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UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the year ended October 31, 2003

OR

Commission file number: 0-29757

VERSATA, INC.

(Exact name of registrant as specified in its charter)

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  ¨  No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of April 30, 2003, was $5,816,993 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 January 9, 2004, 7,865,143 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2003 annual stockholders’ meeting to be held on June 11, 2004 are incorporated by reference into Part III of this annual report on Form 10-K.

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VERSATA, INC.

FORM 10-K

For The Year Ended October 31, 2003

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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 our management, based on the information currently available to our management. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Forward-looking statements in this release include without limitation, statements regarding, Company’s market opportunity; product and marketing strategy; extending the Company’s technology leadership; continuing to grow the Company’s multi-channel distribution network; and leveraging technology alliances.

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, any unforeseen technical difficulties related to the Company’s products; elimination or lack of market interest in Company’s current products or services; inability to continue to develop competitive new products and services on a timely basis; introduction of new products or services by major competitors; lack of market acceptance in or interest in Company’s future strategy; and those risks discussed in the sections entitled “Risk Factors That May Affect Future Results” (Item 1) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 7). In light of significant uncertainties inherent in forward looking information included in this report on Form 10-K, the inclusion of this information should not be regarded as a representation that our plans and objectives will be achieved. 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.

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PART I

Item 1.    Business

Overview

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

The Company provides solutions for automating and simplifying the building, maintenance and ongoing evolution of large, complex, data-intensive enterprise applications. These applications typically access multiple data sources, incorporate multiple database tables and user interfaces, execute very complex business transactions and support thousands of users. The Versata solution effectively and efficiently replaces time-intensive hand-coding efforts associated with Java 2, Enterprise Edition (“J2EE”) and the Common Object Request Broker Architecture (“CORBA”) with simple, intuitive business rules and graphical process flow specification.

Versata’s primary value proposition and sales focus has consistently been on cheaper and faster application development. While Versata is confident there is a continuing opportunity for its technology in its core market of application development products, it believes that there may be a more strongly differentiated opportunity for the Company in the emerging area of master data management. Master data management concerns the management of highly valuable shared data that is used in support of business processes and transactions throughout the enterprise. Examples of master data would include customer data, product data, pricing data, configuration data, and other data types that vary from one industry to the next. Management of such data requires the specification and enforcement of business rules and business logic that ensure complete, consistent and accurate data across all systems within the enterprise.

Traditional data-management approaches emphasize the creation of information models, but often overlook the business rules that define the management of this information over time, leaving such responsibility to the various applications that produce and consume the shared data. As a result, many organizations find themselves with an increasingly fragmented information landscape, unable to answer such simple questions as “what accounts does this customer hold with us across all of our operating divisions?”. Such segregated master data management problems must be addressed for businesses to quickly comply with important new regulatory initiatives such as the USA PATRIOT Act’s Anti-Money Laundering initiative or the HIPPA Healthcare patient records initiative.

Based on existing customer experience, Versata believes that development of enterprise master data management systems will likely follow the same development process as that used for traditional application development: business analysts define the business rules required to properly operate on and maintain the shared master data; these rules are then used by the programmers to draw models, sketch out pseudo-code, and write programs that are intended to meet the original specifications; these programs are then integrated with the rest of the company’s infrastructure resources and deployed to a production environment. With Versata, the programming step is eliminated: the business analyst specifies the business logic, and that business logic is directly executed by the Versata runtime product, the Versata Logic Server. This simplification enables companies to react faster to business demands by developing data management solutions more efficiently with an enhanced ability to change these solutions as the business needs change.

This new opportunity area will leverage the success that many of Versata’s customers have had, using existing Versata products to provide easily-configurable, rules-based applications that can be continuously adapted to meet changing business conditions and regulatory pressures. Versata’s objective is to establish the Versata Logic Suite, the Company’s family of business logic products, as an adaptable master data management platform. The Company intends to do this by extending its technology leadership, continuing to grow its multi-channel distribution network, and leveraging its technology alliances.

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Versata markets its products primarily through a direct sales force in North America and in Europe. The Company also works with a network of consulting and systems integration partners, companies selling pre-packaged software applications, and companies selling software applications over the Internet on a subscription service basis.

