income  (expense),  net decreased
slightly from  $(365,000)  in 1998 to  $(304,000)  in 1999.  During 1999 we paid
slightly  higher  interest  expense on debt,  which was  partially  offset by an
increase in interest income over prior year.

Liquidity and Capital Resources

    Since inception, we have funded our operations primarily through the private
sale of our equity securities, and our initial public offering, resulting in the
aggregate, net proceeds of approximately $167.2 million. We have also funded our
operations  through  equipment  financing.  As of October 31, 2001, we had $24.9
million  in cash and cash  equivalents  and  short-term  investments  and  $14.8
million in working  capital.  Net cash used in  operating  activities  was $46.6
million, $34.5 million, $14.5 million, and $7.4 million for the ten months ended
October  31,  2001,  and the  years  ended  December  31,  2000,  1999 and 1998,
respectively. Net cash flows used in operating activities in each period reflect
increasing  net  losses,  offset  by  non-cash  expenses  including  stock-based
compensation, depreciation and amortization.

    Net cash  provided by  investing  activities  was $22.9  million for the ten
months ended  October 31, 2001,  and net cash used in investing  activities  was
$49.6 million,  $2.1 million and $299,000 for the years ended December 31, 2000,
1999 and 1998,  respectively.  Cash provided by investing  activities during the
ten months ended October 31, 2001  primarily  reflects  maturities of short-term
investments of $26.9 million offset by purchases of $3.7 million of property and
equipment. Cash used in investing activities during the years ended December 31,
2000, 1999 and 1998 primarily reflect  purchases of property and equipment.  Our
capital expenditures consisted of purchases of operating resources to manage our
operations  including  computer  hardware and  software,  office  furniture  and
equipment and leasehold improvements relating to our new headquarters.

    Net cash  provided by financing  activities  was $445,000 for the ten months
ended October 31, 2001, and $102.6 million,  $31.5 million and $10.7 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Cash provided by
financing  activities  includes net proceeds  from the issuance of preferred and
common stock including that from our initial public offering in March 2000.

                                       29
<PAGE>

    We  believe  that  our  cash in the bank as of  October  31,  2001 , 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 fiscal  2002 or
beyond.  In the event  additional  financing is required,  we may not be able to
raise it on acceptable terms or at all.

    Our Company has entered into leases for certain  office space and  equipment
with  original  terms  ranging  from 36 months to the year  2008.  The lease for
office space includes  scheduled base rent increases over the term of the lease.
The total  amount of the base rent  payments is charged to expense over the term
of the lease using the straight-line  method. In addition,  the lease for office
space  contains an escalation  clause to recover  increases in future  operating
costs and real  estate  taxes  over the base  year.  The  future  minimum  lease
payments shown below are exclusive of such escalation.

    We have also entered into sub-lease  agreements for certain office space and
equipment.

    Future minimum lease payments under all noncancelable  leases at October 31,
2001 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                 Operating Leases
                                                                     ----------------------------------------
                                                                                   Contractual
                                                            Capital     Gross       Sub-lease        Net
                                                            Leases   Commitments     Income      Commitments
                                                            -------  ------------  -----------   ------------
        Year Ending October 31,
<S>                                                         <C>      <C>              <C>            <C>
          2002.........................................     $  88    $   3,276        1,714          1,562
          2003.........................................        78        3,253        1,829          1,424
          2004.........................................        78        3,306        1,563          1,743
          2005.........................................        78        3,418          962          2,456
          2006.........................................        57        3,538          991          2,547
          2007 and thereafter..........................        --        6,838        1,895          4,943
                                                            -----    ---------        -----         ------
                  Total minimum lease payments.........       379    $  23,629        8,954         14,675
                                                                     =========        =====         ======
          Less interest................................       (80)
                                                            -----
          Present value of minimum lease payments......       299
          Less current portion.........................       (56)
                                                            -----
                                                            $ 243
                                                            =====
</TABLE>


Critical Accounting Policies

    Our  discussion  and  analysis  of our  financial  condition  and results of
operations are based upon our 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
us 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, we evaluate our estimates.  We base our
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 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  both  parties  sign a  license  agreement,  the fee is fixed or
determinable,  collection is reasonably  assured and delivery of the product has
occurred.  Generally,  we provide  payment  terms that range from thirty days to
ninety days from the invoice date. Accordingly, payment terms that exceed ninety
days are not  considered  fixed or  determinable  and revenue is  recognized  as
payments become due. When contracts  contain  multiple  elements,  and for which
vendor  specific  objective  evidence  ("VSOE")  of fair  value  exists  for the
undelivered elements, we recognize revenue for the delivered elements based upon
the residual method. VSOE is generally the price for products sold separately or
the  renewal  rate  in the  agreement  for  PCS.  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 31% of our net revenues for the ten months ended October 31, 2001,
and 7% of our assets and 7% of our total liabilities as of October 31, 2001.

      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.

                                       30
<PAGE>

    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  periods.  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

    With the  exception  of the $350,000  deductible  amount of  directors'  and
officers' liability insurance expensed in April 2001, no estimate can be made of
the ultimate  loss or possible  loss  associated  with the  resolution  of these
contingencies.  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 operations and financial position.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

    We are 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, we establish policies
and  procedures  to manage our exposure to  fluctuations  in interest  rates and
foreign currency values.

    Interest  rate  risks.  We  invest  our  cash  in  a  variety  of  financial
instruments,   consisting   principally  of  investments  in  commercial  paper,
interest-bearing  demand  deposit  accounts with financial  institutions,  money
market funds and highly liquid debt securities of  corporations,  municipalities
and the U.S. Government. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies  overseas are operating balances and are invested
in short-term time deposits of the local operating bank.

    All of the  cash  equivalents,  short-term  and  long-term  investments  are
treated as  "available-for-sale."  Investments  in both fixed rate and  floating
rate interest  earning  instruments  carry a degree of interest rate risk. Fixed
rate securities may have their market value adversely  impacted due to a rise in
interest  rates,  while  floating rate  securities  may produce less income than
expected  if  interest  rates  fall.  Due in part to these  factors,  our future
investment  income may fall  short of  expectations  due to changes in  interest
rates or we may suffer  losses in  principal if forced to sell  securities  that
have seen a decline in market value due to changes in interest  rates.  However,
the Company  reduces its interest rate risk by investing its cash in instruments
with short maturities. Our exposure, on our portfolio of marketable investments,
to changes in short term interest rates is  insignificant as of October 31, 2001
because the average  holding period until maturity of our cash  equivalents  and
short-term investments was approximately 25 days.

    The table below presents the principal  amount and related  weighted average
interest rates for our investment portfolio.  Short-term  investments are all in
fixed rate instruments.

    Table of investment securities (in thousands) at October 31, 2001:

                                                                   Weighted
                                                                    Average
                                              Fair Value       Interest Rate (%)
                                              ----------       -----------------
          Cash & cash equivalents:
            Cash                                $9,377             2.44
            Commercial Paper                    $4,992             2.44
            Auction Floater                     $6,005             2.69
            Money Market Funds                  $1,497             2.69
                                                ------
                                               $21,871

                                       31
<PAGE>

          Short-term investments:
            Corporate debt securities             $497             2.33
            Debt securities issued by the
              U.S. government                   $2,539             3.98
                                                ------
                                                $3,036

    Foreign  currency  risks.  As of October 31,  2001,  Versata  had  operating
subsidiaries located in the United Kingdom,  Germany,  France, Belgium,  Canada,
India and  Australia.  Our revenue  outside the United States was 31 percent for
the ten months  ended  October 31, 2001.  The only  geographic  sub-region  with
revenue  greater than 10 percent of total  revenue in fiscal 2001 was the United
Kingdom with 28 percent. International sales were made mostly from the Company's
foreign sales subsidiaries in the local countries and are typically  denominated
in the local  currency of each country.  These  subsidiaries  also incur most of
their expenses in the local currency. Accordingly,  foreign subsidiaries use the
local currency as their functional currency.

    The  Company's  international  business  is subject  to risks  typical of an
international  business,  including,  but not  limited  to,  differing  economic
conditions,  changes in  political  climate,  differing  tax  structures,  other
regulations and restrictions, and foreign exchange volatility.  Accordingly, the
Company's  future results could be materially  adversely  impacted by changes in
these or other factors.

    The Company is also exposed to foreign  exchange  rate  fluctuations  as the
financial  results of foreign  subsidiaries  are translated into U.S. dollars in
consolidation.  As exchange rates vary, these results, when translated, may vary
from  expectations and adversely  impact overall  financial  results.  We do not
currently enter into foreign  currency hedge  transactions.  Through October 31,
2001,  foreign  currency  fluctuations  have not had a  material  impact  on our
financial position or results of operations.

    We do not currently use derivative financial instruments. We generally place
our cash and cash equivalents in high quality money-market securities. We do not
expect any material loss from these  investments and therefore  believe that our
potential interest rate exposure is not material. We do not currently enter into
foreign currency hedge transactions.

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 December 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. We will adopt SFAS No. 144 effective November 1, 2001. The adoption
is not  anticipated to 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

                                       32
<PAGE>

April 30, 2002.  Upon  adoption we are required to  reclassify  all prior period
amounts to conform to the current period presentation.  We are in the process of
evaluating  the  effects  of  these  changes  on  our   consolidated   financial
statements.

    In  November  2001, the  FASB  issued  EITF  Issue  01-14,  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  revenues  and the  corresponding  expenses  incurred  as  costs of
revenues within the income statement. We expect to adopt the provisions of D-103
during the first quarter of fiscal 2002.

Item 8. Financial Statements and Supplementary Data

    Our consolidated financial statements are located on the pages below.

<TABLE>
<CAPTION>
                                                                                                    Page
                                                                                                    ----
<S>                                                                                                 <C>
         Report of Independent Accountants.....................................................     F-2
         Consolidated Balance Sheets as of October 31, 2001, December 31, 2000 and 1999........     F-3
         Consolidated Statements of Operations and Comprehensive Loss for the ten months
           ended October 31, 2001 and the years ended December 31, 2000, 1999 and 1998.........     F-4
         Consolidated Statement of Stockholders' Equity for the ten months ended October 31,
           2001 and the years ended December 31, 2000, 1999 and 1998...........................     F-5
         Consolidated Statements of Cash Flows for the ten months ended October 31, 2001 and
           the years ended  December 31, 2000, 1999 and 1998...................................     F-6
         Notes to Consolidated Financial Statements............................................     F-7
</TABLE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

    Not applicable.

                                       33
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

    The following table sets forth certain  information  regarding our executive
officers and other officers and directors.

<TABLE>
<CAPTION>
       Name                                               Age                             Position
       ----                                               ---                             --------
<S>                                                       <C>   <C>
       Douglas L. Roberts (4)..........................   45    Chief Executive Officer, President, Director
       James A. Doehrman...............................   44    Executive Vice President, Chief Operating and Financial
                                                                Officer
       Val Huber.......................................   52    Vice President, Development and Chief Technology Officer
       Rahul Patel.....................................   37    Vice President, Research and Development
       Lisa Tomlinson..................................   44    Vice President, Human Resources
       Iain Grant......................................   38    Vice President, Worldwide Professional Services
       Rocco Quaglietti................................   49    Vice President, Sales America
       Nicholas  Birtles...............................   57    Vice President, Sales Europe
       Gary Morgenthaler(1)(2)(5)......................   53    Chairman of the Board
       Robert Davoli(3)................................   53    Director
       Donald W. Feddersen(1)(2)(5)....................   67    Director
       John W. Larson(1)(3)............................   66    Director
       Kanwal Rekhi(2)(4)..............................   56    Director
       Eugene Wong (4).................................   67    Director

<FN>
(1) Member of Audit Committee.

(2) Member of Compensation Committee.

(3) Term of office expires at 2002 Annual Meeting of Stockholders.

(4) Term of office expires at 2003 Annual Meeting of Stockholders.

(5)  Term of office expires at 2004 Annual Meeting of Stockholders.
</FN>
</TABLE>

    Douglas L.  Roberts.  Mr.  Roberts  joined  Versata in  December  of 2000 as
Executive  Vice  President of Worldwide  Field  Operations.  In March 2001,  Mr.
Roberts was appointed as Versata's  interim Chief  Executive  Officer and became
Versata's  Chief  Executive  Officer and President in September  2001.  Prior to
joining  Versata,  from July 2000 to October 2000,  Mr.  Roberts was Senior Vice
President of the Global e-Business Group for Peregrine  Systems in Atlanta,  GA.
From October 1999 to July 2000,  Mr.  Roberts was Senior Vice  President/General
Manager of Worldwide  Sales for Harbinger  Corporation.  From  September 1995 to
October  1999,  Mr.  Roberts  was  Senior  Vice  President,  Sales at  BellSouth
Wireless.  In addition,  Mr. Roberts has held strategic positions at Software AG
of  North  America,  Inc.  (Vice  President  and  General  Manager,   Federal  &
International Operations),  and Applied Business Technology (Regional Director).
Mr. Roberts earned a degree in Finance from Furman University in Greenville, SC,
with advanced  studies at George  Washington  University  and the  University of
Maryland.

    James  A.  Doehrman.   Mr.  Doehrman  serves  as  Versata's  Executive  Vice
President, Chief Operating and Financial Officer. Mr. Doehrman joined Versata in
February 2001 as Executive  Vice President and Chief  Financial  Officer and was
appointed  as Chief  Operating  Officer in March  2001.  From June 2000  through
February  2001,  Mr.  Doehrman   served  as  Executive  Vice  President,   Chief
Administrative  Officer and  Treasurer  at  E.piphany,  Inc.  From  January 2000
through May 2000, Mr. Doehrman was Senior Vice President and Chief Financial and
Administrative  Officer at Octane Software, a web-centric customer  relationship
management  software  company that merged with E.piphany in May 2000.  From July
1997 to January 2000 Mr.  Doehrman was the Vice  President  and Chief  Financial
Officer of technology  publisher IDG Books Worldwide.  Mr.  Doehrman's  previous
experience  includes  over 18 years of  progressive  management,  financial  and
operational  assignments  with  companies  like  Simon  &  Schuster,   Federated
Department  Stores and Arthur  Andersen & Co. Mr.  Doehrman holds a B.A.  degree
from Southern Methodist University. He is also a Certified Public Accountant.

    Val Huber.  Mr. Huber joined Versata in 1995 as Vice President,  Development
and Chief Technology Officer.  Prior to joining Versata,  from 1989 to 1994, Mr.
Huber served as a lead architect on various technology projects at Sybase. Prior
to working  with

                                       34
<PAGE>

Sybase,  from 1980 to 1989,  Mr. Huber  served as Director of Business  Computer
Systems at Wang Labs.  Mr.  Huber  holds a B.A.  in  Chemistry  from  Vanderbilt
University.

    Rahul Patel.  Mr. Patel serves as Versata's  Vice  President of Research and
Development.  Mr. Patel joined Versata in 1995 as a Lead Engineer. Mr. Patel was
promoted to Director of Research  and  Development  and the Lead  Architect  for
Versata  in  1998,  prior  to  becoming  the  Vice  President  of  Research  and
Development in June 2000.  Before joining  Versata,  from December 1990 to April
1992, Mr. Patel was a Senior Software Engineer for Sun  Microsystems.  From 1992
to January 1995, Mr. Patel was a Lead Engineer in the advanced tools  technology
group for  Sybase.  Mr.  Patel  holds a Master  of  Science  degree in  Computer
Engineering  from the  University  of  Florida in  Gainesville.  He also holds a
Bachelor of Science degree in Engineering from Gujarat  University in Ahmedabad,
India.

    Lisa Tomlinson. Ms. Tomlinson joined Versata in March 2001 as Vice President
of Worldwide Human  Resources.  From 1999 through 2001 Ms.  Tomlinson  served as
Vice President of Human Resource at PacPizza, LLC a franchisee of Pizza Hut, and
from 1997 through 1999, Ms. Tomlinson served as Vice President of Human Resource
at Pizza Hut. From May 1992 through  November 1996 Ms. Tomlinson was Director of
Human Resources at Marriott Corporation,  a hospitality company. Ms. Tomlinson's
previous  experience  includes over sixteen years of Human Resources  management
with companies like Bendix  Corporation and the CIS  Corporation.  Ms. Tomlinson
holds a B.A. degree from Western Michigan University.

