**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-KSB**

 
| **ý** | ** ** | **Annual report under Section 13 or 15(d) of  the Securities Exchange Act of  1934 for the fiscal year ended October 31, 2005.**                                                                                                                                                  |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                             |
| **Or**     |
|       |       |                                                                                                                                                                                                                                                                                             |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of  the Securities Exchange Act of  1934 for the transition period from             to             .** |

 

**Commissionfile number: 0-28540**

 

**VERSANT CORPORATION**

(Name of SmallBusiness Issuer in its Charter)

 
| **California**                                                                                        | ** ** | **94-3079392**       |
|-------------------------------------------------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction                                                                         |       | (I.R.S.  Employer    |
| of  incorporation or organization)                                                                    |       | Identification  No.) |
|                                                                                                  |       |                 |
| **6539  Dumbarton Circle, Fremont, California 94555**                                                 |
| (Address of  principal executive offices) (Zip code)                                                  |
|                                                                                                  |       |                 |
| **(510) 789-1500**                                                                                    |
| (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, no par value** |

 

Check whetherthe issuer is not required to file reports pursuant to Section 13 or 15(d) forthe Exchange Act.  o

 

Check whetherthe issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes   ýNo  o

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. o

 

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes oNo ý

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes oNo ý

 

State issuer’srevenues for its most recent fiscal year: $20,509,000

 

The aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was sold, or theaverage bid and asked prices of such common equity, as of January 15,2006: $16,224,378

 

The number ofshares outstanding of each of the issuer’s classes of common equity, as of January 15,2006, 3,557,089 shares of Common Stock, no par value.

 

 

----

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxystatement relating to its 2006 Annual Meeting of Shareholders are incorporatedby reference in Part III of this Annual Report on Form 10-KSB whereindicated.

 

TransitionalSmall Business Disclosure Format: (check one):

 

Yes oNo  ý

 

3

----

 

**VERSANTCORPORATIONANNUAL REPORT ON FORM 10-KSBFor the Fiscal Year Ended October 31, 2005**

 

**TABLE OFCONTENTS**

 
| **Item No.**      | ** ** | **Name of Item**                                                                                                             | ** ** | ** ** |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|              |       |                                                                                                                         |       |       |
| **PART I**   |       |                                                                                                                         |       | 6          |
|              |       |                                                                                                                         |       |       |
| Item 1.           |       | Description  of Business.                                                                                                    |       | 6          |
| Item 2.           |       | Description  of Property.                                                                                                    |       | 14         |
| Item  3.          |       | Legal  Proceedings.                                                                                                          |       | 14         |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders.                                                                         |       | 14         |
| Item 4A.          |       | Executive Officers of the Registrant.                                                                                        |       | 15         |
|              |       |                                                                                                                         |       |       |
| **PART II**  |       |                                                                                                                         |       | 17         |
|              |       |                                                                                                                         |       |       |
| Item 5.           |       | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities.            |       | 17         |
| Item 6.           |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations.                                 |       | 19         |
| Item 7.           |       | Financial Statements.                                                                                                        |       | 56         |
| Item 8.           |       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure.                                       |       | 84         |
| Item 8A           |       | Controls and Procedures                                                                                                      |       | 84         |
| Item 8B.          |       | Other Information.                                                                                                           |       | 86         |
|              |       |                                                                                                                         |       |       |
| **PART III** |       |                                                                                                                         |       | 86         |
|              |       |                                                                                                                         |       |       |
| Item 9.           |       | Directors, Executive Officers, Promoters  and Control Persons; Compliance with Section 16(a) of the Exchange  Act. |       | 86         |
| Item 10.          |       | Executive Compensation.                                                                                                      |       | 86         |
| Item 11.          |       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters.                             |       | 86         |
| Item 12.          |       | Certain Relationships and Related  Transactions.                                                                             |       | 86         |
| Item 13.          |       | Principal Accountant Fees and Services                                                                                       |       | 87         |
| Item 14.          |       | Exhibits                                                                                                                     |       | 87         |
|              |       |                                                                                                                         |       |       |
| **SIGNATURE**     |       | 87                                                                                                                           |
|              |       |                                                                                                                         |       |       |
| **CERTIFICATION** |       |                                                                                                                         |

 

4

----

 

VDS, Versant® enJin®, Versant JDO, Versant OpenAccess and VRTF are trademarks of Versant in the United States and/or othercountries.   All other corporate or trade names or service marksreferred to in this report are the names or marks of their respective owners inthe United States and/or other countries.

 

5

----

 

**CAUTIONREGARDING FORWARD-LOOKING STATEMENTS**

 

*This Form 10-KSB containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934 and Section 27A of the Securities Act of1933.  These forward-looking statements are based on Versant’s currentexpectations about our business and industry and reflect our beliefs andassumptions based upon information that is reasonably available to us at thedate of this report.  In many cases you may identify these forward-lookingstatements by words such as “will,” “should,” “may,” “might, “believes,” “anticipates,”“expects,” “intends,” “estimates” and similar expressions.  Theseforward-looking statements may include, among other things, projections of ourfuture financial performance and trends anticipated for our business.*

 

*We caution investors that forward-lookingstatements are only predictions, forecasts or estimates based upon our currentexpectations about future events.  The forward-looking statements are notguarantees of our future performance and are subject to significant risks anduncertainties that are inherently difficult to assess and predict. Ouractual results and performance may differ materially from the results andperformance anticipated by any forward-looking statements due to these risksand uncertainties. Some of the important risks and factors that could cause ourresults and performance to differ from results or performance anticipated by thisreport are discussed in Item 7 of this report, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation - Risk Factors,” whichyou should read carefully. We undertake no obligation to revise or update anyforward-looking statements in order to reflect events or circumstances that mayarise or occur after the date of this report or for any other reason. Readers are urged to carefully review and consider the various disclosures madeby Versant in this report and in our other reports filed with the Securitiesand Exchange Commission that attempt to advise interested parties of the risksand factors that may affect our business.*

 

**PART I**

 

### **Item 1.  Business**

###  

## ***Overview of the Company***

##  

We are a leading provider of object-oriented data management softwarethat forms a critical component of the infrastructure of enterprisecomputing.   Companies use Versant solutions to solve complex datamanagement and data integration problems. We design, develop, market andsupport object-oriented database management system products to address suchproblems. We also provide related product support, training, and consultingservices to assist users in developing and deploying software applicationsbased on our products. We operate our business within a single operatingsegment referred to as Data Management. We were incorporated in California in August 1988under the name Object Sciences Corporation and completed our initial publicoffering of our common stock under the name of Versant Object TechnologyCompany in July 1996. The name of the company was changed to VersantCorporation on July 15, 1998. In November 2002, we acquired MokumeSoftware, Inc., a privately held company that developed technology for usein real-time applications. In March 2004, we acquired Poet Holdings, Inc.(Poet) through a merger. Prior to that merger, Poet was a European-basedprovider of object-oriented data management software whose stock was publiclytraded in the U.S. In June 2004, we acquired the JDO Genie product line andits customers from JDO Genie (PTY) Ltd., a privately held South African companyand in July, 2004, we acquired FastObjects, Inc., a private company thatheld North American distribution rights with respect to Poet’s FastObjectdatabase management product. Our principal executive offices are located at6539 Dumbarton Circle, Fremont, California 94555 and our telephone number is510.789.1500.  Our website URL is www.versant.com.