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

Strategy

Versata currently offers a platform that raises the level of abstraction for application development. Over the years, the Company’s many successful customers have repeatedly proven the value of the Versata technology in allowing them to build larger, more complex and better performing applications than they could otherwise have achieved. Quite simply, some of Versata’s customers, such as American Management Systems (AMS), could never have delivered comparable solutions in anywhere near the same timeframe without Versata.

This value of rapid development has been Versata’s primary message since inception. However, there have always been two key components to the value proposition that Versata’s core business rules technology has delivered:

The first is in the area of application construction—specifically, cheaper and faster time to deployment for new application development. Union Bank of California is a great example of a customer that has used the same small team of developers to build more than 25 applications internally, with each application requiring no more than 3 months to develop.

Versata’s second value component is in the area of application configuration and maintenance—specifically, the ability to quickly and easily configure the application at the time of deployment as well as to continuously adapt the application across the enterprise lifecycle. By using Versata as the foundation of the Advantage 3.0 system, AMS has been able to configure this ERP-style packaged application for each new customer in significantly less time than normally associated with such large systems. Similarly, Meridian Health Care Management has used Versata to address key pains in preparing for the unexpected in the context of changing industry practices.

Application Development Value Proposition

Versata believes that there is an ongoing opportunity for the Company in the application development market, particularly as it looks at introducing new platform capabilities like rules auditing that would allow customers to create auditable applications supporting compliance requirements without the need to build specific auditing functionality into their applications. However, Versata believes that the bigger opportunity is related to its ability to deliver solutions that are easily configurable and can be continuously adapted to meet changing business conditions and regulatory pressures, particularly in the area of master data management.

Master Data Management Platform

Versata has a unique opportunity to provide a configurable and adaptable data management foundation. Using business rules and intelligent automation, this foundation can be configured and continuously adapted to implement proprietary company policies, as well as regulatory and compliance requirements. For example, within IBM there are a variety of customer information systems sharing master customer data. IBM has layered a master data management platform across these systems to manage and synchronize the information. The platform, built and continuously adapted with the current Versata product range tracks all changes to the customer data, cross-references to the disparate systems, and maintains an audit history. It affords IBM the ability to meet the rigorous demands of the business and government regulatory compliance requirements.

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This data management foundation is what the industry at large, including major players such as SAP, is starting to call master data management. As already noted, master data management is concerned with the management of highly valuable shared data that is used in support of business processes and transactions throughout the enterprise. These systems are owned and implemented by IT organizations that provide crucial data services for the day-to-day operating efficiency of the business. Importantly, much of this master data is subject to regulatory oversight and the management of this data open to auditor scrutiny. Timeliness, accuracy, transparency and adaptability are key dimensions in addressing these requirements.

Versata believes that its rules technology coupled with its existing customer experience gives it a competitive advantage in the area of master data management. As Versata moves forward, the Company intends to enhance its platform product capabilities in support of this new direction. Such enhanced capabilities may include rules auditing in support of compliance, the introduction of “soft constraints” and associated event notification mechanisms in support of data sharing and management, broader XML and Web Services capabilities in support of Service Oriented Architectures and more support for business analysts and compliance officers to directly configure rules in deployed systems without requiring extensive IT involvement.

Versata Solution

Versata believes it has a significant competitive advantage with respect to the development and deployment of complex, data-intensive applications. Our customers continue to realize the following benefits:

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 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 need 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 easily transitioned from other programming technologies like Visual Basic, PowerBuilder, or COBOL, so that companies can take advantage of the existing business domain knowledge.

Reduce Project Risks

Our solution reduces project risks 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, the Versata solution enables the direct execution of the business requirements/logic.

Reduce the Risk of Selecting the Wrong Technology

Versata implements and layers its technology on top of industry standards and allows the migration of business logic to new versions of those standards. This is important because it eliminates the need for application developers to re-write their applications as each edition of the J2EE, Enterprise JavaBeans (“EJB”), or other standard changes. Versata enables companies to invest in designing and managing their business logic without concern for the underlying technology.

Speed Time to Market

Our solutions help companies significantly reduce the time necessary to develop and maintain their applications. In the current rapidly changing economy, early-to-market companies are rewarded with increasing

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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 operations.