    Iain Grant.  Mr.  Grant  joined  Versata in April 2001 as Vice  President of
World Wide Professional  Services.  Prior to joining Versata, from November 1998
through  April 2001,  Mr. Grant served as CEO at @tlas  e-Solutions  Inc., a San
Francisco  based firm that  developed XML based  integration  and  collaboration
software.  From April 1997 through November 1998 Mr. Grant served as a Principal
Consultant for IBM Global  Services.  From November 1990 through April 1997, Mr.
Grant served as a senior manager with PricewaterhouseCoopers. Mr. Grant holds an
honors degree in  Mathematics,  Statistics,  and  Operational  Research from the
University of Exeter, England.

    Rocco  Quaglietti.  Mr.  Quaglietti  joined  Versata in January 2000 as Vice
President of Channel Sales. In October 2001, Mr. Quaglietti was promoted to Vice
President,  Sales  Americas.  Prior to joining  Versata,  from  October  1997 to
December 1999 Mr. Quaglietti was Vice President of Sales at Cloudscape, producer
of a Java-based Object Relational Database Management System. Mr. Quaglietti was
Director of Channels Sales at Pilot Software from October 1995 through September
1997.  Mr.  Quaglietti  also served as Director of Channel Sales at Ingres for 6
years. Mr. Quaglietti  previous  experience includes over 10 years of sales with
companies like GEISCO and Pansophic  Systems.  Mr.  Quaglietti holds a BS degree
from North Adams State College and an MBA from Golden Gate University.

    Nicholas  Birtles.  Mr. Birtles  recently joined Versata in February 2002 as
Vice  President  of Sales,  Europe.  From  March 2001  through  March 2002 , Mr.
Birtles  served  as Vice  President,  International  at  Support.com  a  Support
Automation Software company. From October 1996 through July 2001 Mr. Birtles was
Chief  Operating  Officer  and  then  the  CEO at  Constellar  Corp,  a  leading
Enterprise  Applications  Integration  company. Mr. Birtles' previous experience
includes  over 25  years  of  International  Sales  and  Sales  management  with
companies like Ingres,  Gupta,  and Comshare.  Mr. Birtles  attended  Manchester
University and studied Mathematics and Chemistry.

    Gary  Morgenthaler.  Mr.  Morgenthaler  has served as a director  of Versata
since 1997. Mr. Morgenthaler is a general partner of Morgenthaler  Ventures. Mr.
Morgenthaler  is a  co-founder  and  former  Chairman  of  Illustra  Information
Technologies, Inc., a database applications Company. Prior to becoming a partner
of Morgenthaler Ventures, Mr. Morgenthaler was Chairman, Chief Executive Officer
and a co-founder of Ingres, a relational  database  management  systems company.
Mr.  Morgenthaler  is a  director  of Catena  Networks,  Nuance  Communications,
Westwave,  and Yotta Networks.  Mr.  Morgenthaler  holds a B.A. in International
Relations from Harvard University.

    Robert Davoli. Mr. Davoli has served as a director of Versata since November
1999. Prior to becoming a director,  Mr. Davoli served as a technical consultant
to Versata from 1995.  Since  November  1995, Mr. Davoli has served as a general
partner at Sigma, a venture  capital firm. From February 1993 to September 1994,
Mr. Davoli served as President and Chief Executive  Officer of Epoch Systems,  a
software  vendor.  Previous to working with Epoch Systems,  Mr. Davoli served as
President and Chief  Executive  Officer of SQL  Solutions,  a services and tools
provider for the  relational  database  market.  From 1990 to 1992,  Mr.  Davoli
served as an executive  officer of Sybase.  Mr. Davoli is a director of Internet
Security Systems,  Inc.,  StorageNetworks,  Inc., and Vignette Corporation.  Mr.
Davoli holds a B.A. in History from Ricker College and studied  Computer Science
at Northeastern University for two years.

                                       35
<PAGE>

    Donald W. Feddersen. Mr. Feddersen has served as a director of Versata since
1997. Mr.  Feddersen has been a private investor since July 1997. In April 2001,
Mr.  Feddersen  joined  Bessemer  Venture  Partners as a private  investor and a
Venture  Partner.  From 1984 to 1996,  Mr.  Feddersen  was a General  Partner of
Charles River Ventures. Before joining Charles River Ventures, Mr. Feddersen was
President  and Chief  Executive  Officer  at  Applicon  from  1978 to 1984.  Mr.
Feddersen also served as President and Chief  Executive  Officer at Entrex.  Mr.
Feddersen  holds  an  M.B.A.  from  The  University  of  Chicago  and a B.S.  in
Engineering from Purdue University.

    John W. Larson.  Mr.  Larson has served as a director of Versata since 1998.
Mr.  Larson has served as senior  partner at the law firm of Brobeck,  Phleger &
Harrison LLP since March 1996.  From 1988 until March 1996, Mr. Larson was Chief
Executive  Officer of the firm.  He has been a partner with the firm since 1969,
except for the period from July 1971 to September 1973 when he was in government
service as Assistant  Secretary of the United States  Department of the Interior
and Counselor to George P. Shultz,  Chairman of the Cost of Living Council.  Mr.
Larson is a director of Sangamo Biosciences Inc., a biotechnology  Company.  Mr.
Larson holds a B.A., with distinction, in Economics, and an L.L.B. from Stanford
University.

    Kanwal  Rekhi.  Mr.  Rekhi has served as a director  of Versata  since 1995.
Since  1994,  Mr.  Rekhi  has  been a  mentor  to and  investor  in  early-stage
technology  companies.  From March 1998 to September  1998,  Mr. Rekhi served as
Chief  Executive  Officer and  Chairman of the Board of  Cybermedia,  a software
Company.  Prior to 1994,  Mr. Rekhi served as Executive Vice President and Chief
Technology Officer at Novell,  Inc. From 1989 to 1995 Mr. Rekhi also served as a
director  of Novell.  Mr.  Rekhi holds an M.S. in  Electrical  Engineering  from
Michigan  Technical  University and a degree in Electrical  Engineering from the
Indian Institute of Technology in Bombay.

    Eugene  Wong.  Dr. Wong has served as a director of Versata  since May 1998.
Since 1997, Dr. Wong has served as a technical consultant and chief scientist to
Versata.  Dr.  Wong has  served  as  Professor  Emeritus  at the  University  of
California on assignment with the National  Science  Foundation since June 1998.
Dr. Wong acted as  Associate  Director  of the office of Science and  Technology
Policy in the Bush White House from 1990 to 1993.  Dr.  Wong holds a B.S.E.,  an
A.M., and a Ph.D., all in Electrical Engineering, all from Princeton University.

    Our  officers  are elected by the board of  directors on an annual basis and
serve until their successors have been duly elected and qualified.

Compliance With Section 16(a) Of The Securities Exchange Act Of 1934

         Section  16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange
Act")  requires our directors and executive  officers,  and persons who own more
than ten percent of a registered class of our equity securities to file with the
SEC initial  reports of  ownership  and reports of changes in  ownership  of our
common stock and other equity securities.  Officers,  directors and greater than
10% stockholders are required by SEC regulation to furnish us with copies of all
Section  16(a)  forms  they  file.  To  our  knowledge,   all  of  these  filing
requirements have been satisfied with the following  exceptions:  as a result of
the Company's change of fiscal year end from December 31 to October 31, a Form 5
for Mr. Doehrman,  Mr. Huber, Mr. Patel, Mr. Roberts and Ms. Tomlinson were late
in filing in  connection  with  issuance of  restricted  stock in April 2001. In
making this  statement,  we have relied solely upon review of the copies of such
reports  furnished  to us and  written  representations  from its  officers  and
directors that no other reports were required.

Item 11. Executive Compensation

Summary of Cash and Certain Other Compensation

    The  following  table sets forth the  compensation  for the two most  recent
completed fiscal years and the transition period from January 1, 2001 to October
31, 2001 (the  "Transition  Period") of (i) each person that served as our Chief
Executive  Officer  during  the fiscal  year 2001,  and (ii) our four other most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000 during the ten months ended 2001. These officers are referred to herein
as the Named Executive Officers.

    Annual   compensation   listed  in  the  following   table   excludes  other
compensation  in the  form of  perquisites  and  other  personal  benefits  that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus of
each of the  Named  Executive  Officers  in  2001.  The  options  listed  in the
following  table were granted under our 1997 Stock Option Plan or our 2000 Stock
Incentive Plan.

                                       36
<PAGE>

<TABLE>
<CAPTION>
                                   Annual compensation                                      Long term compensation
                         -------------------------------------------------------------------------------------------------------

                                                                                    Award                      Payouts
                                                                       ---------------------------------------------------------

                                                                                       Securities
Name and principal                                      Other Annual    Restricted     underlying     LTIP      All other
position                 Year       Salary     Bonus    compensation    stock award(s) options/SARs   payouts   compensation
--------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>        <C>        <C>       <C>             <C>            <C>  <C>       <C>            <C>
Douglas L. Roberts       2001 (1)   $217,800   $20,000   $206,821(2)     $209,250(3)         - (4)
Chief Executive Officer  2000          -          -           -               -              -            -           -
                         1999          -          -           -               -              -            -           -

John A. Hewitt           2001 (1)   $92,380      -0-          -               -         200,000(5)        -           -
Former President         2000       $213,750   $164,500       -               -              -            -           -
and Chief Executive      1999       $180,000   $110,000       -               -              -            -           --
Officer

James A. Doehrman        2001 (1)   $145,500   $30,000   $206,821(2)     $209,250(3)         - (4)        -           -
Chief Operating Officer, 2000          -          -           -               -              -            -           -
Chief Financial Officer  1999          -          -           -               -              -            -           -
and Secretary

Val Huber                2001 (1)   $140,800   $20,000    $55,800(2)     $ 55,800(3)         - (4)        -           -
Vice President,          2000       $155,000   $99,500        -               -              -         25,000         -
Development and Chief    1999       $145,000   $64,000        -               -              -            -           -
Technology Officer

Manish Chandra (6)       2001 (1)   $151,500   $20,000    $47,839(2)     $ 55,800(3)         - (4)        -           -
Former Vice President,   2000       $140,000   $60,000        -               -              -            -           -
Marketing                1999       122,500    $23,500        -               -              -            -           -

Rahul Patel              2001 (1)   $140,800   $20,000    $47,839(2)     $ 55,800(3)         - (4)        -           -
Vice President,          2000       $140,000   $62,800        -               -              -            -           -
Research and             1999       $120,000   $28,000        -               -              -            -           -
Development
</TABLE>

    (1)  Represents  the  Transition  Period from January 1, 2001 to October 31,
         2001.

    (2)  Represents  amounts  paid in  connection  with the grant of  restricted
         stock as described below in this item under the section entitled "Grant
         of Restricted Stock to the Named Executive Officers" and as a retention
         measure  for our Named  Executives,  in April  2001,  we paid the Named
         Executives a bonus to cover the estimated personal income tax impact of
         making an IRS Code  Section  83b  election  following  the grant of the
         restricted  shares.  At that  time we  determined  that this plan was a
         preferable form of executive retention than if the Company had issued a
         comparable number of options, in lieu of restricted stock, to the Named
         Executives  and then  advanced  them  funds  to  "early  exercise"  the
         options,  which has been a  practice  for  executive  retention  in the
         industry,  but which,  in hindsight,  in our opinion it is generally an
         ineffective form of executive retention.

    (3)  Represents the grant of restricted  common stock as described  below in
         this item under the Section  entitled "Grant of Restricted Stock to the
         Named Executive Officers." In order to calculate the aggregate value of
         the shares in the table,  we used the closing price of our common stock
         as traded on the Nasdaq  National  Market on April 16, 2001,  the grant
         date.  Each officer  received 2 grants of  restricted  shares of common
         stock, which are subject to our repurchase right. The first grants vest
         over a period of 50 months, with 12.5% of the shares vesting six months
         from the date of issuance (April 16, 2001),  and the balance vesting in
         equal  monthly  installments  thereafter.  The  second  grants  vest as
         follows:  25% of the shares vest six months from the date of  issuance,
         another  25% vest one year from the date of  issuance  and the  balance
         vest  monthly over the next 12 months.  Mr.  Roberts  received  750,000
         shares of common stock,  which had an aggregate value of $307,500 as of
         October 31, 2001. Mr. Doehrman received 750,000 shares of common stock,
         which had an aggregate  value of $307,500 as of

                                       37
<PAGE>
         October 31, 2001.  Mr. Huber  received  200,000 shares of common stock,
         which had an  aggregate  value of $82,000 as of October 31,  2001.  Mr.
         Chandra received 200,000 shares of common stock, which had an aggregate
         value of $82,000 as of October 31,  2001.  Mr. Patel  received  200,000
         shares of common stock,  which had an aggregate  value of $82,000 as of
         October 31, 2001.

    (4)  All the options granted in the Transition Period were cancelled as more
         fully set forth below in this item under the Section  entitled  "Option
         Grants in Ten Months Ended October 31, 2001."

    (5)  Mr.  Hewitt's  options were cancelled upon his  termination on April 6,
         2001.

    (6)  Mr. Chandra resigned subsequent to October 31, 2001.

Potential Realizable

Option Grants in Ten Months Ended October 31, 2001

    The following table sets forth  information  regarding option grants to each
of the Named Executive Officers during the ten months ended October 31, 2001. No
stock  appreciation  rights were granted to the Named Executive  Officers during
the Transition  Period. The options described in the table below were granted to
the Named Executive Officers on February 9, 2001. The options granted to Messrs.
Roberts,  Doehrman, Huber, Chandra and Patel were cancelled on April 16, 2001 in
connection with the grant of restricted stock. The options granted to Mr. Hewitt
were cancelled upon his termination on April 6, 2001.

<TABLE>
                                Stock Option Grants in Ten Months Ended October 31, 2001
<CAPTION>
                                                                                                   Potential Realizable
                                             Individual Grants                                             Value
                                         --------------------------                                  at Assumed Annual
                                                       Percent of                                        Rates (1)
                                          Number or       Total                                       Of Stock Price
                                          Securities     Options                                  Appreciation for Option
                                          Underlying   Granted to                                          Term
                                           Options      Employees   Exercise Price  Expiration   --------------------------
            Name                          Granted(#)     in 2001        ($/Sh)         Date         5%($)        10%($)
            ----                          ----------     -------        ------         ----         -----        ------
<S>                                         <C>            <C>            <C>         <C>            <C>           <C>
            Douglas Roberts                   2,650         < 1           5.50        2/9/2011       N/A           N/A
            John A. Hewitt, Jr.             200,000        3.1            5.50        2/9/2011       N/A           N/A
            James Doehrman                  450,000        6.9            5.50        2/9/2011       N/A           N/A
            Val Huber                        80,375        1.2            5.50        2/9/2011       N/A           N/A
            Manish Chandra                  125,000        1.9            5.50        2/9/2011       N/A           N/A
            Rahul Patel                      81,343        1.2            5.50        2/9/2011       N/A           N/A

<FN>
         (1) Not  Applicable  because all the options  granted in the Transition
             Period were cancelled as set forth above.
</FN>
</TABLE>

    In 2001, we granted options to purchase up to a total of 6,490,374 shares to
employees  under our 2000 Stock  Incentive Plan at exercise  prices equal to the
fair market value of our common stock on the date of grant, as determined by the
closing price of our common stock as traded on the Nasdaq National Market.


Grant of Restricted Stock to the Named Executive Officers

         On April 16, 2001, the Compensation Committee of our Board of Directors
approved  an Equity  Incentive  Program  ("EIP") to retain the  services  of the
Executive Officers  essential to the Company's future financial  success.  Under
the terms of the EIP, certain officers of the Company were given the opportunity
to  exchange  certain  "underwater"   outstanding   unexercised  options  for  a
restricted  share grant. As a condition to  participation  in the EIP, all stock
options  granted  after  October 16, 2000 were  replaced by a  restricted  share
grant. The purchase price of the restricted stock was $0.001 per share.

The following  table sets forth the grants of restricted  shares of common stock
made under the EIP:


                                 38
<PAGE>
                                                                  Restricted
                                                                 shares subject
                                               Number of        to repurchase as
                                               Securities        of October 31,
                      Name                      Granted         2001 Granted
                      ----                    -----------      ----------------
         Douglas Roberts...............        252,600 (1)           221,025
         Douglas Roberts...............        497,400 (2)           373,050
         James Doehrman................        450,000 (1)           393,750
         James Doehrman................        300,000 (2)           225,000
         Val Huber.....................        100,000 (1)            75,000
         Val Huber.....................        100,000 (2)            87,500
         Manish Chandra................        100,000 (1)            75,000
         Manish Chandra................        100,000 (2)            87,500
         Rahul Patel...................        100,000 (1)            75,000
         Rahul Patel...................        100,000 (2)            87,500

         (1) These  grants  vest over a period of 50  months,  with 12.5% of the
             shares  vesting  six months  from the date of  issuance  (April 16,
             2001),  and the  balance  vesting  in  equal  monthly  installments
             thereafter.