 

## ***Industry Background***

 

Data management has evolved significantly over the past fewdecades.  As business computing becamemore sophisticated, network and hierarchical databases emerged in the 1970’s toserve growing business

 

6

----

 

data requirements.  In the 1980s,these types of databases were largely superseded by relational databasetechnology, which continues to be a widely prevalent database technologytoday.  The mid to late 1980s saw theemergence of object-oriented software programming, in which smaller softwarebuilding blocks called objects, which can perform specific functions, areaggregated with other objects in order to create larger software systems. Withthe advent of object-oriented software programming, it became possible toincorporate the unique features and advantages of object-based software intodatabase management solutions. Our principal products are object-based databasemanagement software solutions, which we believe have advantages over relationaldatabase technology. In particular, we believe that object-based databasemanagement solutions are especially well suited for successfully addressing thecomplex and challenging data management and analytical requirements ofcompanies who need to rapidly source, update, analyze and use very largechanging bodies of data for a wide variety of business applications.

 

## ***Overview of the Products and Services***

##  

We provide sophisticated data management solutions designed to addressthe complex data management needs of enterprises and providers of productsrequiring complex data management functions.  Our products are typicallydeployed to manage data for business systems and enable these systems to accessand integrate data necessary for their sophisticated business applications. OurVersant Object Database product is used primarily by larger enterprises whichhave significant large-scale data management requirements, such as technologyproviders, telecommunications carriers, government defense agencies and defensecontractors, healthcare companies and companies in the financial services andtransportation industries. Since the incorporation of Poet’s FastObjectssolution into our product line in March 2004, we have expanded the scopeof our solutions to address the data management needs of smaller systems aswell. The data management needs of our customers usually involve many businessfunctions, ranging from usage and management of the customer’s internal data tothe processing of externally originated information; such as customerenrollment, billing and payment transaction data.  Our solution has alsobeen used to solve complex data management issues such as fraud detection, riskanalysis, yield management, and a host of other problems that requires anapplication specific data management solution.

 

In addition to our product offerings, assisting users in developmentand deployment of applications based on the Versant Object Database andFastObjects, we offer a variety of services, including consulting, training,and technical support services.  We provide maintenance and support serviceswith respect to our own products.  Inaddition, we also offers a dedicated consulting practice for IBM WebSpherecustomers, under which we provide a certain number of consultants to IBMand both IBM and Versant sales representatives market the services of theseconsultants to different WebSphere customers.

 

## ***Benefits of Versant Solutions***

##  

Our products provide customers the following benefits for specializeddata management:

 

•                                          *High Performance*.  Our object-based architectureprovides direct access or navigation to stored objects.  The balancedclient-server architecture of Versant products enhances performance byefficiently distributing processing burdens between clients and servers toleverage the processing power of networked computers.

 

•                                          *Highly Scalable Support for Distributed Computing*.  Ourproducts can work in various environments ranging from small workgroupoperations to operations involving thousands of users over the wide areanetworks or the Internet. This scalability can be achieved through object-leveloperations and other design features.

 

•                                          *Reliability, Availability and Serviceability*.  OurObject Database product offers a number of features designed to permitcontinuous operation, including features providing online backup and recoveryand online modification of the database system, as well as system utilitiesthat can operate while the system is running.  These features, togetherwith replication and disk mirroring provided by a Fault Tolerant Server,support continuous operation of our products.

 

7

----

 

•                                          *Language-Independent Support for Object-Oriented Programming*. Our products provide native support for the leading object-oriented softwaredevelopment languages of C++ and Java.  This quality of our productsfacilitates rapid and flexible application development by the customers and themaintenance and evolution of complex and dynamic applications that closelymodel real-world systems and processes.

 

•                                          *Support for Component Architectures*.  The VersantObject Database client integrates with leading J2EE application servers,including the IBM WebSphere and BEA Weblogic application servers. Theseapplication servers enable users to build and deploy J2EE-based applicationsthat will work compatibly and directly with the Versant Object Database inorder to gain our inherent productivity and performance advantages.

 

•                                          *Integration with Users’ Existing Information Systems*. Versant products operate on a wide range of server platforms, including UNIXplatforms from Sun Microsystems, Hewlett-Packard, IBM, Linux platforms from RedHat, and Microsoft Windows platforms. In addition, the interfaces for Versantproducts are based on industry standard APIs. The support of these emerging standards for API’s allow our solutions tohave interoperability with applications originally designed for relationaldatabases that have taken this standards based approach during implementation.

 

## ***Our Strategy***

##  

We were involved in the following activities in fiscal 2005, which willimpact our operation and business in fiscal 2006 and beyond:

 

We made substantial investments in research and development to alignour products with industry trends.  Weexpect to receive benefits from such investments in the second half of fiscal2006. We also released our Versant Object Database 7.0 with support for Javaindustry standards API’s, known as JSR243 (Java Data Objects) and JSR220 (TheJava Persistence API).  These standardsare expected to form the foundation for Java developers designing futuredatabase applications against both object and relational technologies.

 

We engaged in strategic marketing efforts to increase our visibilityand credibility through participation in open source initiatives via theEclipse Foundation, a nonprofit organization dedicated to advance open sourcecomputing that enjoys participation by a significant percentage of the Javadeveloper community. We established an open source Java JSR220 tooling projectwithin the Eclipse Foundation.  Thetooling project provides useful capabilities for relational database developersand elevates our visibility and credibility within that community.

 

We implemented a restructuring plan to reduce our operating expenses byconsolidating our product lines and streamlining our engineering, marketing,sales, and administrative resources. The purpose of the restructuring was torefocus our business back to our core object database product offerings.

 

We also focused our sales and marketing efforts on our data managementproducts, Versant Object Database, VDS and FastObjects, and related consultingand training services.  Versant Object Database and its predecessor VDSwere the key focus of our marketing efforts and the major source of our licenserevenues in fiscal 2005.

 

The technology sector was the largest vertical market for our revenuesin fiscal 2005. The incorporation of the Versant products into the offerings ofindependent software vendors (ISVs) has increased our share of license revenuesin this sector. Examples of the technology applications in which our productsare used are demand consensus forecasts, collaborative planning, andrequirements management applications.

 

The telecommunications industry also continued to be a very significantvertical market for our revenues in fiscal 2005.  Customers in thetelecommunications industry have used our products in such strategicdistributed applications as network modeling and management, fault diagnosis,fraud prevention, service activation and assurance, and customer billing. Most notably, we were able to deploy our software in the next generation 3GUMTS applications built by several leading telecommunications equipmentproviders.

 

8

----

 

We have also been able to gain customer acceptance in other verticalmarkets, including defense, financial services, transportation, and healthcare.  We expect to maintain roughly the same mix of revenues betweendifferent vertical markets in fiscal 2006.

 

## ***Products and Services***

 

*Versant Object Database*

 

Versant Object Database, a seventh generation object databasemanagement system, is the successor to our VDS product. Based on the sametechnology, Versant Object Database provides the same capabilities as VDS whileproviding industry standard interfaces for the Java developer.  Additionally, Versant Object Databaseincludes the following enhanced features over the VDS product:

 

•                  Anew improved query engine, which has the ability to perform more appropriatereport oriented queries and allows better support for the new standards basedquery APIs.  These queries includesupport for set based operations, server side sorting, and predicateevaluation.  The new query engine setsthe stage for future integration with industry accepted reporting tools.

 

•                  Improvedperformance and scalability by opening the storage manager layer for higherconcurrency, eliminating latency, which is found in read-mostly applicationswith large numbers of concurrent transactions. This will have a significant impact on future competitive benchmarkingsituations for applications requiring large user bases.