As Versata transitions to delivering master data management solutions, the Company expects to provide additional benefits to its customers. While they will continue to enjoy the application development benefits outlined above, new advantages will include the following:

Business Agility and Continuous Adaptability

Versata’s products facilitate rapid response to business challenges, enabling constant innovation of processes and applications to stay in step with business demands and ahead of competition. When changes are required to the management of master data, the Versata approach would allow the data stewards to systematically and rapidly implement those changes by modifying business rules. For example, if a new regulatory requirement is introduced that affects the way in which changes to shared customer account information must be analyzed for potential fraud, the business rules defined in Versata could be quickly and easily changed by data analysts. Additionally, the application user interfaces that support the management of the client master data would be automatically updated to reflect the new business rules. The traditional alternative is for programmers to investigate the current code, first finding, then changing, thousands of lines of hand implemented programming code. These changes must then be exhaustively tested to ensure no errors in translation or unexpected impacts on other parts of the system.

Real-Time Business Management

The Versata platform offers a proven transactional data management capability that stands in strong contrast with traditional batch-oriented approaches. As customers apply Versata to the management of their shared master data, this capability would enable them to increasingly manage their business in “real-time.” In addition, because the business rules are directly executed as stated, without translation by a “human programmer”, users would have more confidence that the master data is accurate and represents a “single source of truth” at all times. This assurance of accuracy would further reduce errors in operating processes and provide important support for tactical decision making.

Ongoing Support and Proof for Compliance Requirements

In addition to implementing a company’s own proprietary policies as business rules, Versata would also be used to implement government or industry mandated compliance regulations stated as business rules. Because these requirements could be entered and managed declaratively as business rules in business domain terms, they could also be directly inspected by auditors, managers, and compliance personnel. Versata’s implementation of these compliance rules would generate audit trails of rule execution that could provide traceability from regulatory requirement to execution proof. Traditional programming approaches would require auditing capabilities to be manually coded by the programmer and updated manually with each change to the system, with the linkage to the original business rules as stated in the requirements being lost in translation.

Products

For organizations building large-scale, transaction-intensive J2EE applications, Versata provides the Versata Logic Suite. The Versata Logic Suite includes the Versata Logic Studio: a proven high-productivity development environment, and the Versata Logic Server: a deployment platform architected for performance and scalability. Unlike any other product on the market, Versata simplifies and accelerates the development of complete, full-function J2EE applications—including presentation-level user interfaces, business logic, persistence models, and workflow processes involving human intervention and/or straight-through processing. In addition, Versata’s proven J2EE deployment platform is specifically architected to meet the rigorous reliability, high-load performance, and scalability demands of today’s business-critical systems.

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Customers

During the year ended October 31, 2003, Versata licensed its products to 56 customers worldwide for use in a wide range of software applications in diverse markets such as financial services, insurance, telecommunications, energy, government, manufacturing, health care, and retail. In fiscal 2003, the Company had 15 new software license customers, including Ahold, Cap Gemini, City of Phoenix, Fairfield Resorts, Merrill Lynch, Thales, and Utility Solutions. In addition, 41 repeat customers purchased additional software licenses from Versata, including Aegis, AMS, Bank of America, Colt Telecom, Fleet Bank, Fidelity National Information Systems (FNIS), TJ Maxx (TJX), IBM, JPMorganChase, Missouri Department of Transportation, Union Bank of California, U.S. Department of Labor and U.S. Bureau of Reclamation.

The following are examples of the use of Versata’s products by selected new and repeat customers during the fiscal year ended October 31, 2003:

For the fiscal year ended October 31, 2003, FINS (formerly Micro General Corporation) accounted for approximately 19% of total Versata revenues and AMS accounted for approximately 14% of total revenues. FINS accounted for approximately 14% of total revenues for the fiscal year ended October 31, 2002. British Telecommunications accounted for approximately 17% of total revenues and FINS accounted for approximately 16% of total revenues for the ten months ended October 31, 2001.

Alliances

IBM

An important element of our sales and marketing strategy is to leverage relationships with key technology and business partners. Our initial strategic marketing, sales and development relationship with IBM provided a

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single product offering that integrated our software with IBM’s WebSphere^® Application Server Advanced Edition on an OEM basis. In September 2000, at our request, we extended our relationship with IBM by entering into a software re-marketing agreement with IBM to allow them to resell some of our products. In September 2001, we further expanded our relationship with IBM by granting IBM the right to resell these products under the Versata brand name through IBM’s Passport Advantage Program, IBM’s volume licensing program. Versata product availability on Passport Advantage eliminates special handling, such as separate contracts with Versata for license maintenance and support. This arrangement has improved Versata’s visibility within IBM and helped increase the volume of software sold through IBM. Our agreement with IBM provides for the current relationship to continue through December 31, 2004. We do not anticipate the renewal of this agreement with IBM as IBM acquired Rational Corporation last year and Rational offers competing products.