         (2) These  grants  vest as  follows:  25% of the shares vest six months
             from the date of issuance,  another 25% vest one year from the date
             of issuance and the balance vest monthly over the next 12 months.

Option  Exercises in  Transition  Period and Option  Values at End of Transition
Period

    The following table sets forth  information  concerning the number and value
of shares of common stock  underlying the unexercised  options held by the Named
Executive  Officers as of October 31, 2001.  The table also sets forth the value
realized upon the exercise of stock options during the  Transition  Period which
is calculated  based on the fair market value of our common stock on the date of
exercise,  as  determined  by the closing price of our common stock as traded on
the Nasdaq  National  Market,  less the exercise price paid for the shares.  The
value of unexercised in-the-money options represents the positive spread between
the exercise  price of the stock options and the fair market value of our common
stock as of October 31, 2001,  which was $0.41 per share. No stock  appreciation
rights were  exercised  during the Transition  Period and no stock  appreciation
rights were outstanding as of October 31, 2001.

              Aggregated Option Exercises in Transition Period and
                    Option Values at End of Transition Period

<TABLE>
<CAPTION>
                                         Shares                      Number of Securities              Value of Unexercised
                                        Acquired                    Underlying Unexercised            In-the-Money Options at
                                           on                       Options at Year-End(#)                Year-End($)(2)
                                        Exercise      Value     -------------------------------   ------------------------------
     Name                                  (#)   Realized($)(1)   Exercisable    Unexercisable      Exercisable    Unexercisable
     ----                              --------- -------------- --------------  ---------------   --------------  --------------
<S>                                          <C>           <C>          <C>              <C>             <C>             <C>
     Manish Chandra................          --            --           30,000           --              6,300           --
     James Doehrman................          --            --           --               --              --              --
     John A. Hewitt, Jr............          --            --           --               --              --              --
     Val Huber.....................          --            --           37,500           --              7,875           --
     Rahul Patel...................          --            --           35,000           --              7,350           --
     Douglas Roberts...............          --            --           --               --              --              --

<FN>
----------

(1) Calculated by multiplying  the number of shares  acquired on exercise by the
    difference  between  the  fair  market  value of the  shares  on the date of
    exercise and the exercise price.

(2) Calculated by determining  the  difference  between the fair market value of
    our  common  stock as of  October  31,  2001 and the  exercise  price of the
    option.
</FN>
</TABLE>

Director Compensation

    We  currently do not  compensate  any  non-employee  member of the board for
their service as board members,  except in some cases through the grant of stock
options. Directors who are also employees do not receive additional compensation
for serving as directors.

    Under our 2000  Stock  Incentive  Plan,  which was  adopted  by our board in
November  1999  and  was  approved  by  our   stockholders   in  February  2000,
non-employee  directors will receive  automatic  option grants  covering  36,000
shares of common stock upon becoming directors and 12,000 shares of common stock
on the date of each annual meeting of  stockholders  beginning in 2001. The 2000
Stock  Incentive Plan also contains a director fee option grant program.  Should
this  program be activated in the future,  each

                                       39
<PAGE>

non-employee board member will have the opportunity to apply all or a portion of
any annual  retainer  fee  otherwise  payable in cash to the  acquisition  of an
option  with an exercise  price below the then fair market  value of our shares.
Non-employee  directors  will also be eligible to receive  discretionary  option
grants and direct stock issuances under our 2000 Stock Incentive Plan.

Severance Agreements

    In April 2001,  we entered  into  severance  agreements  with our  executive
officers  (the  "Executive  Severance   Agreement").   The  Executive  Severance
Agreement provides for certain benefits including the payment of equivalent of 6
months base salary, if the executive's  employment with Versata is involuntarily
terminated  without  cause or if the  executive  resigns  from Versata due to an
involuntary  change in the  executive's  responsibilities.  Additionally,  if an
executive's  employment  with the Company is  involuntarily  terminated  without
cause or terminated after a change in control of the Company, the executive will
receive one hundred percent (100%)  accelerated  vesting of restricted stock and
stock options.

Compensation Committee Interlocks and Insider Participation

    The  Compensation  Committee  of the board of  directors  was formed in July
1998,  and  the  current  members  of the  Compensation  Committee  are  Messrs.
Morgenthaler,  Feddersen  and Rekhi.  None of the  members  of the  compensation
committee  of the board of  directors  was at any time  since the  formation  of
Versata an officer or employee  of Versata.  No  executive  officer  serves as a
member of the board of  directors or  compensation  committee of any entity that
has one or more  executive  officers  serving on our board of  directors  or our
compensation committee of the board of directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management

    The table below sets forth information regarding the beneficial ownership of
our common stock as of December 31, 2001 by the following individuals or groups:

    o    each person or  entirety  who is known by us to own  beneficially  more
         than 5% of our outstanding stock;

    o    each  of  the  named  executive   officers  appearing  in  the  Summary
         Compensation table above (the "Named Executive Officers");

    o    each of our directors; and

    o    all directors and Named Executive Officers as a group.

    Each stockholder's  percentage  ownership in the following table is based on
43,752,484  shares of common stock  outstanding as of December 31, 2001.  Unless
otherwise indicated,  the principal address of each of the stockholders below is
c/o Versata,  Inc., 300 Lakeside Drive, Suite 1500,  Oakland,  California 94612.
Except as otherwise  indicated,  and subject to  applicable  community  property
laws,  except to the extent authority is shared by both spouses under applicable
law, we believe the persons  named in the table have sole voting and  investment
power with respect to all shares of common stock held by them.

<TABLE>
<CAPTION>
                                                                          Shares Acquirable
                                                                          -----------------
                                                                           within 60 Days          Percentage of Shares
                                                                           --------------          --------------------
Name of Beneficial Owner                             Shares Owned       of December 31, 2001        Beneficially Owned
------------------------                             ------------       --------------------        ------------------

<S>                                                    <C>                       <C>                          <C>
Morgenthaler Venture Partners IV, L.P. (1)              5,720,749                     --                      13.1%
Sigma Management V, LLC (2)                             5,430,105                     --                      12.4%
Douglas Roberts (3)                                       750,000                     --                       1.7%
James Doehrman (4)                                        750,000                     --                       1.7%
Val Huber (5)                                             605,050                 37,500                       1.5%
Rahul Patel (6)                                           370,500                 35,000                       *
Manish Chandra (7)                                        345,000                 30,000                       *
John A. Hewitt, Jr. (8)                                   228,535                     --                       *
Donald Feddersen                                           56,084                 42,997                       *
John W. Larson (9)                                         91,201                  6,997                       *
Kanwal Rekhi (10)                                         534,362                 42,997                       1.3%
Eugene Wong (11)                                          220,891                 35,597                       *
</TABLE>

                                       40
<PAGE>

<TABLE>
<S>                                                    <C>                       <C>                          <C>
Robert Davoli (12) (2)                                  5,430,105                 27,997                      12.5%
Gary Morgenthaler (1)                                   5,720,749                 42,997                      13.2%
All directors and executive  officers as a group       15,102,477                302,082                      35.0%
(12 people)

<FN>
* Less than 1%
-------------------------------------------------

1.  Principal  address is 2730 Sand Hill Road,  Suite 280, Menlo Park, CA 94025.
Includes 3,000 shares held by Morgenthaler Management Partners. Mr. Morgenthaler
disclaims  beneficial  ownership of all of these shares  except to the extent of
his  pecuniary  interest  in these  shares.  Includes  2,000  shares held by Mr.
Morgenthaler.  The general partner of Morgenthaler  Venture Partnership IV, L.P.
is  Morgenthaler   Management   Partners  IV,  L.P.  The  general   partners  of
Morgenthaler  Management Partners IV, L.P. are Gary Morgenthaler,  a director of
Versata, J. Morgenthaler,  Robert Pavey, Robert Bellas, Jr., and John Lutsi, who
have  dispositive  and  voting  powers  with  respect  to  the  shares  held  by
Morgenthaler Venture Partnership IV, L.P.

2. Principal address is 1600 El Camino Real, Suite 280, Menlo Park, CA 94025.

3. Includes  583,971  shares of common stock  subject to the Company's  right of
repurchase.

4. Includes  600,750  shares of common stock  subject to the Company's  right of
repurchase.

5.  Includes  100,000  shares in the Huber Family  Trust.  Mr.  Huber  disclaims
beneficial  ownership  of these  shares  except to the  extent of his  pecuniary
interest in these shares.  Also includes  183,700 shares of common stock subject
to the company's right of repurchase.

6. Includes  177,860  shares of common stock  subject to the Company's  right of
repurchase.

7. Includes  171,700  shares of common stock  subject to the Company's  right of
repurchase.

8. Principal  address is 333 Bush Street,  Unit 3905,  San Francisco,  CA 94104.
Includes 71,633 shares held by H&W  Development  Corp. and 31,902 shares held by
H&R Development Corp. Includes 75,000 shares held by the spouse of the reporting
person and 50,000  shares  held in a  retirement  account for the benefit of the
reporting  person.  Mr. Hewitt  disclaims  beneficial  ownership of these shares
except to the extent of his pecuniary interest in these shares.

9. Does not include  38,198 shares held by Brobeck,  Phleger & Harrison LLP. Mr.
Larson  disclaims  beneficial  ownership of these shares except to the extent of
his pecuniary interest in these shares.

10. Includes  534,362 shares held by the Rekhi Family Trust,  62,111 shares held
by the Benjamin Rekhi Trust and 62,111 shares of the Raj-Ann Kaur Rekhi Trust of
which Mr. Rekhi is a trustee. Mr. Rekhi disclaims beneficial ownership except to
the extent of his pecuniary interest in these shares.

11. Shares held in the Wong Family Trust of which Mr. Wong is a Trustee.

12. Includes  5,188,844 shares held by entities  affiliated with Sigma Partners.
Mr. Davoli disclaims  beneficial  ownership of these shares except to the extent
of his pecuniary interest in these shares.
</FN>
</TABLE>

Item 13. Certain Relationships and Related Transactions.

    The  following is a  description  of  transactions  since January 1, 2001 to
which we have been a party and in which the amount involved exceeded $60,000 and
any director,  executive officer, or security holder that we know owns more than
five percent of our capital stock had or will have a direct or indirect material
interest.

    During  2000,  we held a $1,000,000  investment  in the  preferred  stock of
TruMarkets,  Inc., a privately  held  corporation.  Our Chairman of the Board of
Directors  held a membership  interest in the general  partner of a  partnership
that  owned  a  controlling   interest  in  the  outstanding  capital  stock  of
TruMarkets,  Inc. In January  2001,  we provided  the  investee  with a $500,000
bridge  loan.  As of  December  31,  2000,  the  investee  was in the process of
developing  its  products and was actively  negotiating  with third  parties for
additional  financing to fund its operations.  During March 2001, the investee's
attempts to obtain additional financing failed and the investee began efforts to
sell the company.  The $500,000  loan was  recorded in  restructuring  and other
expenses  in the first  quarter of

                                       41
<PAGE>

2001. In June 2001,  TruMarkets,  Inc. was acquired by MortgageSight Holding LLC
("MortgageSight") and our investment and loan were converted to 22,122 shares of
preferred stock, or less than 1% of MortgageSight.  It is our understanding that
MortgageSight has ceased its operations; therefore, the value of these shares is
uncertain, so no amount has been recorded on the balance sheet.

    In  November  1999,  our former  Chief  Financial  Officer,  Kevin  Ferrell,
delivered a full-recourse promissory note to us in payment for 100,000 shares of
Series F  preferred  stock.  The  principal  amount  secured  under the note was
$556,000.  The note bore  interest  at the rate of 7.00% per  annum,  compounded
annually,  and was secured by the purchased shares.  The principal balance would
become due and payable in one lump sum on the third  anniversary  of the signing
of the note  (November  2002).  In 2000,  Mr.  Ferrell  paid down  approximately
$103,000 in principle and $35,000 in interest towards this note.

    In December 1999, Mr. Ferrell  delivered a full-recourse  promissory note to
us in payment of the exercise price of 400,000  outstanding  stock options under
our 1997 stock option plan.  The  principal  amount  secured  under the note was
$1,200,000.  In 2000,  Mr. Ferrell paid down $84,000  approximately  in interest
towards this note. Mr.  Ferrell  resigned in February 2001. In February 2001, we
exercised  our right to  repurchase  240,000  unvested  shares of Mr.  Ferrell's
400,000 option shares. We paid par value to repurchase the shares, which reduced
the principal amount of the note by $720,000. The offset to the reduction in the
note was recorded as a reduction in paid in capital.

    In October 2001, we wrote down $632,000 in principal in connection with both
of Mr.  Ferrell's  notes.  At  October  31,  2001,  $301,000  remains  in  notes
receivable as a component of stockholders'  equity,  all of which relates to Mr.
Ferrell's two notes.

    In January 2000, Mr. Hewitt delivered a full recourse  promissory note to us
in payment of the exercise  price of stock options  issued  pursuant to our 1997
Stock Option Plan. The principal  amount secured under the note was  $1,015,000.
The note had a term of three  years and bore  interest  at the rate of 7.00% per
annum,  compounded  annually.  The note was secured by the purchased  shares and
additional collateral. The entire unpaid balance of the note was due and payable
upon  termination of employment,  failure to pay any installment of principal or
interest when due, or insolvency or bankruptcy, or in the event we are acquired.
None of the shares  serving as security for the note could have been sold unless
the principal  portion of the note  attributable to those shares and the accrued
interest on that principal  portion was paid to us. In December 2000, Mr. Hewitt
delivered to us another full recourse promissory note in the amount of $375,000.
The note was secured by shares of our common  stock held by us for the  previous
loan. The note was due and payable on January 31, 2002, and bore interest at the
prime  rate as  reported  in The  Wall  Street  Journal  from  time to time  and
compounded annually. Accrued interest was due on each anniversary of the signing
of the note. Mr. Hewitt resigned in March 2001. In June 2001, in connection with
Mr. Hewitt's  termination of employment,  we cancelled both promissory notes and
related accrued interest totaling $1,517,000 in exchange for a pledge of 770,009
shares of our  Company's  common stock owned by the officer.  On that date,  the
fair  market  value of the  770,009  shares was  $919,000  and was  recorded  as
treasury   stock  and  $598,000  was   included  in   restructuring   and  other
non-recurring  expenses.


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

    (a) The  following  documents  are filed as a part of this Annual  Report on
        Form 10-K:

        1. Financial Statements.

        The consolidated financial statements contained herein are as listed on
        the "Index" on page

        2. Financial Statement Schedule.

        Reference is made to Schedule II following the signature pages hereto.

        3. Exhibits. Reference is made to Item 14(c) of this Annual Report on
        Form 10-K.

    (b) Reports on Form 8-K.

                                       42
<PAGE>
        Versata filed the following reports on Form 8-K:

    The Company filed a Form 8-K on January 4, 2002, announcing Versata's change
of fiscal year end from December 31 to October 31.

    (c) Exhibits

    Exhibits  submitted  with the  Annual  Report on Form 10-K as filed with the
Securities and Exchange  Commission and those incorporated by reference to other
filings are listed on the Exhibit Index.

    Exhibit Index

                                  EXHIBIT INDEX
      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)        Senior Loan and Security  Agreement,  dated August 20, 1999,
                    between Versata and Phoenix Leasing Incorporated, as amended
                    on October 1, 1999.

     10.7(2)+       Joint Product and Marketing  Agreement,  dated September 27,
                    1999, between Versata and IBM.

     10.8(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.

     10.9(4)        Software  Remarketing  Agreement,  effective  September  27,
                    2000,  between Versata and  International  Business Machines
                    Corporation.

     21.1           Subsidiaries of Versata.

     23.1           Consent   of    PricewaterhouseCoopers    LLP,   Independent
                    Accountants.

----------

+   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.

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

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

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

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

                                       43
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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, on March 29, 2002.

