According to the Company’s FORM 10-Q for the quarterly period ended January 31, 2003, since April 11, 2001, several securities class action complaints have been filed against the Company, and certain of its current and former officers and directors. In August 2001, the class action lawsuits were consolidated in the United States District Court for the Northern District of California. On October 19, 2001, the lead plaintiffs filed an amended class action complaint naming the Company and certain of the Company’s 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 sections 11 and 15 of the Securities Act of 1933. The amended complaint sought an unspecified amount of damages on behalf of persons who purchased the Company’s stock during a class period between March 31, 2000 and April 30, 2001. In July 2002, the Company reached an agreement with the plaintiffs to settle the class action lawsuit in order to avoid protracted and expensive litigation and the uncertainty of the outcome at a trial. The agreement for settlement does not constitute any admission of wrongdoing on the part of Versata or the individual defendants. The Company’s settlement calls for a payment of $9.75 million in cash by our insurance carriers, the issuance of 200,000 shares of the Company’s common stock, and for certain corporate therapeutics. The holders of the settlement stock have a put option of $3.50 per share during a period of 20 trading days commencing one year from the date of distribution; provided however, the put options shall expire if Versata shares trade above $3.50 per share for 15 consecutive trading days during the one year period following the date of distribution of the settlement stock. On February 14, 2003, the court approved the settlement agreement. The Company accrued $700,000 for this liability in accrued restructuring and other in fiscal 2002.

By the Notice of Pendency and Settlement, the parties reached an agreement-in-principle to settle the action. The proposed Settlement creates a Settlement Fund worth a minimum of $10,450,000. Depending on the number of eligible shares purchased by Settlement Class Members who elect to participate in the Settlement and when those shares were purchased and sold, the estimated average recovery per share will be approximately $0.41 before deduction of Court-approved fees and expenses. If the Settlement is approved by the Court, counsel for the Representative Plaintiffs will apply to the Court for attorneys' fees of 25% of the Settlement Fund. Counsel also plan to seek reimbursement of out-of-pocket expenses from the Settlement proceeds. If the amount requested by counsel is approved by the Court, the average cost per share would be $0.11.

The original complaint charges Versata and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that during the Class Period, Versata made false statements about its business and prospects and reported favorable but false financial results causing its stock to trade at artificially inflated levels of as high as $100-15/16 per share. Then, on March 29, 2001, Versata shocked the investment community with an announcement that its reported financial statements were under investigation. On this news, Versata's shares plummeted to as low as $0.28, or 99% lower than its Class Period high of $100-15/16.