ILOG

ILOG, the world’s leading supplier of C++ and Java software components, and Versata have entered into a strategic alliance agreement in 2001 whereby the companies participate in joint marketing and sales activities, as well as provide a level of integration between their products. Specifically, Versata has developed a connector between the Versata Logic Server and ILOG JRules. In turn, ILOG is developing a connector between their ILOG JViews for Workflow product and the Versata Logic Server. This technical collaboration has resulted in a unified platform that supports all types of business logic: transactions, processes, and decisions. However this unified platform uniquely provides improved business management with full visibility from the declarative specification of the business requirements to monitoring and managing the actual transactions, rules, and processes that a govern business. In addition, Versata and ILOG have collaborated on a variety of sales and marketing activities, including seminars, sales events, and exchanged sales leads. The ILOG and Versata strategic alliance agreement automatically renews for one year terms until terminated by either party upon ninety (90) days prior written notice.

MetaMatrix

MetaMatrix, the model-driven information integration pioneer, and Versata entered into a strategic alliance agreement in 2002 whereby the companies participate in joint sales and marketing activities as well as provide a level of integration between their products. Customers who use the MetaMatrix integration technology with Versata’s declarative business logic solution can rapidly integrate multiple sources of data into the Versata business rules management platform, and can capture the metadata across these disparate systems to create a consistent, logical data information model. We believe that when customers combine these two technologies they may not only simplify master data management, but also further reduce maintenance costs. This agile infrastructure will enable companies to adapt quickly to changes in business logic, data sources, technologies and platforms. The MetaMatrix and Versata strategic alliance agreement automatically renews for one year terms until terminated by either party upon ninety (90) days prior written notice.

Future Alliances

As Versata progresses with its solution for master data management, new partnerships and alliances will be needed to augment its product capabilities. Versata is in the process of identifying potential new strategic partnerships to complement its own products and technologies. Prospective partners are likely to come from several different technology sectors, including batch data cleansing; report generation; security systems; and companies delivering vertical solutions in the financial services, manufacturing and telecommunications industries.

Competition

The application development market is intensely competitive, subject to technological changes and significantly affected by new product introductions and other market activities of industry participants. Versata expects the competition in this industry to persist and intensify as the market continues to consolidate. Versata’s

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primary competition comes from companies developing their software applications internally using traditional programming approaches. The Company also competes with a number of other sources including:

Versata has identified the principal competitive factors in our market as:

Although Versata believes that it currently competes favorably with respect to these factors, the market for application development products is rapidly maturing and consolidating. Versata may not be able to maintain its competitive position against current and potential competitors 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 That May Affect Future Results” section contained below.

In contrast, we believe that the master data management arena is an emerging opportunity area with few competitors. However, industry analysts such as Meta Group, Tower Group, and Gartner predict that known industry leaders and several smaller software companies will begin to innovate and deliver master data management offerings. Some of the potential competitors in this market segment will likely include Chordiant, DWL, SAP, Siebel, and Soliton.

Services

An important component of Versata’s overall solution is its ability to provide 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, Versata enables its customers to automate e-business software applications without worrying about internal staffing constraints. Versata’s services organization consists of staff consultants and technical support personnel. The Company can also engage a variety of System Integration partners and independent contractors to augment its service offerings.

Consulting Services

Versata consulting services offers insight into the realities of complex transaction and process-based business application development. The Company’s services include system architecture, data modeling, system design, software application development, testing, configuration, installation, quality assurance, risk assessment

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and performance tuning. Versata also provides project management services to assist customers in developing and deploying large enterprise applications with multiple data sources, multiple database tables, and multiple user interfaces. The Company also offers complete turnkey services whereby Versata professionals and consulting partners can deliver complete customized solutions. These services can be provided at customers’ sites as well as via remote electronic connection, offering a balance between personal interaction and speed of responsiveness.

Training Services

Versata offers its customers introductory and advanced training in the use of its 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. Versata prices these services per course or on a per day basis.