                             VERSATA

                             By: /s/  DOUGLAS ROBERTS
                                ----------------------
                                 Chief Executive Officer, President and Director


                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature  appears below
constitutes and appoints Douglas Robert and James Doehrman, and each of them, as
his  true  and  lawful   attorneys-in-fact   and  agents,  with  full  power  of
substitution  and  resubstitution,  for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments)  to this  Annual  Report on Form  10-K,  and to file the same,  with
exhibits  thereto  and  other  documents  in  connection  therewith,   with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing requisite and necessary to be done in connection  therewith,
as fully to all intents and  purposes as he might or could do in person,  hereby
ratifying and confirming all that said  attorneys-in-fact  and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME                                          TITLE                                      DATE
----                                          -----                                      ----

<S>                                           <C>                                        <C>
/S/ DOUGLAS ROBERTS                           Chief Executive Officer, President and     March 29, 2001
-----------------------------------------     Director (Principal Executive Officer)
Douglas Roberts

/S/ JAMES DOEHRMAN                            Executive Vice President, Chief            March 29, 2001
-----------------------------------------     Operating and Financial Officer
James Doehrman                                (Principal Accounting Officer)

/S/ GARY MORGENTHALER                         Chairman of the Board                      March 29, 2001
-----------------------------------------
Gary Morgenthaler

/S/ ROBERT DAVOLI                             Director                                   March 29, 2001
-----------------------------------------
Robert Davoli

/S/ DONALD W. FEDDERSEN                       Director                                   March 29, 2001
-----------------------------------------
Donald W. Feddersen

/S/ JOHN W. LARSON                            Director                                   March 29, 2001
-----------------------------------------
John W. Larson

/S/ KANWAL REKHI                              Director                                   March 29, 2001
-----------------------------------------
Kanwal Rekhi

/S/ EUGENE WONG                               Director                                   March 29, 2001
-----------------------------------------
Eugene Wong
</TABLE>
                                       44
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Report of Independent Accountants........................................   F-2
Consolidated Balance Sheets..............................................   F-3
Consolidated Statements of Operations and Comprehensive Loss.............   F-4
Consolidated Statement of Stockholders' Equity...........................   F-5
Consolidated Statements of Cash Flows....................................   F-6
Notes to Consolidated Financial Statements...............................   F-7

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders of Versata, Inc.:

    In our opinion,  the consolidated  financial  statements listed in the index
appearing  under  Item  14(a) 1 on  page  42  present  fairly,  in all  material
respects,  the  financial  position of Versata,  Inc.  and its  subsidiaries  at
October  31,  2001,  December  31,  2000  and  1999,  and the  results  of their
operations  and their cash flows for the ten months  ended  October 31, 2001 and
each of the three years in the period ended  December 31,  2000,  in  conformity
with accounting  principles  generally accepted in the United States of America.
In addition,  in our opinion,  the financial  statements  schedule listed in the
index appearing under Item 14(a) 2 on  page  42 presents fairly, in all material
respects,  the information  set forth therein when read in conjunction  with the
related  consolidated  financial  statements.  These  financial  statements  and
financial statement schedule are the responsibility of the Company's management;
our  responsibility  is to express an opinion on these financial  statements and
financial  statement  schedule  based on our audits.  We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers, LLP
PricewaterhouseCoopers, LLP

San Jose, California
February 27, 2002

                                      F-2
<PAGE>

                                  VERSATA, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands except share data)

<TABLE>
                                     ASSETS

<CAPTION>
                                                                          October 31,     December 31,       December 31,
                                                                             2001             2000                1999
                                                                        ---------------  -------------     -----------
    Current assets:
<S>                                                                      <C>              <C>               <C>
      Cash and cash equivalents.....................................     $    21,871      $    39,272       $    20,655
      Short-term investments........................................           3,036           29,926                --
      Accounts receivable, net......................................           3,975           14,177             5,587
      Unbilled receivables..........................................             236            3,584             1,584
      Prepaid expenses and other....................................             848            3,075             2,311
                                                                         -----------      -----------       -----------
              Total current assets..................................          29,966           90,034            30,137
    Restricted cash.................................................           5,445            5,189                --
    Property and equipment, net.....................................           6,257           11,901             1,902
    Note receivable from related parties............................              --              156               134
    Intangibles, net................................................           3,898           12,205             1,389
    Other assets....................................................             216              354                98
                                                                         -----------      -----------       -----------
              Total assets..........................................     $    45,782      $   119,839       $    33,660
                                                                         ===========      ===========       ===========

                                                 LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
    Accounts payable..............................................       $     1,062      $     9,040       $     2,025
    Accrued liabilities...........................................             6,177           13,146             7,298
    Accrued restructuring                                                      1,420               --                --
    Accrued stock-based compensation..............................                --            1,095                --
    Current portion of equipment line and capital lease...........               237              134               166
    Deferred revenue..............................................             6,246            8,661             4,433
                                                                         -----------      -----------       -----------
              Total current liabilities.............................          15,142           32,076            13,922
     Accrued restructuring, less current portion                               1,513               --                --
    Equipment line and capital lease, less current portion and other             337              218               320
                                                                         -----------      -----------       -----------
              Total liabilities.....................................          16,992           32,294            14,242
                                                                         -----------      -----------       -----------
    Commitments and contingencies (Note 14)
    Stockholders' equity:
    Convertible preferred stock, $0.001 par value; 30,580,000
        shares authorized; nil, nil and 26,572,909  shares issued
        and outstanding as of October 31, 2001, December 31, 2000
        and 1999, respectively......................................              --               --                26
    Common stock, $0.001 par value; 150,000,000 shares
        authorized, 42,280,565, and 41,142,180 and 7,204,111
        shares issued and outstanding as of October 31, 2001 and
        December 31, 2000 and 1999, respectively....................              42               41                 7
    Additional paid-in capital......................................         217,379          226,352            89,905
    Treasury stock                                                            (1,383)              --                --
    Notes receivable from stockholders..............................            (301)          (3,868)           (2,413)
    Unearned stock-based compensation...............................          (2,585)         (13,870)          (14,732)
    Accumulated other comprehensive income (loss)...................            (210)             166                --
    Accumulated deficit.............................................        (184,152)        (121,276)          (53,375)
                                                                         -----------      -----------       -----------
              Total stockholders' equity............................          28,790           87,545            19,418
                                                                         -----------      -----------       -----------
              Total liabilities and stockholders' equity............     $    45,782      $   119,839       $    33,660
                                                                         ===========      ===========       ===========
</TABLE>

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

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           Ten Months                   Year Ended
                                                                             Ended       ------------------------------------------
                                                                          October 31,      December    December 31,     December
                                                                              2001         31, 2000        1999         31, 1998
                                                                         --------------- ------------- -------------- -------------
<S>                                                                      <C>             <C>           <C>            <C>
  Revenue:
    Software license..................................................   $   13,886      $   26,814    $    6,729     $    1,924
    Services..........................................................       15,494          29,794         5,853          2,026
                                                                         ----------      ----------    ----------     ----------
            Total revenue.............................................       29,380          56,608        12,582          3,950
  Cost of revenue:
    Software license..................................................          206           1,088           499            234
    Services (excluding stock-based compensation of  $1,866 for the
      ten months ended October 31, 2001; $7,437,  $515 and $64 for
      for the years ended December 31, 2000, 1999 and 1998,
      respectively)...................................................       17,558          30,514         6,121          2,248
                                                                         ----------      ----------    ----------     ----------
            Total cost of revenue.....................................       17,764          31,602         6,620          2,482
                                                                         ----------      ----------    ----------     ----------
  Gross profit........................................................       11,616          25,006         5,962          1,468
                                                                         ----------      ----------    ----------     ----------
  Operating expense:
    Sales and marketing  (excluding  stock-based  compensation of
       $4,317 for the ten months ended October 31, 2001; $13,245,
       $2,351 and $74 for the years ended December 31, 2000, 1999            26,500          46,717        15,609          4,495
       and 1998, respectively)........................................
    Product development (excluding  stock-based  compensation of
       $87 for the ten months ended October 31, 2001; $3,064, $815
       and $49, for the years ended December 31, 2000, 1999                   8,793           9,727         4,769          3,275
       and 1998, respectively)........................................
    General and administrative (excluding stock-based
       compensation of $493 for the ten months ended
       October 31, 2001; 1,766, $274 and $15 for the years ended             10,589          12,675         3,125          1,379
       December 31, 2000, 1999 and 1998 respectively).................
    Stock-based compensation..........................................        1,659          25,512         3,955            202
    Amortization of intangibles and impairment charge.................        8,696           1,341            --             --
    Impairment of investment..........................................           --           1,000            --             --
    Restructuring and other non-recurring expenses (exclusive of the..       19,696             937            --             --
       benefit of $5,104 for the ten months ended October 31, 2001,
       relating to the reversal of previously recorded stock-based
       compensation related to employees terminated in the
       restructuring)
            Total operating expense...................................       75,933          97,909        27,458          9,351
                                                                         ----------      ----------    ----------     ----------
  Loss from operations................................................      (64,317)        (72,903)      (21,496)        (7,883)
  Interest income.....................................................        1,836           5,150           377            106
  Interest expense....................................................          (64)            (86)         (655)          (365)
  Other non-operating, net............................................         (331)            (62)          (26)             8
                                                                         ----------      ----------    ----------     ----------
  Net loss............................................................      (62,876)        (67,901)      (21,800)        (8,134)
  Deemed preferred stock dividend.....................................           --              --       (10,800)            --
                                                                         ----------      ----------    ----------     ----------
  Net loss attributable to common stockholders........................   $  (62,876)     $  (67,901)   $  (32,600)    $   (8,134)
                                                                         ==========      ==========    ==========     ==========
  Other comprehensive income (loss):
    Change in unrealized gain (loss) on marketable
       securities.....................................................           (2)             35            --             --
    Change in foreign currency translation adjustments................          378             131            --             --
                                                                         ----------      ----------    ----------     ----------
  Comprehensive loss..................................................   $  (62,500)     $  (67,735)   $  (21,800)    $   (8,134)
                                                                         ==========      ==========    ==========     ==========
  Basic and diluted net loss per share................................   $    (1.56)     $    (2.06)   $    (9.18)    $    (3.99)
                                                                         ==========      ==========    ==========     ==========
  Weighted-average common shares outstanding..........................       40,216          32,891         3,552          2,038
                                                                         ==========      ==========    ==========     ==========
</TABLE>

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

                                      F-4
<PAGE>

                                  VERSATA, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                    Additional
                                                                                                    ----------
                                                   Convertible Preferred Stock      Common Stock      Paid-in      Treasury Stock
                                                   --------------------------- -------------------    -------      --------------
                                                        Shares       Amount      Shares     Amount    Capital     Shares     Amount
                                                     ------------  ----------- ----------  --------  --------  ------------ -------
<S>                                                  <C>           <C>         <C>         <C>      <C>                    <C>
Balances at December 31, 1997 .....................  12,087,508    $    12     1,729,586   $    1   $  24,317        --    $  --
Series D convertible  preferred stock issued
for cash, net of issuance costs of $38 ............   5,160,116          5          --       --         8,265        --       --
Series D convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest ..................................   1,823,013          2          --       --         2,933        --       --
Warrants issued in connection with Series D
convertible preferred stock financing .............        --         --            --       --           137        --       --
Common stock issued for cash upon exercise of
stock options and warrants ........................        --         --         514,113     --           101        --       --
Unearned stock-based compensation .................        --         --            --       --         1,306        --       --
Amortization of unearned stock-based compensation .        --         --            --       --          --          --       --
Net loss ..........................................        --         --            --       --          --          --       --
                                                    -----------    -------    ----------   ------   ---------   ---------  -------
Balances at December 31, 1998 .....................  19,070,637    $    19     2,243,699   $    1   $  37,059        --    $  --
Convertible preferred stock issued upon exercise
of warrants .......................................     104,534       --            --       --           198        --       --
Series E convertible preferred stock issued for
cash, net of issuance costs of $70 ................   3,607,967          3          --       --        12,554        --       --
Series E convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest ..................................     873,626          1          --       --         3,057        --       --
Warrants issued in connection with Series E
convertible preferred stock financing .............        --         --            --       --           521        --       --
Common stock issued upon exercise of stock options         --         --       1,177,953        2         550        --       --
Common stock repurchased ..........................        --         --          (9,930)    --          --          --       --
Restricted common stock issued in exchange for
notes receivable upon exercise of options .........        --         --       3,715,535        4       1,863        --       --
Payments on notes receivable from stockholders ....        --         --            --       --          --          --       --
Common stock issued upon exercise of warrants .....        --         --          76,854     --            87        --       --
Series F convertible  preferred stock issued for
cash, net of issuance costs of $25 ................   2,777,698          3          --       --        15,416        --       --
Issuance of Series F convertible preferred stock
in exchange for notes receivable ..................     100,000       --            --       --           556        --       --
Series F convertible preferred stock issued in
connection with acquisition .......................      38,447       --            --       --           461        --       --
Allocation of discount on preferred stock .........        --         --            --       --        10,800        --       --
Deemed preferred stock dividend ...................        --         --            --       --       (10,800)       --       --
Stock-based compensation expense ..................        --         --            --       --           815        --       --
Unearned stock-based compensation .................        --         --            --       --        16,768        --       --
Amortization of unearned stock-based compensation .        --         --            --       --          --          --       --
Net loss ..........................................        --         --            --       --          --          --       --
                                                    -----------    -------    ----------   ------   ---------   ---------  -------
Balance at December 31, 1999 ......................  26,572,909    $    26     7,204,111   $    7   $  89,905        --    $  --
                                                    ===========    =======    ==========   ======   =========   =========  =======
Common stock issued in initial public offering,
net of issuance costs of $2.2 million .............        --         --       4,427,500        4      96,651        --       --
Conversion of preferred stock on date of
public offering ................................... (26,950,287)       (26)   26,950,287       26        --          --       --
Common stock issued for notes receivable
from stockholders .................................        --         --         589,000        1       1,812        --       --
Common stock issued upon exercise of stock
options and warrants ..............................        --         --       1,624,001        2       2,499        --       --
Repurchase of stock from stockholder ..............        --         --        (188,080)    --           (37)       --       --
Issuance of common stock under employee
stock purchase plan ...............................        --         --          86,894     --         1,773        --       --
Issuance of common stock in connection
with Verve acquisition ............................        --         --         448,467        1       4,502        --       --
Assumption of stock options in connection
with Verve acquisition ............................        --         --            --       --         2,098        --       --
Loans provided to stockholders ....................        --         --            --       --          --          --       --
Payments on notes receivable from stockholders ....        --         --            --       --          --          --       --
Series F convertible preferred stock issues in
connection with acquisition .......................      72,000       --            --       --         1,087        --       --
Series F convertible preferred stock issues
for cash ..........................................     269,784       --            --       --         1,500        --       --
Convertible preferred stock issued upon
exercise of warrants ..............................      35,594       --            --       --            90        --       --
Accumulated other comprehensive income ............        --         --            --       --          --          --       --
Unearned stock-based compensation .................        --         --            --       --        27,829        --       --
Amortization of unearned stock-based compensation .        --         --            --       --        (3,357)       --       --
Net loss ..........................................        --         --            --       --          --          --       --
                                                    -----------    -------    ----------   ------   ---------   ---------  -------
Balance at December 31, 2000 ......................        --      $  --      41,142,180   $   41   $ 226,352        --    $  --
                                                    ===========    =======    ==========   ======   =========   =========  =======
Common stock issued upon exercise of stock
options and warrants ..............................        --         --         300,710     --           118        --       --
Issuance of common stock under employee
stock purchase plan ...............................        --         --         352,134     --         1,480        --       --
Cancellation of notes receivable and
repurchase of common stock at par value ...........        --         --        (354,000)      (1)     (1,517)       --       --
Repurchase of common stock ........................        --         --        (146,150)    --           (29)       --       --
Issuance of restricted stock to officers ..........        --         --       2,305,000        2          (2)       --       --
Repurchase of common stock of former officer
in connection with guarantee of loan and
cancellation of promissory note ...................        --         --            --       --          --    (1,319,309)  (1,383)
Write-off of note receivable in connection
with settlement agreement .........................        --         --            --       --          --          --       --
Accumulated other comprehensive income ............        --         --            --       --          --          --       --
Unearned stock-based compensation .................        --         --            --       --        (9,023)       --       --
Amortization of unearned stock-based compensation .        --         --            --       --          --          --       --
Net loss ..........................................        --         --            --       --          --          --       --
                                                    -----------    -------    ----------   ------   ---------   ---------  -------
Balance at October 31, 2001 .......................        --      $  --      43,599,874   $   42   $ 217,379  (1,319,309) $(1,383)
                                                    ===========    =======    ==========   ======   =========   =========  =======
</TABLE>
<TABLE>
<CAPTION>
                                                                                  Accumulated
                                                                                  -----------
                                                       Notes         Deferred       Other                         Total
                                                       -----         --------       -----                         -----
                                                   Receivable from  Stock-Based  Comprehensive    Accumulated  Stockholders'
                                                   ---------------  -----------  -------------    -----------  -------------
                                                    Stockholders   Compensation     Income          Deficit       Equity
                                                   --------------- ------------  -------------    -----------  -------------
<S>                                                  <C>            <C>            <C>            <C>            <C>
Balances at December 31, 1997 .....................  $      --      $      --      $      --      $   (23,441)   $       889
Series D convertible  preferred stock issued
for cash, net of issuance costs of $38 ............         --             --             --             --            8,270
Series D convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest ..................................         --             --             --             --            2,935
Warrants issued in connection with Series D
convertible preferred stock financing .............         --             --             --             --              137
Common stock issued for cash upon exercise of
stock options and warrants ........................          (44)          --             --             --               57
Unearned stock-based compensation .................         --           (1,306)          --             --             --
Amortization of unearned stock-based compensation .         --              202           --             --              202
Net loss ..........................................         --             --             --           (8,134)        (8,134)
                                                     -----------    -----------    -----------    -----------    -----------
Balances at December 31, 1998 .....................  $       (44)   $    (1,104)   $      --      $   (31,575)   $     4,356
Convertible preferred stock issued upon exercise
of warrants .......................................         --             --             --             --              198
Series E convertible preferred stock issued for
cash, net of issuance costs of $70 ................         --             --             --             --           12,557
Series E convertible preferred stock issued upon
conversion and cancellation of bridge loans and
accrued interest ..................................         --             --             --             --            3,058
Warrants issued in connection with Series E
convertible preferred stock financing .............         --             --             --             --              521
Common stock issued upon exercise of stock options          --             --             --             --              552
Common stock repurchased ..........................         --             --             --             --             --
Restricted common stock issued in exchange for
notes receivable upon exercise of options .........       (1,867)          --             --             --             --
Payments on notes receivable from stockholders ....           54           --             --             --               54
Common stock issued upon exercise of warrants .....         --             --             --             --               87
Series F convertible  preferred stock issued for
cash, net of issuance costs of $25 ................         --             --             --             --           15,419
Issuance of Series F convertible preferred stock
in exchange for notes receivable ..................         (556)          --             --             --             --
Series F convertible preferred stock issued in
connection with acquisition .......................         --             --             --             --              461
Allocation of discount on preferred stock .........         --             --             --             --           10,800
Deemed preferred stock dividend ...................         --             --             --             --          (10,800)
Stock-based compensation expense ..................         --             --             --             --              815
Unearned stock-based compensation .................         --          (16,768)          --             --             --
Amortization of unearned stock-based compensation .         --            3,140           --             --            3,140
Net loss ..........................................         --             --             --          (21,800)       (21,800)
                                                     -----------    -----------    -----------    -----------    -----------
Balance at December 31, 1999 ......................  $    (2,413)   $   (14,732)   $      --      $   (53,375)   $    19,418
                                                     ===========    ===========    ===========    ===========    ===========
Common stock issued in initial public offering,
net of issuance costs of $2.2 million .............         --             --             --             --           96,655
Conversion of preferred stock on date of
public offering ...................................         --             --             --             --             --
Common stock issued for notes receivable
from stockholders .................................       (1,813)          --             --             --             --
Common stock issued upon exercise of stock
options and warrants ..............................         --             --             --             --            2,501
Repurchase of stock from stockholder ..............           31           --             --             --               (6)
Issuance of common stock under employee
stock purchase plan ...............................         --             --             --             --            1,773
Issuance of common stock in connection
with Verve acquisition ............................         --             --             --             --            4,503
Assumption of stock options in connection
with Verve acquisition ............................         --             --             --             --            2,098
Loans provided to stockholders ....................       (1,025)          --             --             --           (1,025)
Payments on notes receivable from stockholders ....        1,352           --             --             --            1,352
Series F convertible preferred stock issues in
connection with acquisition .......................         --             --             --             --            1,087
Series F convertible preferred stock issues
for cash ..........................................         --             --             --             --            1,500
Convertible preferred stock issued upon
exercise of warrants ..............................         --             --             --             --               90
Accumulated other comprehensive income ............         --             --              166           --              166
Unearned stock-based compensation .................         --          (27,829)          --             --             --
Amortization of unearned stock-based compensation .         --           28,691           --             --           25,334
Net loss ..........................................         --             --             --          (67,901)       (67,901)
                                                     -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2000 ......................  $    (3,868)   $   (13,870)   $       166    $  (121,276)   $    87,545
                                                     ===========    ===========    ===========    ===========    ===========
Common stock issued upon exercise of stock
options and warrants ..............................         --             --             --             --              118
Issuance of common stock under employee
stock purchase plan ...............................         --             --             --             --            1,480
Cancellation of notes receivable and
repurchase of common stock at par value ...........        1,518           --             --             --
Repurchase of common stock ........................         --             --             --             --              (29)
Issuance of restricted stock to officers ..........         --             --             --             --
Repurchase of common stock of former officer
in connection with guarantee of loan and
cancellation of promissory note ...................        1,419           --             --             --               36
Write-down of note receivable in connection
with settlement agreement .........................          630           --             --             --              630
Accumulated other comprehensive income ............         --             --             (376)          --             (376)
Unearned stock-based compensation .................         --            4,522           --             --           (4,501)
Amortization of unearned stock-based compensation .         --            6,753           --             --            6,763
Net loss ..........................................         --             --             --          (62,876)       (62,876)
                                                     -----------    -----------    -----------    -----------    -----------
Balance at October 31, 2001 ......................   $      (301)   $    (2,585)   $      (210)   $  (184,152)   $    28,790
                                                     ===========    ===========    ===========    ===========    ===========
</TABLE>