 

•                  Improvedfault tolerant server operation and support of XA connectivity which hassignificant impact to 24x7 applications and applications operating in aheterogeneous environment.

 

In addition to the new features described, the Versant Object Databasealso includes the features of Versant Developer Suite.

 

*Versant Developer Suite (VDS)*

 

VDS, a sixth generation object database management system, is designedto support multi-user, commercial applications in distributedenvironments.  VDS enables users to store, manage, and distributeinformation that they believe often cannot be administered effectively throughtraditional database technologies, including the following types of information:

 

•                       real-timedata, such as graphics, images, video, audio and unstructured text;

•                       dynamic,graph-oriented data, such as network management data and advanced financialinstruments; and

•                       meta-data,data aiding integration of diverse systems, and workflow information, whichtogether enable the construction of systems that integrate diverse systems andadd new functionality, often making this functionality available over theInternet.

 

The object-oriented, balanced client-server architecture of VDS providesthe basis for high-performance, scalable distributed applications.  Webelieve that VDS’ performance is superior compared to relational databasemanagement systems, particularly for complex data applications, for which VDShas the capability of processing a wide variety of abstract data types in ahighly concurrent, high performance manner.

 

VDS is designed to integrate up to 65,000 databases connected over alike number of locations on a variety of hardware and software platforms. Each database has a theoretical storage capacity of 4.6 million terabytes, anamount far beyond the actual capacity of the most existing operating systems.VDS implements a variety of database features, including a two-phase commitmentfor distributed transaction integrity and “database triggers” to monitorchanging events and data and to notify users and applications when specifiedevents occur.  In addition, on-line management utilities enable routinemaintenance to be performed while the database is running.  These includeutilities to perform backup operations, manage log

 

9

----

 

files, dynamically evolve database schema, add, delete and compressvolumes on disk storage and related functions.  These utilities providemultiple levels of administrative access and application security.  Webelieve that use of VDS allows our customers to reduce the time they need todevelop applications for their data management systems by improving theirsystem performance.

 

Version 6.0 of VDS includes the core object database management system,C++ and Java language interfaces, XML for import and export of data into thedatabase and asynchronous replication services to provide updates amongdistributed Versant databases. We believe that by bundling thesecomponents with VDS, it enhances the solution that we are offering and makes iteasier for the customers to deploy such components.

 

As part of the VDS family, we also offer Fault Tolerant Server and HighAvailability Backup Solution, options that customer can use in situations thatrequire advanced capabilities.

 

Versant Fault Tolerant Server**provides**for highly reliable operations in mission-criticalenvironments. This product provides transparent failure recovery by connectingdatabase clients to synchronized copies of the database stored on physicallyseparate computers.  If one of the databases fails, due to operatingsystem failure and hardware breakdown or any other form of interruption, theother database continues operation without application interruption.  Whenthe failed database is restored, the two databases automatically resynchronizeand resume operations without any interruption in application processing.

 

Our High Availability Backup Solution enables VDS to use the mirroringand backup features of other enterprise storage systems to take an onlinebackup of very large data volumes within seconds, without impacting transactionresponse times.

 

*FastObjects*

 

FastObjects is an object database management system designed to provideminimal administration and work natively with the customer’s product. Theprimary target for FastObjects product line is for use as an embedded datamanagement system to be integrated in a customer’s products. FastObjects isused in a vast range of applications, including medical devices, vendingmachines, telecom equipment, and defense systems. The majority of FastObjectsinstallations are now running under the Microsoft Windows Operating System.However, during fiscal 2006 we plan to focus most of our development resourceson our flagship product line, Versant Object Database, and plan to migrate tothe Microsoft .NET environment in order to give our customers the opportunityto have a migration path from FastObjects products to Versant Object Database.

 

## ***Services***

##  

We derived a majority of our revenues from services in fiscal2005. Our services include maintenance and support programs for our datamanagement products and the WebSphere consulting services practice.

 

In addition to our product offerings, we offer our customers training,consulting and maintenance and technical support services.

 

We provide maintenance and technical support services for our productsthat are generally available at an annual fee that varies depending on the typeand level of support the customer requires.  Maintenance and supportcontracts, which typically have twelve-month terms, are offered concurrentlywith the initial license of our product and entitle the customers to telephonesupport, product upgrades, and documentation updates.  For additionalfees, customers may purchase a special support package that provides dedicatedsupport engineers and telephone support available for 24 hours per day sevendays a week.  Maintenance contracts are typically renewable annually andtypically are paid for in advance for all products, but in some instancesmaintenance and support fees are paid in arrears.

 

We also provide a variety of training and consulting services to assistcustomers in design, development, training and management of applications theybuild based on our core products as well as IBM’s

 

10

----

 

WebSphere application server.  Training services are offered for avariety of Versant-specific and object-related technologies and range frombeginning to advanced levels.  Consulting services are available foranalysis and design assistance, mentoring and technical transfer, applicationcoding, design reviews and performance analysis.  In addition, we providecustom development services to customers that request unique or proprietaryproduct extensions.  Our IBM WebSphere consulting practice provides IBMwith the manpower to support the WebSphere business, and IBM’s and our salesrepresentatives market these consulting services.

 

 **Sales Channels**

 

We market and sell our products principally through our direct salesforce and through value-added resellers, systems integrators, and distributors.

 

*Direct Sales.*Ourdirect sales organization is based in corporate offices in Fremont, Californiaand Hamburg, Germany, and at our other regional offices in the U.S. andelsewhere around the world. The direct sales organization includes thefield sales personnel, who are responsible for account management, and systemsengineers, who answer technical questions and assist customers in runningbenchmarks against competitive products and in developing prototypeapplications.

 

*Indirect Sales.* Our sales strategy is to develop indirect distribution channels, such asvalue-added resellers and systems integrators.  Systems integrators mayinclude our products with our own or those of other vendors, in order toprovide a complete solution to our customers. Under their agreements withVersant, value-added resellers and systems integrators are typically notsubject to any minimum purchase or resale requirements and can cease marketingour products at any time. Certain value-added resellers and systemsintegrators offer products they produce or that are produced by third parties,which in some cases compete with our products.

 

*Marketing. *Ourmarketing programs are aimed at audiences with the goal of building visibilityand generating leads for our business. Our marketing programs include ourefforts at cultivating media and analysts relations, fostering valuableinvestor communications, speakers’ programs, online marketing,partner-marketing programs and participation in conferences and tradeshows. Ourproducts are typically marketed through (i) development licenses, whichentitle the customer to develop applications that use a Versant softwareproduct, and (ii) deployment licenses, which entitle the customer to selland market.

 

*Sales Process*. The cycle for a complete sale of our products to new and large enterprisecustomers can often exceed six months and may extend to a year or beyond. For existing customers with successfully deployed applications, sales cyclesfor new applications of our core products are generally shorter.  Duringthe sales cycle, meetings involving both technical and management staff areconducted frequently at the prospective customer’s site and at ourheadquarters.  As part of their product selection process, our prospectivecustomers typically perform a detailed technical evaluation or benchmark of ourobject-based technologies, often directly comparing them to competitiveproducts.  Upon completion of the evaluation, a customer that chooses oursolution may purchase one or more development licenses depending upon thenumber of their programmers that will develop and build their customers’application.  Additionally, a customer may purchase technical support,training courses and consulting services.  Our customers may also purchasedeployment licenses at the same time as they purchase development licenses, ormay defer their purchase of deployment licenses and related maintenance untilthey complete the application development (a process that typically takes atleast six months and can exceed one year). Once an application is ready fordeployment, a customer may elect to purchase deployment licenses from us.