Customer Support

Versata believes that a high level of customer service and support is essential to its success. The Company offers a range of customer support services including (i) business hour telephone and e-mail support from its Oakland, Australia, Germany and United Kingdom facilities, (ii) 24-hour-a-day/seven-day-a-week production system support and (iii) on-site support on request. Versata also provides customers with access to a developer knowledge base, discussion groups and other repositories of information regarding its products. The Company’s customers typically purchase annual customer support contracts at prices dependent upon their desired level of customer service.

Services Partners

In addition to Versata’s internal services organization, the Company has relationships with resellers, professional service organizations and global system integrators that offer consulting, training and customer support services. These service partners include IBM Global Services, Online Business Systems, and Cap Gemini Ernst and Young. Versata’s service partners are encouraged to attend and complete a series of Versata training courses.

Sales and Marketing

Sales

Versata sells its products through a multi-channel distribution model, which includes both direct and indirect channel sales. As of December 31, 2003, Versata’s sales organization consisted of 15 professionals throughout North America and Europe. The Company’s sales teams typically include a sales representative and a solutions architect that are supported by a regional service manager. As of December 31, 2003, Versata had 5 quota-carrying sales teams.

Versata utilizes 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. The Company’s sales model can include a proof of concept and/or an ROI approach to winning competitive sales opportunities. In many of these competitive situations, the tangible results of Versata’s proof of concept and/or ROI analyses substantiate the time-to-market advantages, ability to support business flexibility and ease of use characteristics of the Versata solution.

Versata complements its direct sales force with channel sales through various types of relationships that either sell, or help sell, products and services. These relationships include:

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Marketing

Versata supports its sales efforts through a variety of marketing initiatives implemented through both our corporate headquarters and our regional offices. The Company’s marketing organization, which consisted of 5 employees as of December 31, 2003, focuses on creating market awareness for Versata’s solutions; generating sales leads; forming relationships with leading technology companies; promoting leadership in the areas of application development and master data management; and educating industry analysts about our solutions. Versata conducts a variety of marketing initiatives worldwide to educate its target market. The Company has 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 its corporate Website, and producing and distributing sales support materials. Versata’s marketing organization also serves an integral role in acquiring, organizing and prioritizing customer and industry feedback in order to help provide product direction to its development organizations. Versata 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. Versata intends to continue to pursue these programs in the future.

Product Development

Design & Engineering

Most of the Versata’s software products are developed internally. The Company also licenses software technology from third parties. Internal development enables Versata to maintain closer technical control over the products and gives it the freedom to designate which modifications and enhancements are most important and when they should be implemented. Product documentation is also created internally. Versata believes 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 Ports and Quality Assurance

In November of 2003, Versata established a relationship with Virtusa Corporation, a US-based premier software engineering services firm, which also has advanced technology centers in India and Sri Lanka. For the next two years (and possibly beyond), Versata has retained Virtusa to provide Versata with engineering services including platform port development, quality assurance, and maintenance. Versata will retain responsibility for product vision, strategy, architecture, design and reference implementation, enabling it to more aggressively drive product innovation and rapidly deliver the next round of capabilities in support of our new strategy.

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Intellectual Property and Licensing

Intellectual Property

We rely on a combination of intellectual property rights 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.

While various proprietary intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on obtaining any particular patent. 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. It is possible that other companies could successfully challenge the validity or scope of our patent and that our patent may not provide a competitive advantage to us. We enforce our copyright, trademark, service mark and trade name rights. Furthermore, as part of our proprietary protection procedures, we enter into non-disclosure agreements with our employees, consultants, 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 including entities located in Australia, Canada, France, Germany, and the United Kingdom.

Employees

As of December 31, 2003, we had 79 active employees and 24 contractors. Of these individuals, 20 employees and contractors were in sales and marketing, 39 employees and contractors were in product development, 16 employees were in professional services, 9 employees were in customer support, and 19 employees and contractors 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 and uncertainties. The following section lists some, but not all, of these risks and uncertainties, which may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the following risk factors in evaluating an investment in our common stock.

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We have limited working capital and may experience difficulty in obtaining needed funding, which may limit our ability to effectively pursue our business strategies.