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

                                      F-5
<PAGE>

                                  VERSATA, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                             Ten Months                 Year Ended
                                                                                Ended    ------------------------------------------
                                                                             October 31,   December      December    December 31,
                                                                                2001       31, 2000      31, 1999        1998
                                                                            ------------ ------------- ------------- --------------
<S>                                                                          <C>             <C>           <C>           <C>
Cash flows from operating activities:
  Net loss.................................................................  $    (62,876)   $   (67,901)  $  (21,800)   $   (8,134)
Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization..........................................        11,436          2,937          495           537
    Provision for doubtful accounts........................................         2,223          2,844          586           223
    Warrants  issued in connection  with bridge loans recorded as interest
      expense..............................................................            --             --          521           137
    Stock-based compensation expense.......................................         1,659         25,512        3,955           202
Cancellation of promissory notes...........................................         1,287             --           --            --
Write-down of leasehold improvements and office furniture due to
  restructuring............................................................         6,574             --           --            --
    Change in operating assets and liabilities:
      Accounts receivable..................................................         7,979        (10,946)      (4,662)       (1,198)
      Unbilled receivables.................................................           736         (2,000)      (1,584)           --
      Prepaid expenses and other assets....................................         2,227           (660)      (2,005)          (68)
      Other assets.........................................................           138           (256)         (68)           --
      Accounts payable and accrued liabilities.............................       (14,947)        11,979        6,606           933
      Accrued restructuring ...............................................         2,933             --           --            --
      Deferred revenues....................................................           197          4,001        3,523           654
      Other long-term liabilities..........................................            --             --         (112)         (285)
                                                                            -------------    -----------   ----------    ----------
        Net cash used in operating activities..............................       (40,434)       (34,490)     (14,545)       (6,999)
                                                                            -------------    -----------   ----------    ----------
Cash flows from investing activities:
  Maturities (purchases) of short-term investments.........................        26,865        (29,890)          --            --
  Purchase of restricted cash..............................................          (256)        (5,189)          --            --
  Purchase of property and equipment.......................................        (3,670)       (12,495)      (1,469)         (299)
  (Decrease) in notes receivable from related parties......................            --            (22)         (34)           --
  Net cash used in connection with acquisitions, net of cash acquired......            --         (2,048)        (586)           --
                                                                            -------------    -----------   ----------    ----------
        Net cash provided by (used in) investing activities................        22,939        (49,644)      (2,089)         (299)
                                                                            -------------    -----------   ----------    ----------
Cash flows from financing activities:
  Principal payments on capital lease obligations and loan.................          (136)          (218)        (707)         (416)
  Proceeds from equipment line.............................................            --             --          362            --
  Net proceeds from issuance of convertible preferred stock................            --          1,500       27,976         8,270
  Net proceeds from issuance of common stock...............................            --         96,655          552            57
  Proceeds from issuance of common stock under employee stock purchase
    plan...................................................................         1,480          1,773           --            --
  Proceeds from exercise of stock options and warrants.....................           118          2,560          285            --
  Repurchase of common stock from stockholders.............................           (29)            (6)          --            --
  Repurchase of common stock from former officers..........................          (988)            --           --            --
  Payments from stockholders on notes receivable...........................            --          1,383           54            --
  Loans provided to stockholders...........................................            --         (1,025)          --            --
  Proceeds from bridge loans...............................................            --             --        3,000         2,816
                                                                            -------------    -----------   ----------    ----------
        Net cash provided by financing activities..........................           445        102,621       31,522        10,727
                                                                            -------------    -----------   ----------    ----------
Effects of exchange rate changes on cash and cash equivalents..............          (351)           130           --            --
                                                                            -------------    -----------   ----------    ----------
        Decrease (increase) in cash and cash equivalents...................       (17,401)        18,617       14,888         3,429
Cash and cash equivalents at beginning of period...........................        39,272         20,655        5,767         2,338
                                                                            -------------    -----------   ----------    ----------
Cash and cash equivalents at end of period................................. $      21,871    $    39,272   $   20,655    $    5,767
                                                                            =============    ===========   ==========    ==========
Supplemental Disclosures of Cash Flow information
Cash paid during the period for interest................................... $          28    $        96   $       72    $      110
                                                                            =============    ===========   ==========    ==========
Supplemental Schedule of Noncash Investing and Financing Activities
Common stock issued for notes receivable from stockholders................. $          --    $     1,813   $    1,867    $       44
                                                                            =============    ===========   ==========    ==========
Convertible preferred stock issued for notes receivable from stockholders.. $          --    $        --   $      556    $       --
                                                                            =============    ===========   ==========    ==========
Issuance of preferred stock upon conversion and cancellation
  of bridge loans and accrued interest..................................... $          --    $        --   $    3,058    $    2,935
                                                                            =============    ===========   ==========    ==========
Issuance of convertible preferred stock in connection with acquisition..... $          --    $     1,087   $      461    $       --
                                                                            =============    ===========   ==========    ==========
Issuance of common stock in connection with acquisition.................... $          --    $     4,503   $       --    $       --
                                                                            =============    ===========   ==========    ==========
Assumption of stock options in connection with acquisition................. $          --    $     2,098   $       --    $       --
                                                                            =============    ===========   ==========    ==========
Property and equipment acquired through capital leases..................... $          --    $        30   $       49    $       --
                                                                            =============    ===========   ==========    ==========
Acquisition of treasury stock in exchange for cancellation of note......... $         919    $        --   $       --    $       --
                                                                            =============    ===========   ==========    ==========
Notes receivable and interest receivable deductible cancelled
in exchange for repurchase of common stock from stockholder................ $       1,518    $        --   $       --    $       --
                                                                            =============    ===========   ==========    ==========
</TABLE>

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

                                      F-6
<PAGE>
                                  VERSATA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, we announced a change in our fiscal year from December
31 to October  31.  The change was  effective  for the  ten-month  period  ended
October 31, 2001.

2. Basis of Presentation

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

    We have an accumulated  deficit of $184.2 million as of October 31, 2001 and
we have generated  losses and negative cash flows from operations in current and
prior periods. We may incur additional  operating losses and negative cash flows
in the future.  The Company may find it necessary to obtain additional equity or
debt financing in the future.  Certain costs could be reduced if working capital
decreased   significantly.   Failure  to  generate  sufficient  revenue,   raise
additional  capital  or  reduce  certain  discretionary  spending  could  have a
material  adverse  affect  on our  ability  to  achieve  our  intended  business
objectives.

3. Summary of Significant Accounting Policies

Use of estimates

    The  preparation  of financial  statements  in  conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  periods.  Actual results could differ from those
estimates.

Revenue recognition

    We derive revenue from two sources as follows: (i) sale of software licenses
to end users, value added resellers (VARs),  distributors,  system  integrators,
independent  software  vendors,  and  application  service  providers;  and (ii)
services which include consulting, training, and post-contract customer support.
We recognize  revenue in accordance  with Statement of Position  97-2,  Software
Revenue  Recognition.  We record revenue from licensing of software  products to
end-users when a license  agreement is signed by both parties,  the fee is fixed
or  determinable,  collection is reasonably  assured and delivery of the product
has occurred. Generally, we provide payment terms that range from thirty days to
ninety days from the invoice date. Accordingly, payment terms that exceed ninety
days are not  considered  fixed or  determinable  and revenue is  recognized  as
payments become due. When contracts  contain  multiple  elements,  and for which
vendor  specific  objective  evidence  ("VSOE")  of fair  value  exists  for the
undelivered elements, we recognize revenue for the delivered elements based upon
the residual  method.  VSOE is generally the price for products sold  separately
or, the renewal rate in the  agreement  for PCS.  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. The portion of fees related to either products delivered or
services  rendered which are not due under our Company's  standard payment terms
are reflected in deferred  revenue and in unbilled  receivables.

                                      F-7
<PAGE>
Cash and cash equivalents and short-term investments

    We  consider  all  highly  liquid  investments  purchased  with an  original
maturity  of  three  months  or  less  to be cash  equivalents.  Our  short-term
investments consist of debt securities with maturities greater than three months
at the date of purchase. We classify all short-term investments as available for
sale in accordance with Statement of Financial Accounting Standards ("SFAS") No.
115,   Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities.
Accordingly,  our  short-term  investments  are  carried at fair value as of the
balance sheet date.  Unrealized  gains and losses are reported net of taxes as a
component of shareholders' equity. The cost of securities sold is based upon the
specific  identification  method.  At each period end presented,  amortized cost
approximated fair value and unrealized gross gains or losses were insignificant,
and during each of the periods presented, realized gains were insignificant.

    The portfolio of cash, cash equivalents and short-term investments consisted
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      As of              As of               As of
                                                                 October 31, 2001  December 31, 2000   December 31, 1999
                                                                 ----------------  -----------------   -----------------
<S>                                                             <C>                 <C>                 <C>
         Cash and cash equivalents:
           Cash................................................ $        9,377      $       11,493      $        1,329
           Commercial paper....................................          4,992              19,102                  --
           Auction floater.....................................          6,005               8,677                  --
           Money market funds..................................          1,497                  --               6,826
         US Agencies:
           Certificates of deposit.............................             --                  --              12,500
                                                                    ----------      --------------      --------------
                                                                $       21,871      $       39,272      $       20,655
                                                                ==============      ==============      ==============
         Short-term Investments:
           Corporate debt securities........................... $          497      $       25,871      $           --
           Debt securities issued by the U.S. government.......          2,539               4,055                  --
                                                                    ----------      --------------      --------------
                                                                $        3,036      $       29,926      $           --
                                                                ==============      ==============      ==============
</TABLE>

Fair value of financial instruments

    The  reported  amounts  of certain of our  Company's  financial  instruments
including cash and cash equivalents and short-term investments, receivables, and
accounts  payable  approximate  fair value due to their  short  maturities.  The
reported  amounts  of loans  payable  approximate  fair  value due to the market
interest rates, which these debts bear.

Concentration of credit risk

    Financial   instruments,   which   potentially   subject   our   Company  to
concentrations  of  credit  risk,   consist  primarily  of  cash,   investments,
certificates of deposit,  money market accounts,  and accounts  receivable.  Our
Company places its cash investments with three major financial institutions.  At
October  31,  2001,  December  31,  2000 and  December  31, 1999 our Company had
deposits in excess of federally  insured limits of $24,707,000,  $68,898,000 and
$20,555,000, respectively.

    Our Company performs ongoing customer credit  evaluations within the context
of the industry in which it operates, does not require collateral, and maintains
allowances  for  potential  credit  losses  on  customer  accounts  when  deemed
necessary.