 

*Shipping and Backlog*. Oursoftware may be either physically or electronically delivered to the customer.If physically delivered, our software product is shipped from either Fremont orHamburg facilities and is delivered to the customer upon receipt of an approvedorder and a signed license agreement. We typically do not have a materialbacklog of unfilled license orders at any given time, and it does not considerbacklog to be a meaningful indicator of our future performance.

 

11

----

 

*International Sales and Marketing*. Our international sales are recorded by subsidiaries located in Germany andUnited Kingdom, which sell our products through distributors and value-addedresellers, as well as directly to end-users.

 

## ***Our Customers***

##  

We categorize our customers into two broad groups, End-Users and ValueAdded Resellers (“VARs”). End Users are companies who use our productsinternally and do not redistribute our products outside of their corporateorganizations. VAR customers, on the other hand, include traditional ValueAdded Resellers, Systems Integrators, OEMs and other vendors who redistributeVersant products to external third party customers, either individually or aspart of an integrated product. We license our data management productsthrough two types of perpetual licenses—development licenses and deploymentlicenses. Development licenses, typically sold on a per seat basis, authorize acustomer to develop an application program that uses our software product.

 

Under a deployment license, a customer is permitted to deploy anapplication that it has developed under a development license from us.End-Users generally purchase deployment licenses based on the number of centralprocessing units (CPU’s) supporting the server that will run the applicationusing our database management system. We offer deployment licenses, forcertain applications, priced on a per user basis.  Pricing of the VersantObject Database, VDS and FastObjects varies according to several factors,including the number of CPU servers on which the application run and the numberof users that are able to access the server at any particulartime. Customers may elect to simultaneously purchase development anddeployment licenses for their projects.

 

VARs and distributors purchase development licenses from us on a perseat basis and on terms similar to those of development licenses sold directlyto End-Users.  VARs are authorized to sublicense deployment copies of ourdata management products, which are either bundled or embedded in the VARs’applications, directly to end-users.  VARs are required to report thedistribution of our software to us and are charged a royalty that is basedeither on the number of copies of application software distributed or computedas a percentage of the selling price charged by the VAR to its end-usercustomers. These royalties may be prepaid in full or paid upon deployment.

 

## ***Our Vertical Markets***

##  

Versant Object Database, VDS and FastObjects are licensed fordevelopment or deployment, or both, in a wide range of applications.  Asubstantial amount of our sales are for applications in the technology,telecommunications, defense, healthcare and financial services sectors. Many of our customers have licensed multiple copies for use in differentapplications.

 

Our future performance will depend in significant part on the increasein the use and sales of the Versant Object Database and FastObjects intechnology, telecommunications, defense, healthcare and financial market applicationsand the continued acceptance of our products within these industries.

 

## ***Competition***

##  

Our software products compete with companies offering object andrelational database management systems. Our competitors, especially Oracle andProgress Software, have longer operating histories, significantly greaterfinancial, technical, marketing, service and other resources, significantlygreater name recognition, broader product offerings, larger and moreestablished distribution channels and a larger installed base of customers. Inaddition, many of our competitors have well-established relationships with ourcurrent and potential customers. We may not be able to compete successfullyagainst current or future competitors, and competitive pressures could have a materialadverse effect on the business, pricing, operating results and financialcondition of the company.

 

12

----

 

## ***Research and Development***

##  

Our research and development expenses consist primarily of personnel andrelated expenses, including payroll and employee benefits, expenses forfacilities and payments made to outside software development contractors. Infiscal 2005 and fiscal 2004, our research and development expenses were $4.0million and $5.1 million respectively. We anticipate that we will continue toinvest significant resources in research and development activities in thefuture to develop new products, advance the technology of our existing productsand develop new business opportunities.

 

## ***Intellectual Property and Other ProprietaryRights***

##  

We rely primarily on a combination of copyright and trademark laws,trade secrets, confidentiality procedures and contractual provisions to protectour proprietary technology. For example, we license our software pursuant tosigned license agreements and, to a lesser extent, “shrink-wrap” licensesdisplayed in evaluation downloads and in software installation screens, whichimpose certain restrictions on the licensee’s ability to utilize our software.In addition, we take steps to avoid disclosure of our trade secrets, such asrequiring persons with access to our proprietary information to executenon-disclosure agreements, and we restrict access to our software source code.We seek to protect our software, documentation and other written materialsunder trade secret and copyright laws, which afford only limited protection. Wewere also awarded a United States patent (No. 5,822,759) for ourproprietary cache system used within our product suites, which expires in 2015.

 

## ***Employees***

##  

As of October 31, 2005, we and our subsidiaries had a total of 100full time employees, of whom 36 were based in the United States, 29 in Europe,and 35 in India. Of the total, 46 employees were engaged in engineering andtechnical services, 10 were engaged in sales and marketing, 30 were engaged inthe services organization, and the remaining 14 were engaged in generaladministration and finance. To the best of our knowledge, none of our employeesis represented by a labor union with respect to employment with Versant.  We have not experienced any organized workstoppage to date and believe that our relationship with our employees isgenerally good.

 

Our future performance depends mostly upon the continued service of ourkey technical, sales, and senior management personnel. The loss of the servicesof one or more of our key employees could have a material adverse effect on ourbusiness, operating results and financial condition.

 

***Restructuring***

 

In 2005 we announced that we were undertaking efforts to restructureour business to refocus our operations on our core database management productsand to appropriately reduce our expenses. In furtherance of this restructuring, in August 2005 we spun offour former Versant Open Access.NET (or VOA.Net) assets to Vanatec GmbH, aprivately held German company.  As wecontinue to execute on our restructuring plans, it is possible that we mayundertake similar actions with respect to portions of our business that are notstrategic, or closely related, to our core database management business.

 

### ***Investor Information***

###  

We are subject to the informational requirements of the SecuritiesExchange Act of 1934 (the Exchange Act). Therefore, we file our periodicreports on Forms 10-Q, 10-QSB, 10-K, 10-KSB, 8-K, proxy statements and otherinformation with the Securities and Exchange Commission (the SEC). Thesereports, proxy statements and other information may be obtained by visiting thePublic Reference Room of the SEC at the 450 Fifth Street, NW, Washington,DC 20549.  Information on operation ofthe SEC’s Public Reference Room may be obtained by calling SEC at1.800.SEC.0330. In addition, the SEC maintains an Internet site (athttp://www.sec.gov) that contains reports, proxy and information statements andother information regarding issuers that file electronically.

 

13

----

 

The financial and other information can also be accessed at ourInvestor Relations website. The address of Versant’s website is as follows:(http://www.versant.com). We make available, free of charge, copies of ourannual reports, annual reports on Forms 10-K or 10-KSB, quarterly reports onForms 10-Q or 10-KSB, current reports on Form 8-K and amendments to thosereports, filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act, as soon as reasonably practicable after filing such materialswith the SEC.

 

**Item 2.  Property.**

 

Our principal administrative, sales,marketing and research and development operations are located at 6539 DumbartonCircle, Fremont, California 94555. Our current lease, which expires on June 30,2007, is for approximately 54,000 square foot office building.  However,we only occupy approximately 21,000 square feet of this space, and in thefourth quarter of fiscal 2004, we recorded a restructuring charge to reflectthis reduced space usage in the future periods.