As of October 31, 2003, we had $13.8 million in cash and short-term investments, and working capital of approximately $7.8 million. To date, we have not achieved profitability or positive cash flow on a sustained basis. Although we believe that our current cash, cash equivalents, and any net cash provided by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months, it is possible that events may occur that could render our current working capital reserves insufficient. Because our revenue is unpredictable and a significant portion of our expenses are fixed, a reduction in projected revenue or unanticipated requirements for cash outlays could deplete our limited financial resources, potentially to a serious degree. We may find it necessary to obtain additional equity or debt financing in fiscal 2004 or beyond. If we require additional external funding, there can be no assurance that we will be able to obtain it 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 cannot secure adequate financing sources on a timely basis, then we would be required, at a minimum, to reduce our operating expenses, which would restrict our ability to pursue our business objectives and could adversely impact our ability to maintain our revenue levels.

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

Our operating results have varied and may continue to vary substantially from period to period. The timing and amount of our license fees are subject to a number of factors that make estimating revenues and operating results prior to the end of a quarter uncertain. While we receive certain recurring revenues on royalty-based license agreements and also from deferred maintenance and support fees, a significant amount of license fees in any quarter is dependent on the execution of new license sales in a particular quarter. Our professional 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. Operating expenses for any year are normally based on the attainment of planned revenue levels for that year and are generally incurred ratably throughout the year. As a result, if revenues were less than planned in any period while expense levels remain relatively fixed; our operating results would be adversely affected for that period. In addition, unplanned expenses such as; increase in salaries, third party software rates, restructuring assumptions, and cost of software development, could adversely affect operating results for the period in which such expenses were incurred.

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

We have experienced operating losses in each quarterly and annual period since inception, and we expect to incur losses in the future. If our revenue grows less than we anticipate or if our operating expenses increase more than expected or are not reduced in the event of lower revenue, we may never achieve profitability. In addition, we have entered into various sublease agreements. If income from these subleases is not received in accordance with the underlying contractual obligations this will have an adverse impact on our financial operations. If we fail to collect amounts due from subleases under contractual arrangements or one of our sublessees does not renew their sublease for periods anticipated in our assumptions, this will have an adverse effect on our operating results and projected cash flow. As of October 31, 2003, we had an accumulated deficit of $206.1 million. Although we have an objective of achieving profitability as soon as practical, we cannot assure you that we will be successful. In order to achieve and maintain profitability, we will need to increase revenues while decreasing expenses.

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 further slowdown of the worldwide economy affects the buying

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decision of corporate customers, such as it has in the recent years. Because our sales are primarily to Global 2000 customers, our business also depends on general economic and business conditions. A reduction in demand for computer software, caused by a weakening of the economy, such as occurred in fiscal 2001, 2002 and 2003, or otherwise, may result in continued decreased revenues or lower revenue growth rates.

Entering Into New or Developing Markets May Also Result in Decreased Revenues or Lower Revenue Growth Rates

As we focus on the new market opportunity in master data management, we may be competing with large, established suppliers and/or systems integrators as well as start-up companies. Some of our current and potential competitors may have greater resources, including technical and engineering resources, than we do. Since the master data management market is relatively new, we believe that success in developing and selling master data management products will require us to devote appropriate efforts to develop the strong sales, marketing and development skills required to address new target markets. These efforts may increase our operating costs and, if we fail to timely generate revenue from the master data management business, our working capital and operating results could be adversely affected. There can be no assurance that our efforts to pursue the master data management business will be successful or will not adversely affect our financial condition or results of operations, particularly in the near term.

If We Do Not Effectively Compete With New and Existing Competitors, Our Revenues and Operating Margins Will Decline.

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. We expect the competition in this industry to persist and intensify as the market continues to consolidate. Many of our competitors, including but not limited to IBM, BEA Systems, Inc., Microsoft, Oracle, and Sun Microsystems 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, such as the ones mentioned herein; 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.

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

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

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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.

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

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

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

Our Company uses a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals, such as the date when they estimate that a customer will make a purchase decision and the potential dollar amount of the sale. We aggregate these estimates periodically in order to generate a sales pipeline. We compare the pipeline at various points in time to look for trends in our business. While this pipeline analysis may provide us with some guidance in business planning and budgeting, these pipeline estimates are necessarily speculative and may not consistently correlate to revenues in a particular quarter or over a longer period of time. A variation in the conversion of the pipeline into contracts or in the pipeline itself such as occurred in the past 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. Our Company’s stock price is affected by a number of factors, some of which are beyond our control, including:

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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