    The  following  table sets  forth  customers  comprising  10% or more of our
Company's total revenue for each of the periods presented:

                             Ten Months
                               Ended
                             October 31,     Year Ended December 31,
                                            -------------------------
                Customer        2001          2000     1999     1998
                --------      --------      -------- --------  ------
                A.........       17%            --       --       18%
                B.........       16%            --       --       13%
                C.........        --            --       12%      --

                                      F-8
<PAGE>
    We had  two  single  customers  that  accounted  for  28%  of  our  accounts
receivable as of October 31, 2001. No single customer accounted for greater than
10% of our  accounts  receivable  as of  December  31,  2000,  and one  customer
accounted for 12% of our accounts receivable as of December 31, 1999.

Property and equipment

    Property  and  equipment  is  stated  at cost and is  depreciated  using the
straight-line  method over the  estimated  useful  lives of the related  assets,
which range from two to five years.  Leasehold  improvements  are amortized on a
straight-line  basis over the life of the lease or the estimated  useful life of
the asset,  whichever is shorter.  Equipment  under  capital  lease is amortized
using the  straight-line  method  over the  lesser  of the  lease  term or their
estimated useful lives.

    Major  additions  and  improvements  are  capitalized,  while  replacements,
maintenance,  and  repairs  that do not improve or extend the life of the assets
are charged to expense.  In the period assets are retired or otherwise  disposed
of, the cost and related  accumulated  depreciation and amortization are removed
from the  accounts,  and any gain or loss on  disposal is included in results of
operations.

Goodwill and other acquisition-related intangibles

    Goodwill is recorded when the consideration paid for acquisition exceeds the
fair value of identifiable net tangible and intangible assets acquired. Goodwill
and other acquisition-related intangibles are amortized on a straight-line basis
over three years.

Stock-based compensation

    Our Company accounts for stock-based employee  compensation  arrangements in
accordance  with provisions of Accounting  Principles  Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and Financial Accounting Standards
Board  Interpretation  ("FIN") No. 28, Accounting for Stock Appreciation  Rights
and Other Variable Stock Option or Award Plans, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based  Compensation.  Under APB
No. 25, compensation expense is based on the difference,  if any, on the date of
grant,  between the fair value of our  Company's  common  stock and the exercise
price.  SFAS 123  defines  a "fair  value"  based  method of  accounting  for an
employee stock option or similar equity investment. The pro forma disclosures of
the difference  between the  compensation  expense  included in net loss and the
related  cost  measured by the fair value  method are  presented in Note 13. Our
Company  accounts for equity  instruments  issued to  nonemployees in accordance
with the  provisions  of SFAS No. 123 and  Emerging  Issues Task Force  ("EITF")
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services.

Software development costs

    Software  development  costs are  included  in product  development  and are
expensed as incurred. After technological  feasibility is established,  material
software  development  costs are  capitalized  in  accordance  with SFAS No. 86,
Accounting  for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed.  The capitalized cost is then amortized on a straight-line  basis over
the  estimated  product  life,  or in the  ratio of  current  revenues  to total
projected  product revenues,  whichever is greater.  To date, the period between
achieving  technological  feasibility,  which the  Company  has  defined  as the
establishment  of a working  model,  and typically  occurs when the beta testing
commences,  and the general  availability  of such  software  has been short and
software   development   costs   qualifying   for   capitalization   have   been
insignificant.  Accordingly,  the  Company  has  not  capitalized  any  software
development costs.

Foreign currency translation

    Assets and liabilities of foreign  operations where the functional  currency
is the local  currency,  are translated  into U.S.  dollars at the balance sheet
date  exchange  rate.  Revenues and expenses are  translated at the average rate
prevailing during the period.  The related gains and losses from translation are
recorded as a translation  adjustment in a separate  component of  stockholders'
equity,  which were not  significant  for the ten months ended October 31, 2001,
and for the years ended  December  31,  2000,  1999 and 1998.  Foreign  currency
transaction gains and losses have been immaterial to date.

Comprehensive loss

    Comprehensive loss consists of net loss, the net changes in foreign currency
translation   adjustment   and  the  net   unrealized   gains   and   losses  on
available-for-sale  securities.  For the years ended December 31, 1999 and 1998,
the net change in foreign currency  translation  adjustments was  insignificant.
There were no other items of comprehensive income in 1999 or 1998.

                                      F-9
<PAGE>
Income taxes

    Our  Company has  accounted  for income  taxes using an asset and  liability
approach which  requires the  recognition of taxes payable or refundable for the
current  year and  deferred  tax  liabilities  and  assets  for the  future  tax
consequences  of events that have been  recognized  in our  Company's  financial
statements  or  tax  returns.  The  measurement  of  current  and  deferred  tax
liabilities  and assets are based on  provisions  of the  enacted  tax law.  The
measurement  of deferred tax assets is reduced,  if necessary,  by the amount of
any tax  benefits  that,  based on  available  evidence,  are not expected to be
realized.

Long-lived assets

    Our Company  accounts for long-lived  assets under SFAS No. 121,  Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, which  requires our Company to review for  impairment of  long-lived  assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset  might not be  recoverable.  When  such an event  occurs,  our  Company
estimates the future cash flows expected to result from the use of the asset and
its eventual  disposition.  If the  undiscounted  expected future cash flows are
less than the carrying amount of the asset, an impairment loss is recognized.

Net loss per share

    Basic and diluted  net loss per share is  computed by dividing  the net loss
available to holders of common stock for the period by weighted  average  number
of shares of common stock  outstanding  during the period.  The  calculation  of
diluted net loss per share  excludes  potential  common stock if their effect is
antidilutive.  Potential  common stock  consists of unvested  restricted  common
stock, and incremental  common or preferred shares issuable upon the exercise of
stock options, warrants and common stock issuable upon conversion of convertible
preferred stock.

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

<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                             Ten Months Ended   -------------------------------------------------
                                                             October 31, 2001          2000            1999            1998
                                                              --------------      --------------  -------------   -------------
<S>                                                           <C>                 <C>             <C>             <C>
Numerator:
  Net loss................................................    $      (62,876)     $      (67,901) $     (21,800)  $      (8,134)
  Deemed preferred stock dividend.........................                --                  --        (10,800)             --
                                                              --------------      --------------  -------------   -------------
  Net loss attributable to common stockholders............    $      (62,876)     $      (67,901) $     (32,600)  $      (8,134))
                                                              ==============      ==============  =============   ==============
Denominator:
  Weighted average shares outstanding.....................            42,337              34,881          4,737           2,038
  Weighted average unvested shares of common stock
     subject to repurchase................................            (2,121)             (1,990)        (1,184)            --
                                                              --------------      --------------  -------------   ------------
  Denominator for basic and diluted calculation...........            40,216              32,891          3,552           2,038
                                                              ==============      ==============  =============   =============
Net loss per share attributable to common stockholders:
  Basic and diluted.......................................    $        (1.56)     $        (2.06) $       (9.18)  $       (3.99)
                                                              ==============      ==============  =============   =============
</TABLE>
    The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share  calculation  above  because to do so
would be antidilutive for the periods (in thousands).
<TABLE>
<CAPTION>
                                                                                     Shares at End of Period
                                                                                           December 31,
                                                                               -------------------------------------
                                                            October 31, 2001      2000         1999           1998
                                                            ----------------   ---------     ---------      --------
<S>                                                              <C>           <C>           <C>            <C>
Effect of common stock equivalents:
Unvested common stock subject to repurchase.................          2,132        1,186         2,165            --
Stock options outstanding...................................          7,923        8,379         4,963         5,409
Convertible preferred stock.................................             --           --        26,573        19,093
Warrants to purchase convertible preferred stock............             --           --           217            78
Warrants to purchase common stock...........................             --           --           538           615
                                                                 ----------    ---------     ---------      --------
Total common stock equivalents excluded from
the computation of earnings per share as
their effect was antidilutive...............................         10,055        9,565        34,456        25,195
                                                                 ==========    =========     =========     =========
</TABLE>

                                      F-10
<PAGE>

Segment information

    We identify our operating segments based on business activities,  management
responsibility and geographical location. For all periods presented, we operated
in a single business segment,  primarily in the United States.  Through December
31, 1998,  foreign  operations  have not been  significant  in either revenue or
investment in long-lived  assets.  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>
                                                                                   Year Ended December 31,
                                                            Ten Months Ended   ------------------------------
                                                            October 31, 2001         2000             1999
                                                            -------------      -------------    -------------
<S>                                                         <C>                <C>              <C>
                  Software license revenue:
                    United States......................     $       8,131      $      19,848    $       5,129
                    Europe.............................             5,755              6,237            1,429
                    Other international................                --                729              171
                                                            -------------      -------------    -------------
                                                                   13,886             26,814            6,729
                  Services revenue:
                    United States......................     $      12,271      $      24,461    $       5,638
                    Europe.............................             3,223              4,621              121
                    Other international................                --                712               94
                                                            -------------      -------------    -------------
                                                                   15,494             29,794            5,853
                  Total revenue:
                    United States......................     $      20,402      $      44,309    $      10,767
                    Europe.............................             8,978             10,858            1,550
                    Other international................                --              1,441              265
                                                            -------------      -------------    -------------
                                                            $      29,380      $      56,608    $      12,582
                                                            =============      =============    =============
</TABLE>

    Long-lived assets,  predominantly intangibles and property and equipment, is
based on the location of the assets,  or, for  intangibles,  the location of the
entity  owning the  intangible  asset.  As of October  31,  2001,  approximately
$15,065,000  of long-lived  assets were located in the United  States,  $644,000
were located in Europe, and $107,000 were located elsewhere.  As of December 31,
2000, approximately  $28,497,000 of long-lived assets were located in the United
States,  $1,054,000 were located in Europe, and $254,000 were located elsewhere.
As of December 31, 1999,  long-lived assets located outside of the United States
were insignificant.

Certain risks and uncertainties

The Company's  products are  concentrated  in the industry  segment for internet
infrastructure  software that is characterized by rapid technological  advances,
changes in  customer  requirements  and  evolving  regulatory  requirements  and
industry standards. These products depend in part on third-party technology that
the Company  licenses from a limited number of suppliers.  Also, the Company has
depended on a limited number of products for  substantially all revenue to date.
Failure by the Company to anticipate or to respond  adequately to  technological
developments  in its industry,  changes in customer or supplier  requirements or
changes in regulatory  requirements  or industry  standards,  or any significant
delays in the development or introduction of products or services,  could have a
material adverse effect on the Company's business, cash flows and operations.

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 December 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

                                      F-11
<PAGE>
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. We will adopt SFAS No. 144 effective November 1, 2001. The adoption
is not  anticipated to 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  ended April 30,  2002.  Upon
adoption we are required to  reclassify  all prior period  amounts to conform to
the current period presentation.  We have not yet evaluated the effects of these
changes on our consolidated financial statements.

    In  November  2001,   the  FASB  issued  EITF Issue 01-14,  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  revenues  and the  corresponding  expenses  incurred  as  costs of
revenues within the income statement. We expect to adopt the provisions of D-103
during the first quarter of fiscal 2002.

4. Balance Sheet Components (in thousands):

Accounts receivable
<TABLE>
<CAPTION>
                                                                   As of
                                                                October 31,    As of December 31,
                                                                    2001         2000        1999
                                                                ----------   ---------   ---------
<S>                                                             <C>          <C>         <C>
                   Accounts receivable......................    $   6,078    $  15,972   $   6,473
                   Less: allowance for doubtful accounts....       (2,103)      (1,795)       (886)
                                                                ----------   ---------   ---------
                                                                $   3,975    $  14,177   $   5,587
                                                                =========    =========   =========
</TABLE>

Property and equipment
<TABLE>
<CAPTION>
                                                                Estimated      As of
                                                               Useful life  October 31,    As of December 31,
                                                                 (years)       2001         2000        1999
                                                                 -------       ----         ----        ----
<S>                                                               <C>       <C>          <C>         <C>
         Equipment..............................................    3       $  6,923     $   8,479   $  3,006
         Furniture and fixtures.................................    5          1,007         1,950        336
         Leasehold improvements.................................    2          1,268         4,488         80
         Equipment under capital leases.........................  3 - 5           39           598        525
                                                                            --------     ---------   --------
                                                                               9,237        15,515      3,947
         Less: Accumulated depreciation and amortization........              (2,980)       (3,614)    (2,045)
                                                                            --------     ---------   --------
                                                                            $  6,257     $  11,901   $  1,902
                                                                            ========     =========   ========
</TABLE>

    Accumulated amortization related to equipment under capital lease at October
31, 2001, December 31, 2000 and 1999 totaled approximately  $605,000,  $517,000,
and $427,000, respectively.

    During  the  ten  months  ended  October  31,  2001,   property,   leasehold
improvements  and  equipment  relating to subleased  offices were disposed of as
part of our restructuring efforts. The charge was $6.3 million.

                                      F-12
<PAGE>
Intangibles

<TABLE>
<CAPTION>
                                                                     As of
                                                                  October 31,    As of December 31,
                                                                      2001         2000        1999
                                                                  ---------    --------    --------
<S>                                                               <C>          <C>         <C>
                  Goodwill....................................    $      --    $  6,584    $  1,139
                  Purchased technology........................        5,680       5,680          --
                  Workforce in place..........................           --       1,250         250
                  Other intangibles...........................           67          60          --
                                                                  ---------    --------    --------
                                                                      5,747      13,574       1,389
                  Less: Accumulated amortization..............       (1,849)     (1,369)         --
                                                                  ---------    --------    --------
                                                                  $   3,898    $ 12,205    $  1,389
                                                                  =========    ========    ========
</TABLE>

     During the ten months ended  October 31, 2001,  we performed an  impairment
assessment of the identifiable  intangibles and goodwill  recorded in connection
with the acquisition of Verve, Inc. and our French  distributor.  The assessment
was performed  primarily due to 1) the 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 exceeding the Company's market capitalization;  2) the overall
decline in the industry growth rates; and, 3) projected  operating results. As a
result,  we 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 estimate as of such
date. There is no remaining goodwill balance at October 31, 2001.

Accrued liabilities

<TABLE>
<CAPTION>
                                                                 As of
                                                              October 31,    As of December 31,
                                                                  2001         2000        1999
                                                              ---------    ---------   ---------
<S>                                                           <C>          <C>         <C>
              Accrued payroll and related liabilities.......  $   2,720    $   9,083   $   2,573
              Accrued royalties.............................         --          208         365
              Accrued professional fees.....................      1,156        1,863       2,045
              Accrued sales tax.............................         68          378          --
              Other accrued liabilities.....................      2,233        1,614       2,315
                                                              ---------    ---------   ---------
                                                              $   6,177    $  13,146   $   7,298
                                                              =========    =========   =========
</TABLE>
5. Restructuring and other non-recurring expenses

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

    In March 2001, we announced a  restructuring  effort to realign our expenses
with a business  plan geared to the changing  economy.  This  restructuring  was
designed to align the workforce  with customer  needs and focus on core business
products.  The  restructuring  plan  included  the  discontinuation  of  further
development  of  non-core  business  products,  facility  consolidations,  and a
reduction in total staff,  including  domestic and  international  employees and
contractors, including staff in our subsidiaries, of approximately 107 positions
across all  departments.  We expensed $6.9 million for  restructuring  and other
expenses in the three months ended March 31, 2001.

    In May 2001, we further reduced staff by approximately 50 positions,  across
all departments,  and closed additional field offices.  We expensed $3.5 million
for restructuring and other expenses in the three months ended June 30, 2001.

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

    In October 2001 an additional 46 positions were eliminated, 25 in the United
States and 21 positions internationally.

The following table summurizes the restructuring activity during the ten months
ended October 31, 2001 (in thousands):
<TABLE>
<CAPTION>
                                                       Office Closure
                                                             and          Asset         Non-
                                                         Subleasing      Disposal    recoverable   Settlement    Other
                                   Employee Severance       Costs         Losses        Loan        Agreement    Costs     Total
                                   ------------------  ---------------  ---------    -----------   ----------   -------    -----
<S>                       <C>          <C>                <C>            <C>           <C>           <C>         <C>       <C>
Accrual balance, December 31,          $  --              $  --          $  --         $  --         $  --       $  --     $  --
  2000

Additions                                4,266              4,295          7,393          504          1,823       1,315     18,596

Cash paid                               (3,361)            (2,613)          (484)         --            (534)       (859)    (7,841)


Non-cash costs                            --                 --           (6,909)        (604)        (1,299)       (110)    (8,922)
                                       -------            -------        -------       ------        -------     -------    --------
Accrual balance, October 31,
  2001                                 $   905            $ 1,662        $  --         $  --         $  --       $   348    $ 2,933
                                       =======            =======        =======       ======        =======     =======    ========
</TABLE>

6. Related Party Transactions

    During  2000,  we held a $1,000,000  investment  in the  preferred  stock of
TruMarkets,  Inc., a privately  held  corporation.  Our Chairman of the Board of
Directors  held a membership  interest in the general  partner of a  partnership
that  owned  a  controlling   interest  in  the  outstanding  capital  stock  of
TruMarkets,  Inc. In January  2001,  we provided  the  investee  with a $500,000
bridge  loan.  As of  December  31,  2000,  the  investee  was in the process of
developing  its  products and was actively  negotiating  with third  parties for
additional  financing to fund its operations.  During March 2001, the investee's
attempts to obtain additional financing failed and the investee began efforts to
sell the company.  The $500,000  loan was  recorded in  restructuring  and other
expenses  in the first  quarter of 2001.  In June  2001,  TruMarkets,  Inc.  was
acquired by MortgageSight  Holding LLC  ("MortgageSight") and our investment and
loan were  converted  to 22,122  shares of preferred  stock,  or less than 1% of
MortgageSight.  It is  our  understanding  that  MortgageSight  has  ceased  its
operations;  therefore, the value of these shares is uncertain, so no amount has
been recorded on the balance sheet.