 

Additionally, we lease sales offices inPlano, Texas and in Chicago, Illinois and our international subsidiaries leasespace, generally under multi-year operating lease agreements, in Hamburg,Germany and in Pune, India. We believe that our current facilities are inreasonably good operating condition and will be adequate for our requirementsfor the next several years. Based on current commercial real estate condition,we believe that we will be able to lease comparable facilities in the U.S. orGermany if required.

 

**Item 3.  Legal Proceedings.**

 

We may fromtime to time be subject to various legal proceedings in the ordinary course ofbusiness.  Currently, we are not subject to any material legal proceedingsrequired to be disclosed under this Item 3.

 

**Item 4.  Submission of Matters to a Voteof Security Holders.**

 

We held our 2005 Annual Meeting ofShareholders on August 22, 2005. Set forth below are descriptions of thematters voted on at the meeting and the results of the votes taken at themeeting.

 

1. Election of Directors:

 
| **Name of Director**  | ** ** | **Votes For** | ** ** | **Votes  Withheld** | ** ** |
|-----------------------|------------|---------------|------------|---------------------|------------|
| ** **            | ** ** | ** **    | ** ** | ** **          | ** ** |
| Jochen Witte          |       | 23,008,013    |       | 793,272             |       |
|                  |       |          |       |                |       |
| Uday Bellary          |       | 22,864,639    |       | 936,646             |       |
|                  |       |          |       |                |       |
| Wiliam Henry Delevati |       | 22,887,894    |       | 913,391             |       |
|                  |       |          |       |                |       |
| Herbert May           |       | 22,896,230    |       | 905,055             |       |
|                  |       |          |       |                |       |
| Bernhard Woebker      |       | 23,015,863    |       | 785,422             |       |

 

2. Amendment to our Articles of Incorporationto effect a 1-for-10 reverse split of the Common Stock and a proportionatereduction in the number of authorized shares of Common Stock, Series APreferred Stock and undesignated Preferred Stock and reduce the number ofauthorized shares in proportion to the reverse split:

 

14

----

 
| **Votes For** | ** ** | **Votes  Against** | ** ** | **Vote  Abstained** | ** ** | **Broker  Non-Votes** |
|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|
| ** **    | ** ** | ** **         | ** ** | ** **          | ** ** | ** **            |
| 21,217,387    |       | 2,508,733          |       | 75,165              |       | —                |

 

3. Approval of the adoption of our 2005 Equity Incentive Plan:

 
| **Votes For** | ** ** | **Votes  Against** | ** ** | **Vote  Abstained** | ** ** | **Broker  Non-Votes** |
|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|
|          |       |               |       |                |       |                  |
| 10,480,847    |       | 1,563,899          |       | 545,948             |       | 11,210,591            |

 

4. Approval of the adoption of our 2005Directors Stock Option Plan:

 
| **Votes For** | ** ** | **Votes  Against** | ** ** | **Vote  Abstained** | ** ** | **Broker  Non-Votes** |
|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|
|          |       |               |       |                |       |                  |
| 9,404,113     |       | 2,638,706          |       | 547,875             |       | 11,210,591            |

 

5. Approval of the adoption of our 2005Employee Stock Purchase Plan:

 
| **Votes For** | ** ** | **Votes  Against** | ** ** | **Vote  Abstained** | ** ** | **Broker  Non-Votes** |
|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|
|          |       |               |       |                |       |                  |
| 11,276,643    |       | 775,076            |       | 538,975             |       | 11,210,591            |

 

6. Ratification of the appointment of GrantThornton LLP as our independent registered public accounting firm for fiscalyear 2005:

 
| **Votes For** | ** ** | **Votes  Against** | ** ** | **Vote  Abstained** | ** ** | **Broker  Non-Votes** |
|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|
|          |       |               |       |                |       |                  |
| 23,566,142    |       | 192,517            |       | 42,626              |       | —                |

 

**4A. Executive Officers and Directors of theRegistrant**

 

The following table identifies the executive officer and the directorsof Versant as of January 15, 2006:

 

15

----

 
| ** **                                  | ** ** | ** ** | ** ** | ** **                                                 | ** ** | **Director** | ** ** |
|---------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|--------------|------------|
| **Name of Director**                        | ** ** | **Age**    | ** ** | **Principal  Occupation**                                  | ** ** | **Since**    | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | ** **                                                 | ** ** | ** **   | ** ** |
| Jochen Witte                                |       | 45         |       | Director, President, Chief Executive and Financial Officer |       | 2004         |       |
|                                        |       |       |       |                                                       |       |         |       |
| Wiliam Henry Delavati (a) (b) (c) |       | 57         |       | Director and Chairman of the Board                         |       | 1999         |       |
|                                        |       |       |       |                                                       |       |         |       |
| Uday Bellary (a) (b) (c)          |       | 51         |       | Director                                                   |       | 2003         |       |
|                                        |       |       |       |                                                       |       |         |       |
| Herbert May (a) (b) (c)      |       | 56         |       | Director                                                   |       | 2004         |       |
|                                        |       |       |       |                                                       |       |         |       |
| Bernhard Woebcker                           |       | 56         |       | Director                                                   |       | 1999         |       |

 

----

(a) Memberof Audit Committee

(b) Memberof Compensation Committee

(c) Memberof Nominating Committee

 

***Jochen Witte*** hasbeen President, Chief Executive Officer, Chief Financial Officer and Secretaryof Versant since June 2005. Previously, Mr. Witte served asPresident, European Operations of Versant subsequent to Company’s merger withPoet Holdings, Inc. Mr. Witte is also a member of our board ofdirectors and responsible for Versant’s European operations. Prior to joiningVersant, Mr. Witte was the CEO of Poet Holdings Inc., which he co-foundedin 1993. He initially worked as the Managing Director of Germany and becamePoet’s Chief Financial Officer in 1999 when Poet went public. Prior to workingwith Poet, Mr. Witte was with BKS Software, where he rose to ManagingDirector after beginning with responsibility for sales and training. Mr. Wittereceived a degree in Business Administration from the Berlin TechnicalUniversity and also attended the University of Wales as an exchange student.

 

***William Henry Delevati***has been the Chairman of the Board since June 2005 and has served as adirector of Versant since October 1999 and is currently the Chairman ofthe Nominating Committee and a member of the Audit and Compensation Committees.Mr. Delevati has served as a consultant to various companies located inthe Silicon Valley area since April 2000. From October 1999 to April 2000,Mr. Delevati served as the Senior Vice President, Information Technologyand Chief Information Officer of Aspect Technology, an automated call devicecompany. From November 1995 to April 1999, Mr. Delevati servedas Vice President of Worldwide Information Services for Quantum Corporation, astorage device company. From April 1995 to November 1995, he was theChief Information Officer, Senior Vice President of MIS for Conner Peripherals,a storage device company. From September 1994 to April 1995, he wasthe Chief Information Officer, Vice President of Worldwide MIS for BorlandCorporation, a software tools company. From September 1993 to September 1994,he was the Chief Information Officer, Vice President of Worldwide MIS forLogitech, a computer peripheral device company. From December 1987 to September 1993,he was the Director of Application Development and Global Information Resourcesfor Sun Microsystems, Inc. Mr. Delevati received a Bachelor ofScience degree in Operations Research from Arizona State University.

 

***Uday Bellary*** hasserved as a director Versant and the Chairman of the Audit Committee of theboard of directors since July 2003 and is also a member of theCompensation and Nominating Committees. Mr. Bellary has served aspart-time CFO of Atrica, Inc. since April 2005, a privately heldoptical Ethernet company. Since September 2003, Mr. Bellary has alsoserved as part time Executive Vice President, Finance, Administration andOperations and Chief Financial Officer of VL, Inc., a privately held VoIPservices company, and as a member of its board of directors. Mr. Bellaryhas also been a member of the board of directors of Backweb Technologies Ltdsince July 2004. From February 2000 to August 2003, he served asthe Senior Vice President, Finance & Administration and ChiefFinancial Officer of Metro Optix, Inc., a privately held provider ofoptical networking equipment, which, to satisfy its liabilities, disposed ofits intellectual property and other assets to Xtera Communications and ceasedoperations in August of 2003.  From September 1997to October 1999, he served as Vice President of Finance and ChiefFinancial Officer of MMC Networks, Inc., a publicly traded manufacturer ofdata networking processors that was acquired by Applied Micro CircuitsCorporation in October 2000. Between February 1997 and September

 

16

----

 

1997, Mr. Bellary was Vice President, Finance & Administrationand Chief Financial Officer of DTM Corporation, a manufacturer ofcomputer-driven laser systems for industrial prototyping. Prior to that he heldvarious positions at Cirrus Logic, Inc., a semiconductor company, mostrecently as the Director of Finance, and prior to that he served in variousroles in international finance accounting and audit departments of IntelCorporation, a semiconductor company. Mr. Bellary received a B.S. degreein Finance, Accounting and Economics and a DMA degree in Finance from KarnatakUniversity, India. Mr. Bellary is a Certified Public Accountant and aChartered Accountant.

 

***Dr. Herbert May ***hasserved as a director of Versant since March 2004 and is currently theChairman of the Compensation Committee and a member of the Audit and NominatingCommittees of the board of directors. From November 2000 to March 2004he served as Chairman of the board of directors of Poet Holdings, Inc. Inaddition, Dr. May served as a member of both the Audit Committee andthe Compensation Committee of Poet Holdings, Inc. Dr. May hasheld several leading positions at Alcatel in both Stuttgart and Paris. His lastposition at Alcatel was Head of the Office of Communication Division. From February 1994to September 1995, Dr. May, acting in the position of Spokesman forthe Management Board, took a leading role as CEO in establishing DeTeSystems, aGerman wholly owned subsidiary of Deutsche Telekom AG that provides systemsolutions for telecommunications services to significant accounts in Germany.In 1995, he was appointed to the Board of Management of Deutsche Telekom AG,where he was responsible for large business customers, multimedia and systemssolutions until May 1998. Currently, Dr. May manages his ownconsulting and investment company and is a member of the advisory boards ofseveral IT and Multimedia companies. He currently serves on the board ofdirectors of InfoVista S.A., a publicly held French company that providessoftware products that monitor and analyze the performance of corporate ITinfrastructures.

 

***Bernhard Woebker***has served as a director of Versant since June 2005 and was previously adirector of Versant from June 1999 until our merger with Poet Holdings, Inc.in March 2004. Mr. Woebker has been a consultant to various investmentbanking and venture capital firms in Europe and the United States since late1999. From January 1999 until July 2001, he served as Executive VicePresident of the Company and from March 1997 until January 1999 heserved as our Vice President and General Manager in Europe. From 1994 to march 1997,he was the President of Versant Object Technology GmbH, an independently-owneddistributorship for Versant products in Europe, which was acquired by Versantin March 1997. From 1976 until 1994, Mr. Woebker held a variety ofpositions in Germany and the United States with Nixdorf Computer AG, NixdorfComputer Engineering Corp. and Siemens Nixdorf Informationssysteme AG, allinformation technology companies, including President and CEO of NixdorfComputer Engineering Corp. in Boston, Massachusetts from 1986 to 1989. Mr. Woebkerhas also served as Senior Vice President, Pyramid Technology Corp. in Europeand as Vice President, NeXT Computer, Inc. in Europe. Mr. Woebkerreceived a Masters of Science degree in Mathematics and Computer Science fromthe University of Hannover.

 

There is no arrangement or understandingbetween our executive officer and any other person pursuant to which anyexecutive officer was or is to be selected as an officer, except that Mr. Wittewas appointed to his current office in connection with our merger withPoet.  There is no family relationship between any of the foregoingexecutive officer or between any of such executive officer and any of themembers of our Board of Directors. Our executive officer serves at thediscretion of the Board.

 

**PART II**

 

**Item 5.  Market for Common Equity, Related Stockholder Matters andSmall Business Issuer Purchases of Equity Securities.**

 

***Price Range of Common Stock***

 

Our common stock is quoted on the Nasdaq CapitalMarket under the symbol “VSNT.”  Our common stock commenced trading on theNasdaq National Market on July 18, 1996.  From July 19, 1999until March 7, 2000, our common stock was traded on the Nasdaq CapitalMarket.  From March 8, 2000 until September

 

17

----

 

30, 2002, our common stock was traded on theNasdaq National Market. Our common stock has been traded on the Nasdaq CapitalMarket since October 1, 2002.  We requested that listing of itscommon stock be transferred to the Nasdaq Capital Market as of October 1,2002 due to the fact that it then seemed unlikely that, in the near term, wewould continue to be able to satisfy the listing criteria of the NasdaqNational Market System.  The following table lists the high and lowintra-day prices of our common stock reported on the Nasdaq Capital Market forthe periods indicated during the last two fiscal years. The prices shown belowhave been adjusted to reflect the 1-for-10 reverse split of our common stockthat became effective on August 22, 2005.

 
| **Fiscal year ended October 31,  2005** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
|                                    |       |     |       |    |       |
| Fourth quarter                          |       | $        | 4.40       |    | $          | 2.71 |   |
| Third quarter                           |       | $        | 6.80       |    | $          | 2.70 |   |
| Second quarter                          |       | $        | 9.60       |    | $          | 4.99 |   |
| First quarter                           |       | $        | 13.30      |    | $          | 6.60 |   |

 
| **Fiscal year ended October 31,  2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
|                                    |       |       |       |       |       |
| Fourth quarter                          |       | $          | 10.90      |       | $          | 6.00 |   |
| Third quarter                           |       | $          | 21.30      |       | $          | 9.80 |   |
| Second quarter                          |       | $          | 30.50      |       | $          | 13.90 |   |
| First quarter                           |       | $          | 26.00      |       | $          | 15.00 |   |

 

***Shareholders***

 

There were approximately 146 holders ofrecord of our common stock as of January 4, 2006.  We believe that asignificant number of beneficial owners of our common stock hold their sharesin street name.  Based on information available to us, we believe thatthere are at least 4,391 beneficial owners of our common stock.

 

***Dividend Policy***

 

We have neither declared nor paid any cashdividend on our common stock in the past. We intend to retain future earnings,if any, to fund development and growth of our business and, therefore, do notanticipate that we will declare or pay cash dividends on our common stock inthe foreseeable future.

 

In connection with our merger with Poet infiscal 2004, the holders of our then outstanding shares of Series APreferred Stock had their outstanding shares of Series A Preferred Stockconverted into shares of our common stock at an increased conversion rate ofthree shares (rather than two shares) of common stock per each share of Series APreferred Stock. In addition, the exercise price of certain common stockpurchase warrants held by such preferred shareholders was reduced from $21.30to $16.60 per share and the term of such warrants was extended by oneyear.  As a result of these actions, a deemed dividend in the amount ofapproximately $2.4 million was recorded during the three months ended April 30,2004. Please see Item 7 — “*Management’s Discussionand Analysis of Financial Condition and Results of Operations -Deemed Dividendto the Preferred Shareholders*”.