    In  November  1999,  our former  Chief  Financial  Officer,  Kevin  Ferrell,
delivered a full-recourse promissory note to us in payment for 100,000 shares of
Series F  preferred  stock.  The  principal  amount  secured  under the note was
$556,000.  The note bore  interest  at the rate of 7.00% per  annum,  compounded
annually,  and was secured by the purchased shares.  The principal balance would
become due and payable in one lump sum on the third  anniversary  of the signing
of the note  (November  2002).  In 2000,  Mr.  Ferrell  paid down  approximately
$103,000 in principle and $35,000 in interest towards this note.

    In December 1999, Mr. Ferrell  delivered a full-recourse  promissory note to
us in payment of the exercise price of 400,000  outstanding  stock options under
our 1997 stock option plan.  The  principal  amount  secured  under the note was
$1,200,000.  In 2000,  Mr. Ferrell paid down $84,000  approximately  in interest
towards this note. Mr.  Ferrell  resigned in February 2001. In February 2001,

                                      F-13
<PAGE>
we exercised our right to repurchase  240,000  unvested shares of Mr.  Ferrell's
400,000 option shares. We paid par value to repurchase the shares, which reduced
the principal amount of the note by $720,000. The offset to the reduction in the
note was recorded as a reduction in paid in capital.

    In October 2001, we wrote down $632,000 in principal in connection with both
of Mr.  Ferrell's  notes.  At  October  31,  2001,  $301,000  remains  in  notes
receivable as a component of stockholders'  equity,  all of which relates to Mr.
Ferrell's two notes.

    In January 2000, Mr. Hewitt delivered a full recourse  promissory note to us
in payment of the exercise  price of stock options  issued  pursuant to our 1997
Stock Option Plan. The principal  amount secured under the note was  $1,015,000.
The note had a term of three  years and bore  interest  at the rate of 7.00% per
annum,  compounded  annually.  The note was secured by the purchased  shares and
additional collateral. The entire unpaid balance of the note was due and payable
upon  termination of employment,  failure to pay any installment of principal or
interest when due, or insolvency or bankruptcy, or in the event we are acquired.
None of the shares  serving as security for the note could have been sold unless
the principal  portion of the note  attributable to those shares and the accrued
interest on that principal  portion was paid to us. In December 2000, Mr. Hewitt
delivered to us another full recourse promissory note in the amount of $375,000.
The note was secured by shares of our common  stock held by us for the  previous
loan. The note was due and payable on January 31, 2002, and bore interest at the
prime  rate as  reported  in The  Wall  Street  Journal  from  time to time  and
compounded annually. Accrued interest was due on each anniversary of the signing
of the note. Mr. Hewitt resigned in March 2001. In June 2001, in connection with
Mr. Hewitt's  termination of employment,  we cancelled both promissory notes and
related accrued interest totaling $1,517,000 in exchange for a pledge of 770,009
shares of our  Company's  common stock owned by the officer.  On that date,  the
fair  market  value of the  770,009  shares was  $919,000  and was  recorded  as
treasury   stock  and  $598,000  was   included  in   restructuring   and  other
non-recurring  expenses.

7. Borrowings

Equipment line

    In  August  1999,  our  Company  obtained  a  capital  financing  line  (the
"Equipment  Line"),  which  provides  for the  purchase of up to  $1,000,000  in
property  and  equipment  with any amounts  borrowed due within 36 months of the
date of the agreement.  Any borrowings under the Equipment Line are payable over
36 months,  with an effective interest rate of approximately 17%. Borrowings are
collateralized  by the equipment  being  financed.  In October 1999, our Company
increased  the  borrowing  limit  under this line to a total of  $2,000,000  and
extended the effective  date of the equipment  line to September 30, 2000. As of
October  31,  2001,  December  31, 2000 and  December  31,  1999, borrowings  of
approximately $181,000,  $270,000 and $362,000,  respectively,  were outstanding
against the Equipment  Line. At October 31, 2001 all future minimum  payments on
the equipment line are due within one year.

8. Income Taxes

    The  primary  components  of the net  deferred  tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                    October 31,  ---------------------------------------
                                                                        2001         2000         1999          1998
                                                                    -----------  -----------  -----------   -----------
<S>                                                                 <C>          <C>          <C>           <C>
                        Net operating loss carryforwards.......     $   45,808   $   27,267   $   18,155    $   11,181
                        Research and experimentation credit
                          carryforwards........................          1,680        1,245        1,050           822
                        Capital loss carryforward..............            398          400           --            --
                        Restructuring costs....................          1,168            --          --            --
                        Other long-term liabilities............          1,035        2,237          555           322
                        Deferred revenue.......................             --           28          (32)            7
                        Property and equipment.................          1,798         (656)          54          (127)
                                                                    ----------   ----------   ----------    ----------
                                                                        51,887       30,521       19,782        12,205
                        Less: Valuation allowance..............        (51,887)     (30,521)     (19,782)      (12,205)
                                                                    ----------   ----------   ----------    ----------
                                                                    $       --   $       --   $       --    $       --
                                                                    ==========   ==========   ==========    ==========
</TABLE>
                                      F-14
<PAGE>

    Due  to  uncertainty  surrounding  the  realization  of  the  favorable  tax
attributes in future tax returns, our Company has recorded a valuation allowance
against  its net  deferred  tax asset.  The  valuation  allowance  increased  by
$21,366,000, $10,739,000, $12,205,000 and $7,577,000 during the ten months ended
October 31, 2001, and the years ended 2000, 1999 and 1998, respectively.

    Differences  between  the  federal  statutory  and  effective  tax rates are
primarily due to the  nonrealizability of net operating losses and the resulting
increase in the valuation allowance.

    At October 31, 2001 our Company has the following  approximate net operating
loss  carryforwards  and  research  and  experimentation   credit  carryforwards
available to reduce future taxable income, if any (in thousands):

                                                         October 31, 2001
                                                 -------------------------------
                                                  Federal      State    Foreign
                                                 ---------   ---------  --------
        Net operating loss carryforwards.......  $ 114,121   $  74,237  $ 13,544
        Research and experimentation credit
          carryforwards........................      1,207         473        --

    The federal net  operating  loss and  research  and  experimentation  credit
carryforwards  expire  through 2010 (through  2021 for state net operating  loss
carryforwards)   if  not  used  beforehand  to  offset  taxable  income  or  tax
liabilities.  For federal and state tax  purposes,  our  Company's net operating
loss and research and  experimentation  credit  carryforwards  may be subject to
certain  limitations on annual utilization in the event of changes in ownership,
as defined by federal and state tax laws.

9. Transition Period Comparative Data:

The following  table presents  certain  financial  information for the ten-month
period ended October 31, 2001 and 2000, respectively. Amounts in thousands.


                                             Ten Months          Ten Months
                                                Ended              Ended
                                          October 31, 2001    October 31, 2000
                                          ----------------    ----------------
                                                                (unaudited)
      Revenue............................    $   29,380         $    44,064
      Gross profit.......................        11,616              19,068
                                             ----------         -----------
      Income before income taxes.........    $  (62,649)        $   (52,279)
      Income taxes.......................          (227)                (18)
                                             ----------         ------------
      Net loss.........................      $  (62,876)        $   (56,297)
                                             ==========         ===========

10. Convertible Preferred Stock:

    In March 2000,  Versata  completed an initial public  offering and upon this
offering,  each outstanding share of Versata's  convertible  preferred stock was
automatically  converted into one share of common stock of Versata  resulting in
the issuance of 26,950,287 shares of common stock.

11. Common Stock

    Our Company's  Certificate  of  Incorporation,  as amended,  authorizes  our
Company to issue  150,000,000  shares of common stock, and 30,580,000  shares of
preferred stock.

    On April 6, 2001,  the Company  issued  2,305,000  shares of common stock to
certain  executive  officers of the company.  The  purchase  price per share was
$0.001 per  share.  The shares  are  subject to a  repurchase  right held by our
Company.  In addition,  certain  other common  stock  option  holders  exercised
unvested  options,  subject to a repurchase  right held by our  Company,  in the
event of voluntary or involuntary  termination of employment of the stockholder.
As of October 31, 2001,  December  31, 2000 and  December  31, 1999,  2,132,657,
1,185,776 and 2,164,582  shares of common stock,  respectively,  were subject to
repurchase  by our Company.  No shares were subject to repurchase as of December
31, 1998.

                                      F-15
<PAGE>

12. Stock Options and Purchase Plan

    In November  1999,  the Board of Directors of our Company  approved the 2000
Stock Option Plan ("the 2000 Plan"),  which became effective on March 3, 2000 in
connection with the initial public  offering of the common stock.  The 2000 Plan
serves as the successor to the  Corporation's  1994, 1996, and 1997 Stock Option
Plans (the "Predecessor  Plans").  All options outstanding under the Predecessor
Plans have been incorporated into the 2000 Plan, and no further option grants or
stock  issuances  will be made  under  the  Predecessor  Plans.  Each  option so
incorporated  will  continue  to be  governed  by the  terms  of  the  agreement
evidencing that option,  and no provision of the 2000 Plan will adversely affect
or otherwise modify the rights of the holders of such incorporated  options with
respect to their acquisition of shares of common stock thereunder.

    The 2000 Plan is comprised of five separate equity incentive  programs:  (i)
the  Discretionary  Option Grant  Program  under which options may be granted to
individuals in the Corporation's  service which will provide them with the right
to purchase  shares of common stock at a fixed price per share equal to the fair
market  value of the common  stock on the grant  date;  (ii) the Stock  Issuance
Program  under  which  such  individuals  may be issued  shares of common  stock
directly, either through the purchase of those shares at fair market value or as
a bonus for services  rendered to the Corporation;  (iii) the Salary  Investment
Option  Grant  Program  under  which  the   Corporation's   officers  and  other
highly-compensated executives may elect to invest a portion of their base salary
each year in special option grants with a below-market  exercise price; (iv) the
Automatic  Option Grant  Program  under which  non-employee  Board  members will
automatically  receive special option grants at designated  intervals over their
period of Board  service;  and (v) the Director Fee Option Grant  Program  under
which  non-employee  Board members may elect to have all or any portion of their
annual  cash  retainer  fee  applied  to  special  stock  option  grants  with a
below-market exercise price.

    The following  table  summarizes  activity under our Company's  stock option
plans:

<TABLE>
<CAPTION>
                                                                                           Options Outstanding
                                                                                         -----------------------
                                                                                                       Weighted
                                                                                                        Average
                                                                            Options                    Exercise
                                                                           Available                   Price Per
                                                                           for Grant       Shares        Share
                                                                          -----------    -----------   ---------
<S>                                                                       <C>            <C>            <C>
                  Balance at December 31, 1997........................       217,289      2,954,438     $ 0.20
                      Additional options authorized...................     3,759,813             --        --
                      Options granted.................................    (1,159,200)     1,159,200       0.20
                      Options granted below intrinsic value...........    (2,253,135)     2,253,135       0.20
                      Options exercised...............................            --       (498,113)      0.20
                      Options canceled................................       459,451       (459,451)      0.21
                                                                         -----------     -----------
                  Balance at December 31, 1998........................     1,024,218      5,409,209       0.20
                      Additional options authorized...................     4,866,694             --        --
                      Repurchase of common stock......................         9,930             --        --
                      Options granted below intrinsic value...........    (4,752,250)     4,752,250       2.39
                      Options exercised...............................            --     (4,893,488)      0.49
                      Options canceled................................       304,874       (304,874)      0.32
                                                                         -----------     -----------
                  Balance at December 31, 1999........................     1,453,466      4,963,097       2.00
                      Additional options authorized...................     6,866,514             --        --
                      Repurchase of common stock                             188,080             --        --
                      Options granted below intrinsic value...........    (3,236,900)     3,236,900        --
                      Options granted.................................    (2,895,942)     2,895,942      13.12
                      Options exercised...............................            --     (1,500,175)      2.30
                      Options canceled................................     1,217,166     (1,217,166)      8.15
                                                                         -----------     -----------

                  Balance at December 31, 2000........................     3,592,384      8,378,598       9.19
                                                                         -----------    -----------
                      Additional options authorized...................     4,934,964             --        --
                      Repurchase of common stock                             146,150             --        --
                      Options and restricted stock granted............    (8,877,374)     6,572,374       2.31
                      Options exercised...............................            --       (300,710)      0.40
                      Options canceled................................     6,727,756     (6,727,756)      7.12
                                                                         -----------    ------------

                  Balance at October 31, 2001.........................     6,523,880      7,922,506
                                                                         ===========    ===========
</TABLE>

                                      F-16
<PAGE>

    The  following  table  summarizes  information  concerning  outstanding  and
exercisable options as of October 31, 2001:

<TABLE>
<CAPTION>
                                                                                         Options Vested and
                                                           Options Outstanding               Exercisable
                                                  -----------------------------------  ---------------------
                                                                Weighted     Weighted               Weighted
                                                                 Average      Average                Average
                                                                Remaining    Exercise               Exercise
                                                               Contractual   Price Per              Price Per
                     Range of Exercise Prices        Shares   Life (years)     Share      Shares      Share
                   ---------------------------    ----------- -----------------------  -----------  ---------
<S>                <C>             <C>             <C>            <C>        <C>        <C>         <C>
                   $     0.20  -   $ 0.90          3,603,496      9.1        $  0.29    1,108,947   $   0.28
                         1.00  -     2.94            771,530      8.4           2.39      350,703       2.58
                         3.00  -     6.88          1,535,566      8.7           5.25      576,533       5.24
                         7.00  -    25.00          1,552,694      8.6          10.45      582,038      10.44
                        25.75  -    42.25            271,190      8.6          31.49       92,810      30.43
                        44.25  -    71.75            188,030      8.7          46.11       57,790      45.24
                                                  ----------                           ----------

                    As of October 31, 2001         7,922,506      8.8           5.60    2,768,821       5.69
                                                  ==========                           ==========
</TABLE>

    We had 1,753,092 and 796,143  options vested and exercisable at December 31,
2000 and 1999, respectively.

Fair value disclosures

    Pro forma information  regarding net loss and net loss per share is required
by SFAS No. 123,  which also requires that the  information  be determined as if
our Company has accounted for its employee stock options  granted under the fair
value method.  The fair value for these options was estimated  using the minimum
value method to the date of our initial  public  offering and the  Black-Scholes
option-pricing model thereafter.

    Our Company  calculated  the minimum  fair value of each option grant on the
date of grant using the  Black-Scholes  option-pricing  method as  prescribed by
SFAS No. 123 using the following assumptions:

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                 Ten Months Ended   -----------------------------------------------------------
                                                 October 31, 2001          2000                1999                1998
                                                 ----------------   ------------------  ------------------  ------------------
<S>                                               <C>                 <C>                 <C>                 <C>
        Risk-free rates......................     3.61% - 5.20%       5.17% - 6.73%       4.91% - 6.19%       4.18% - 5.63%
        Expected lives (in years)............          5.0                  5.0                5.0                 5.0
        Dividend yield.......................          0.0%                 0.0%               0.0%                0.0%
        Expected volatility..................          240%                 155%               0.0%                0.0%
</TABLE>

    The weighted  average fair value of these options  granted in the ten months
ended October 31, 2001, and the years ended December 31, 2000, 1999 and 1998 was
$2.31, $14.04, $4.16 and $0.044, respectively.