 

***Recent Sales of UnregisteredSecurities***

 

There were no issuances of unregisteredsecurities in fiscal 2005 that have not been reported previously in a quarterlyreport on Form 10-QSB or a current report on Form 8-K.

 

18

----

 

***Issuer Purchases of EquitySecurities***

 

No purchases of Versant equity securitieswere made by or on behalf of Versant in the fourth quarter of our fiscal yearended October 31, 2005.

 

**Item 6.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*As indicated in the paragraph above Item 1 inthis report, this Form 10-KSB (including this Item 6) contains certainforward-looking statements within the meaning of the Securities Exchange Actand the Securities Act.  In many cases you may identify theseforward-looking statements by words such as “will,” “should,” “may,” “might,” “believes,”“anticipates,” “expects,” “intends,” “estimates” and similar expressions. Theseforward-looking statements include, among other things, projections of ourfuture financial performance and trends anticipated for our business.  Wecaution investors that forward-looking statements are only predictions orestimates based upon our current expectations about future events.  Theforward-looking statements are not guarantees of future performance and aresubject to significant risks and uncertainties that are inherently difficult toassess and predict.  Our actual results and performance may differmaterially from the results and performance anticipated by any forward-lookingstatements due to these risks and uncertainties, some of which are discussedbelow in this Item 6 under the heading  “Risk Factors.” Readers are urgedto carefully review and consider the various disclosures made by us in thisreport and in our other reports filed with the Securities and ExchangeCommission that attempt to advise interested parties of the risks and factorsthat may affect our business.*

 

**Certain Industry Terms**

 

We have listed below, for reference purposes,certain technical terms that are well known and often used in ourindustry.  We have defined these terms here to assist readers in betterunderstanding the information provided in this report:

 

•                  RelationalDatabase - Data management software that stores data as tables and columns andcan be accessed using an industry standard language called SQL.

 

•                  ApplicationServer Software - Deployment software that is used to build and deploy Internetapplications including commercial websites and internal company websites.

 

•**                 **Cache -Performance enhancing software that works with servers to improve theirresponse times and throughput.

 

•                  IntegrationFramework - Bridging software that can connect two disparate pieces of softwaretogether.

 

•                  XML- A standard format used to exchange data (information) between multiplesoftware systems.

 

•                  Object-Oriented- object oriented refers to software that uses smaller building blocks calledobjects to create larger software systems.

 

•                  DataIntegration - Data integration is a broad term for a variety of techniques thatenable the data from one software system to be used in other software systems.

 

•                  Replication- a range of technical approaches that enable multiple databases to beapproximately synchronized, or to contain the same data.

 

19

----

 

•                  Diskmirroring - uses specialized software, and often specialized hardware, to getthe same data on two storage disks for the purpose of increasing thereliability or making a quick snapshot (duplicate backup) of a database.

 

•                  Faulttolerant server - a server that offers higher reliability by the use ofduplicated hardware and specialized software. In the case of a failure of onedatabase, the surviving database can continue offering normal service.

 

•                  J2EE-based- an application or software component that is deployed in a Java 2 EnterpriseEdition (J2EE) software environment.

 

•                  Zero-administration- An application that has been constructed so that no intervention from aDatabase Administrator is required.

 

•                  Native-Applicationsare constructed from a large number of individual software pieces. Theconstruction is usually easier and resulting application more reliable when thesoftware pieces are built using the same software language, withcompatible interaction methods, and running on the same operating system. Theseinteractions would be called “native”. In the less-desirable case, there willthe need for conversions and adaptations, and the interactions could be called “non-native”.

 

***Background and Overview***

 

We design, develop, market and support highperformance object database management, data access and data integrationsoftware systems and provide related services to address the complex datamanagement needs of enterprises and providers of products requiring datamanagement functions.  Our products and services collectively comprise oursingle operating segment, which we call “Data Management”.

 

Our products are typically used by customersto manage data for business systems to enable these systems to access andintegrate data necessary for their data management applications. Our datamanagement products and services offer customers the ability to managereal-time, XML and other types of hierarchical and navigational data. Webelieve that by using our data management solutions, customers cut hardwarecosts, accelerate and simplify development, significantly reduce administrationcosts and deliver products with a significant competitive edge.

 

Our Data Management business is currentlycomprised of the following key products:

 

•*        VersantObject Database,*previously VDS, a seventh generation object databasemanagement system that is used in high-performance large-scale real-timeapplications. Our former product, Versant enJin, has been replaced by Versant ObjectDatabase using Java Data Object (JDO) and the Java Persistence API languageinterface.

 

•*        FastObjects*,an object-oriented database management system that can be embedded as a highperformance component into customers’ applications and systems.

 

Our Versant Object Database product offeringsare used primarily by larger organizations, such as technology providers,telecommunications carriers, government defense agencies and defensecontractors, healthcare companies and companies in the financial services andtransportation industries, each of which have significant large-scale datamanagement requirements. Versant JDO, a product that we introduced last year,as part of the technology we acquired in June 2004 from JDO Genie, has nowbeen absorbed and integrated into the Versant product family and no longer soldas standalone product. With the incorporation

 

20

----

 

of Poet’s FastObjects solution into ourproduct line following our March 2004 merger with Poet, we have expandedthe scope of our solutions to also address data management needs of smallerbusiness systems.

 

Our customers’ data management needs caninvolve many business functions, ranging from management of the use and sharingof a company’s internal enterprise data to the processing of externallyoriginated information such as customer enrollment, billing and paymenttransaction data. Our solutions have also been used to solve complex datamanagement issues such as fraud detection, risk analysis and yield management.

 

In addition to our product offerings, toassist users in developing and deploying applications based on Versant ObjectDatabase and FastObjects, we offer a variety of services, including consulting,training and technical support services. We also offer a dedicated consultingpractice for IBM WebSphere customers. Under our agreement with IBM, signed inlate 2000 and renewed most recently in August 2004, we jointly marketservices and outsource our consultants to IBM to provide such services.

 

We license our products and sell associatedmaintenance, training and consulting services to end-users through our directsales force and through value-added resellers, systems integrators anddistributors. The sale of services is an important aspect of our business.  During the fiscal year ended October 31,2005 and 2004, 57% and 58% of our revenues, respectively, were derived fromservices.

 

In addition to these products and services,we resell related software developed by third parties. To date, substantiallyall of our revenues have been derived from the following data managementproducts and related services:

 

•                  salesof licenses for Versant Object Database, FastObjects, and to a much lesserextent, Versant Open Access;

•                  maintenanceand technical support services for our products;

•                  consultingservices (Versant and Poet consulting practice and dedicated IBM WebSphereconsulting practice) and training services;

•                  nonrecurringengineering fees received in connection with providing services associated withVersant Object Database;

•                  theresale of licenses, and maintenance, training and consulting services forthird-party products that complement Versant Object Database;

•                  reimbursementsreceived for out-of-pocket expenses, which we incurred and are recorded asrevenues in our statement of operations.

 

**Selected Consolidated Financial Data**

 

The selected historical financial datapresented below are derived from the consolidated financial statements ofVersant Corporation. The selected consolidated financial data set forthbelow is qualified in its entirely by, and should be read in conjunction with, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andthe Consolidated Financial Statements of Versant and notes thereto includedelsewhere in this report.