    Had  compensation  costs  been  determined  based upon the fair value at the
grant date for awards granted under our stock option and stock  purchase  plans,
consistent with the methodology prescribed under SFAS No. 123, our Company's pro
forma net loss  attributable  to  common  stockholders  and pro forma  basic and
diluted  net loss per share  under SFAS No.  123 would have been (in  thousands,
except per share data):

                                      F-17
<PAGE>

<TABLE>
<CAPTION>
                                                                  ------------- --------------------------------------
                                                                   Ten Months
                                                                     Ended             Year Ended December 31,
                                                                  October 31,   --------------------------------------
                                                                      2001         2000          1999         1998
                                                                      ----         ----          ----         ----
<S>                                                               <C>           <C>          <C>           <C>
              Net loss attributable to common stockholders
                As reported....................................   $  (62,876)   $  (67,901)  $  (32,600)   $  (8,134)
                Pro forma......................................   $  (96,740)   $  (77,189)  $  (33,073)   $  (8,214)
              Net loss per share attributable to common
              stockholders
                As reported....................................   $    (1.56)   $    (2.06)  $    (9.18)   $   (3.99)
                Pro forma......................................   $    (2.41)   $    (2.35)  $    (9.31)   $   (4.03)
</TABLE>

Unearned stock-based compensation

    In  connection  with certain  stock option  grants,  our Company  recognized
unearned  compensation  that is being  amortized over the vesting periods of the
related options,  usually 50 months, using an appropriate accelerated basis. The
total unearned compensation recorded by our Company from January 1, 1997 through
October 31, 2001 was $45.9 million.  Amortization  expense recognized during the
ten months ended October 31, 2001, and the years ended  December 31, 2000,  1999
and  1998  was  $1.7  million,   $25.5   million,   $4.0  million  and  $200,000
respectively.

Employee stock purchase plan

    Versata's  Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
our Board of Directors in November 1999 and was approved by the  stockholders in
February  2000. A total of 500,000  shares of common stock has been reserved for
issuance under the Purchase Plan. The reserve will automatically increase on the
first trading day of the second fiscal  quarter each year, by an amount equal to
one percent (1%) of the total  number of shares of our common stock  outstanding
on the last trading day of the immediately preceding first fiscal quarter. In no
event will any annual reserve increase exceed 1,000,000 shares.

    The Purchase Plan enables eligible employees to designate up to 15% of their
compensation  for the purchase of stock.  The purchase price is 85% of the lower
of the fair market value of Versata's  common stock on the first day or the last
day of each six-month  purchase period.  No compensation  expense is recorded in
connection  with the plan.  We issued  352,134  shares of common stock under the
Purchase  Plan during the ten months  ended  October  31, 2001 for an  aggregate
purchase price of $1.5 million.

    Compensation  cost  (included in pro forma net loss  attributable  to common
stockholders  and net loss per share  attributable  to common  stockholders)  is
recognized  for the fair  value of the  employees'  purchase  rights,  which was
estimated  using the  Black-Scholes  option  pricing  model  with the  following
weighted average  assumptions for the ten months ended October 31, 2001 and year
ended  December  31,  2000:  risk-free  rate of 4.72% and  5.52%,  respectively;
expected  life of six months;  divided  yield of 0%, and expected  volatility of
240% to 155%, respectively.  The weighted average grant date fair value of those
purchase  rights  granted  during the ten months ended October 31, 2001 and year
ended  December  31,  2000,  as defined by SFAS No.  123,  was $33.75 and $7.44,
respectively.

    In August 2001, the Company suspended employee participation in the Purchase
Plan.


13. Employee Benefit Plans

    In May 1995,  our Company  established  a 401(k)  Profit  Sharing  Plan (the
"Plan") which covers substantially all employees.  Under the Plan, employees are
permitted to contribute up to 20% of gross compensation not to exceed the annual
402(g) limitation for any Plan year. Discretionary  contributions may be made by
our  Company.  Our Company  made no  contributions  during the ten months  ended
October 31, 2001, or the years ended December 31, 2000, 1999 and 1998.

    Effective  September 1, 1998, our Company  adopted a  nonqualified  deferred
compensation  plan, which permits eligible officers and key employees to defer a
portion of their  compensation.  At October  31,  2001,  December  31,  2000 and
December 31, 1999 the deferred compensation  amounts,  together with accumulated
interest,  which are  distributable  in cash after  retirement or termination of
employment,   amounted  to  approximately  $193,000,   $546,000,  and  $310,000,
respectively.

    In  December  2001,  the Company  suspended  employee  participation  in the
deferred compensation plan.

    231,731 stock options  assumed by us in  connection  with the  acquistion of
Verve, Inc. are subject to stock appreciation  rights that allow the optionee to
elect to receive cash  compensation  that  approximates the increase in value of
the stock  option,  in lieu of exercising  the option.  On November 20, 2000, we
granted 19,610 options to some of the optionees at $12.27  exercise  price,  and
212,121  options  to the other  optionees  at $2.88  exercise  price.  The stock
appreciation  rights must be exercised by the optionees at $2.88 exercise price.
The stock  appreciation  rights must be exercised by the optionee in whole or in
part no more than nine months after  vesting of the  options.  As of October 31,
2001, the stock appreciation rights for a total of 5,070 shares issued at $12.27
exercise price were outstanding,  and the stock appreciation  rights for a total
of 118,509 shares issued at $2.88 exercise price were outstanding.

                                      F-18
<PAGE>
14. Commitments and Contingencies

    Our Company has entered into leases for certain  office space and  equipment
with  original  terms  ranging  from 36 months to the year  2008.  The lease for
office space includes  scheduled base rent increases over the term of the lease.
The total  amount of the base rent  payments is charged to expense over the term
of the lease using the straight-line  method. In addition,  the lease for office
space  contains an escalation  clause to recover  increases in future  operating
costs and real  estate  taxes  over the base  year.  The  future  minimum  lease
payments shown below are exclusive of such escalation.

    We have also entered into sub-lease  agreements for certain office space and
equipment.

    Future minimum lease payments under all noncancelable  leases at October 31,
2001 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                 Operating Leases
                                                                     ----------------------------------------
                                                                                   Contractual
                                                            Capital     Gross       Sub-lease        Net
                                                            Leases   Commitments     Income      Commitments
                                                            -------  ------------  -----------   ------------
        Year Ending October 31,
<S>                                                         <C>      <C>              <C>            <C>
          2002.........................................     $  88    $   3,276        1,714          1,562
          2003.........................................        78        3,253        1,829          1,424
          2004.........................................        78        3,306        1,563          1,743
          2005.........................................        78        3,418          962          2,456
          2006.........................................        57        3,538          991          2,547
          2007 and thereafter..........................        --        6,838        1,895          4,943
                                                            -----    ---------        -----         ------
                  Total minimum lease payments.........       379    $  23,629        8,954         14,675
                                                                     =========        =====         ======
          Less interest................................       (80)
                                                            -----
          Present value of minimum lease payments......       299
          Less current portion.........................       (56)
                                                            -----
                                                            $ 243
                                                            =====
</TABLE>

    Rent  expense for the ten months  ended  October 31,  2001,  and years ended
December 31, 2000, 1999 and 1998 was approximately  $3.5 million,  $2.8 million,
$529,000 and $477,000, respectively.

Legal Proceeding

Securities Class Action

    Since April 11, 2001,  several securities class action complaints were filed
against us, and certain of our current and former  officers  and  directors.  In
August 2001, the class action lawsuits were consolidated before one judge in the
United States District Court for the Northern District of California. On October
19, 2001 the lead plaintiffs  filed an amended class action complaint naming us,
certain  of our former  officers  and a current  director,  as  defendants.  The
amended class action  complaint  alleges  claims under section 10(b) and section
20(a) of the Securities  Exchange Act of 1934 and claims under section 11 and 15
of the Securities Act of 1933. The amended complaint seeks an unspecified amount
of damages on behalf of persons who purchased our stock during the class period.
It is premature to come to any  conclusions as to the  allegations and potential
damages.  We intend to defend  these  actions  vigorously.  The  hearing for our
motion to dismiss the action is set for May 10, 2002. We expensed the deductible
amount of  directors'  and  officers'  liability  insurance of $350,000 in April
2001.

State Derivative Action

    Since June 11, 2001, two derivative actions were filed on our behalf against
certain  current and former  officers and directors in Superior Court of Alameda
County,  California.  The complaints  also name us as a nominal  defendant.  The
complaints allege that the defendants  breached their fiduciary  duties,  abused
their  control of the  corporation,  and engaged in gross  mismanagement  of the
corporation,  by  allegedly  making or  permitting  the  Company  to make  false
financial  statements and seek,  among other things,  compensatory  damages.  On
November 7, 2001, the state court issued an Order granting  Versata's  Motion to
Stay Proceedings in the consolidated  derivative action until the earlier of the
filing  of an answer by  Versata  in the  Federal  action or  dismissal  of that
action.

                                      F-19
<PAGE>

    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.

Litigation and other claims

    The Company is 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 the Company's  consolidated  results of operations or
consolidated financial position. We intend to defend these actions vigorously.


                                      F-20
<PAGE>

                                  VERSATA, INC.

                         UNAUDITED QUARTERLY INFORMATION

    The  following   table  sets  forth  our  historical   unaudited   quarterly
information for our most recent seven quarters,  both in absolute dollars and as
a percentage of total revenue for each quarter.  This quarterly  information has
been prepared on a basis consistent with our audited  financial  statements and,
we  believe,   includes  all   adjustments,   consisting  of  normal   recurring
adjustments,  necessary for a fair  presentation of the information  shown.  Our
quarterly  operating  results  have  fluctuated  and may  continue to  fluctuate
significantly as a result of a variety of factors and operating  results for any
quarter are not necessarily indicative of results for a full fiscal year.

    On  December  31,  2001  Versata  announced  a change in its fiscal  year to
October 31, 2001. The Company previously  reported results as of March 31, 2001,
June 30, 2001 and September 30, 2001.

<TABLE>
<CAPTION>
                                 September 30,   June 30,      March 31,    December 31,   September 30,   June 30,    March 31,
                                     2001          2001          2001           2000           2000          2000        2000
                                -------------  ------------  ------------  -------------  -------------  -----------  -----------
Revenue:
<S>                              <C>           <C>           <C>            <C>            <C>           <C>          <C>
 Software license................$   3,276     $    5,991    $    4,140     $   8,029      $   8,572     $    6,077   $    4,136
 Services........................    2,968          4,868         6,892         6,995          9,031          7,798        5,970
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
       Total revenue.............    6,244         10,859        11,032        15,024         17,603         13,875       10,106
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
Cost of Revenue:
 Software license................       79            149           157           297            376            221          194
 Services........................    3,155          5,136         8,388         9,048          8,392          7,596        5,478
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
       Total cost of revenue.....    3,234          5,285         8,545         9,345          8,768          7,817        5,672
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
Gross profit.....................    3,010          5,574         2,487         5,679          8,835          6,058        4,434
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
Operating expense:
 Sales and marketing.............    4,675          8,657        11,940        12,965         12,070         11,493       10,189
 Product development.............    1,748          2,650         3,895         2,964          2,740          2,166        1,857
 General and administrative......    2,824          3,045         3,992         4,341          3,285          3,048        2,001
 Stock-based compensation........      941            717          (141)        3,210          4,493          6,735       11,074
 Amortization of intangibles.....    1,987          1,152         1,145           681            233            237          190
Restructuring and other
  non-recurring expenses.........    5,149          3,504         6,909         1,693            243             --           --
                                     -----     ----------    ----------     ---------      ---------     ----------   ----------
       Total operating expense...   17,324         19,725        27,740        25,854         23,064         23,679       25,311
                                    ------     ----------    ----------     ---------      ---------     ----------   ----------
Loss from operations.............  (14,314)       (14,151)      (25,253)      (20,175)       (14,229)       (17,621)     (20,877)
 Interest income (expense),
  Net............................      303            489           909         1,293          1,487          1,619          665
 Other non-operating, net........     (215)           (53)           --           (62)            (1)            --           --
                                      ----     ----------    ----------     ---------      ----------    ----------   ----------
Net loss.........................$ (14,226)    $  (13,715)   $  (24,344)    $ (18,944)     $ (12,743)    $  (16,002)  $  (20,212)
                                 =========     ==========    ==========     =========      =========     ==========   ==========
Basic and diluted net
 Loss per share..................$   (0.35)    $   (0.34)    $   (0.61)     $   (0.48)     $   (0.33)    $   (0.42)   $   (1.33)
                                 =========     =========     =========      =========      =========     =========    =========
Weighted average common
 shares used in computing
 basic and diluted net
 loss per share..................   39,888        40,164        39,821        39,159         38,424         37,698       15,203
As a percentage of revenue:
Revenue:
 Software license................     52.5%         55.2%         37.5%         53.4%           48.7%         43.8%        40.9%
 Services........................     47.5%         44.8%         62.5%         46.6%           51.3%         56.2%        59.1%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
       Total revenue.............    100.0%        100.0%        100.0%        100.0%          100.0%        100.0%       100.0%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
Cost of Revenue:
 Software license................      1.3%          1.4%          1.4%          2.0%            2.1%          1.6%         1.9%
 Services........................     50.5%         47.3%         76.0%         60.2%           47.7%         54.7%        54.2%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
       Total cost of revenue.....     51.8%         48.7%         77.5%         62.2%           49.8%         56.3%        56.1%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
Gross profit.....................     48.2%         51.3%         22.5%         37.8%           50.2%         43.7%        43.9%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
Operating expense:
 Sales and marketing.............     74.9%         79.7%        108.2%         86.3%           68.6%         82.8%       100.8%
 Product development.............     28.0%         24.4%         35.3%         19.7%           15.6%         15.6%        18.4%
 General and administrative......     45.2%         28.0%         36.2%         28.9%           18.7%         22.0%        19.8%
 Stock-based compensation........     15.1 %         6.6%         -1.3%         21.4%           25.5%         48.5%       109.6%
 Amortization of intangibles.....     31.8%         10.6%         10.4%          4.5%            1.3%          1.7%         1.9%
 Impairment of investment........      --             --            --           6.7%            --             --           --
 Nonrecurring expenses...........     82.5%         32.3%         62.6%          4.6%           1.4%           --            --
                                     -----    ----------    ----------     ---------      ----------    ---------    ----------
       Total operating expense...    227.5%        181.6%        251.4%        172.1%          131.1%        170.6%       250.5%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
Loss from operations.............   -229.3%       -130.3%       -228.9%       -134.3%          -80.9%       -126.9%      -206.6%
 Interest income                       4.9%
  (expense), net.................                    4.5%          8.2%          8.6%            8.4%         11.7%         6.6%
 Other non-operating, net........     -3.4%         -0.5%         -0.2%         -0.4%            0.1%         -0.1%         0.0%
                                     -----    ----------    ----------     ---------      ----------    ----------   ----------
       Net loss..................   -227.8%       -126.3%       -220.7%       -126.1%          -72.4%       -115.3%      -200.0%
                                    ======    ==========    ==========     =========      ==========    ==========   ==========
</TABLE>

                                      F-21
<PAGE>

                  Schedule II Valuation and qualifying accounts
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                          Balance at                               Balance at
     Description                                                         beginning of      Additions  Deductions    end of
     -----------                                                            period         ---------  ----------    period
                                                                            ------                                  ------
<S>                                                                          <C>            <C>         <C>          <C>
     Allowance for doubtful accounts for the years ended:
     December 31, 1999.............................................              300            689       (103)          886
     December 31, 2000.............................................              886          2,844     (1,935)        1,795
     October 31, 2001..............................................            1,795          2,223     (1,915)        2,103
     Allowance for deferred tax asset accounts for the years ended:
     December 31, 1999.............................................           12,205          7,577         --        19,782
     December 31, 2000.............................................           19,782         10,739         --        30,521
     October 31, 2001..............................................           30,521         21,366         --        51,887
</TABLE>

                                      F-22
<PAGE>

                                  EXHIBIT INDEX

      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)          Senior Loan and Security Agreement, dated August 20, 1999,
                      between  Versata  and  Phoenix  Leasing  Incorporated,  as
                      amended on October 1, 1999.

     10.7(2)+         Joint Product and Marketing Agreement, dated September 27,
                      1999, between Versata and IBM.

     10.8(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.

     10.9(4)          Software  Remarketing  Agreement,  effective September 27,
                      2000, between Versata and International  Business Machines
                      Corporation.

     21.1             Subsidiaries of Versata.

     23.1             Consent   of   PricewaterhouseCoopers   LLP,   Independent
                      Accountants.

----------

+   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.

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

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

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

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

                                      F-23