 

It should also be noted that since we changedour fiscal year end from December 31 to October 31 in 2001, itstransition period in 2001 is presented only for a ten months period, whichimpacts the comparability of the selected consolidated financial data. Inaddition, in its fiscal 2004, we completed a merger with Poet on March 18,2004, which increased our revenues and operating expenses for part of fiscal2004 and substantially increased the number of outstanding shares at fiscalyear-ends for purposes of computing net loss per share in fiscal 2004. Weincurred restructuring charges of approximately $638,000 and $3.3 million forfiscal 2005 and 2004, respectively, and a charge of approximately $12.9 millionand $1.0 million related to impairment of goodwill and intangible assets forfiscal 2005 and 2004, respectively.  Each of the above has an impact onthe comparability of the financial data presented in Item 6 of this report.

 

21

----

 
| ** **                                                               | ** ** | **Fiscal Year Ended October 31,** | ** ** | **Ten Months  Ended October 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Consolidated statement of operation data:**                            |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Revenues:**                                                            |       |                                   |       |                                   |       |   |   |   |   |   |   |
| License                                                                  |       | $                                      | 8,828      |                                   | $          | 9,686 |   | $ | 9,082 |   | $ | 10,106 |   | $ | 7,362 |   |
| Maintenance                                                              |       | 6,305                                  |       | 6,783                                  |       | 6,076 |   | 5,300 |   | 5,135 |   |
| Professional services                                                    |       | 5,376                                  |       | 6,406                                  |       | 6,901 |   | 4,550 |   | 11,412 |   |
| Total revenues                                                           |       | 20,509                                 |       | 22,875                                 |       | 22,059 |   | 19,956 |   | 23,909 |   |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Cost of revenues:**                                                    |       |                                   |       |                                   |       |   |   |   |   |   |   |
| License                                                                  |       | 274                                    |       | 457                                    |       | 843 |   | 902 |   | 634 |   |
| Amortization of intangible assets                                        |       | 671                                    |       | 698                                    |       | 91 |   | — |   | — |   |
| Maintenance                                                              |       | 1,456                                  |       | 1,516                                  |       | 1,312 |   | 1,291 |   | 1,191 |   |
| Professional services                                                    |       | 5,164                                  |       | 5,858                                  |       | 6,011 |   | 4,041 |   | 10,546 |   |
| Total cost of revenues                                                   |       | 7,565                                  |       | 8,529                                  |       | 8,257 |   | 6,234 |   | 12,371 |   |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Gross profit                                                             |       | 12,944                                 |       | 14,346                                 |       | 13,802 |   | 13,722 |   | 11,538 |   |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Operating expenses:**                                                  |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Sales and marketing                                                      |       | 5,815                                  |       | 8,051                                  |       | 7,703 |   | 7,854 |   | 8,482 |   |
| Research and development                                                 |       | 3,925                                  |       | 5,137                                  |       | 4,340 |   | 5,835 |   | 5,464 |   |
| General and administrative                                               |       | 4,687                                  |       | 4,514                                  |       | 4,471 |   | 3,440 |   | 2,985 |   |
| Amortization of goodwill                                                 |       | —                                 |       | —                                 |       | — |   | 202 |   | 396 |   |
| Impairment of goodwill                                                   |       | 10,300                                 |       | 707                                    |       | — |   | — |   | 555 |   |
| Impairment of intangibles                                                |       | 2,613                                  |       | 317                                    |       | — |   | — |   | — |   |
| Restructuring                                                            |       | 638                                    |       | 3,271                                  |       | — |   | — |   | 668 |   |
| Total operating expenses                                                 |       | 27,978                                 |       | 21,997                                 |       | 16,514 |   | 17,331 |   | 18,550 |   |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Loss from operations                                                     |       | (15,034                                | )          | (7,651                                 | )          | (2,712 | ) | (3,609 | ) | (7,012 | ) |
| Variable interest, net                                                   |       | 320                                    |       | —                                 |       | — |   | — |   | — |   |
| Other income (loss), net                                                 |       | 197                                    |       | 119                                    |       | 397 |   | 287 |   | (53 | ) |
| Loss from continuing operations before taxes and  deemed dividend        |       | (14,517                                | )          | (7,532                                 | )          | (2,315 | ) | (3,322 | ) | (7,065 | ) |
| Provision for income taxes                                               |       | 37                                     |       | 88                                     |       | 74 |   | 68 |   | 93 |   |
| Net loss from continuing operations before deemed  dividend              |       | (14,554                                | )          | (7,620                                 | )          | (2,389 | ) | (3,390 | ) | (7,158 | ) |
| Deemed dividend to preferred shareholders                                |       | —                                 |       | (2,422                                 | )          | — |   | — |   | — |   |
| Net loss from continuing operations attributable to  common shareholders |       | (14,554                                | )          | (10,042                                | )          | (2,389 | ) | (3,390 | ) | (7,158 | ) |
| Loss from discontinued operations, net of income tax                     |       | —                                 |       | (1,646                                 | )          | — |   | — |   | — |   |
| Loss from sale of discontinued operations, net of  income tax            |       | —                                 |       | (309                                   | )          | — |   | — |   | — |   |
| Net loss                                                                 |       | $                                      | (14,554    | )                                      | $          | (11,997 | ) | $ | (2,389 | ) | $ | (3,390 | ) | $ | (7,158 | ) |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Net loss per share:**                                                  |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Basic & diluted                                                 |       | $                                      | (4.11      | )                                      | $          | (3.85 | ) | $ | (1.75 | ) | $ | (2.76 | ) | $ | (5.94 | ) |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Shares used in per share calculation:**                                |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Basic & diluted                                                 |       | 3,539                                  |       | 3,117                                  |       | 1,368 |   | 1,227 |   | 1,204 |   |
|                                                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Non-cash stock-based compensation included in  the above expenses:**   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Cost of revenues                                                         |       | $                                      | 27         |                                   | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Sales and marketing                                                      |       | 12                                     |       | 25                                     |       | 5 |   | — |   | — |   |
| Research and development                                                 |       | 44                                     |       | 25                                     |       | — |   | — |   | — |   |
| General and administrative                                               |       | 13                                     |       | 36                                     |       | 1,204 |   | — |   | 22 |   |
| Total                                                                    |       | $                                      | 96         |                                   | $          | 86 |   | $ | 1,209 |   | $ | — |   | $ | 22 |   |

 
| ** **                                         | ** ** | **As of October 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Consolidated  balance sheet data:**              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and short-term investments |       | $                          | 3,958      |   | $ | 3,313 |   | $ | 2,991 |   | $ | 4,427 |   | $ | 4,101 |   |
| Restricted  cash                                   |       | —                     |       | 320 |   | 320 |   | — |   | — |   |
| Working  capital                                   |       | 870                        |       | 1,311 |   | 602 |   | 2,326 |   | 3,664 |   |
| Total assets                                       |       | 16,246                     |       | 32,545 |   | 11,069 |   | 11,921 |   | 15,370 |   |
| Total  long-term liabilities                       |       | 897                        |       | 1,400 |   | 392 |   | 901 |   | 634 |   |
| Total  liabilities and stockholder’ equity    |       | 16,246                     |       | 32,545 |   | 11,069 |   | 11,921 |   | 15,370 |   |
|                                                    |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Financial Highlights for Fiscal2005***

 

•                  Ournet revenues in fiscal 2005 were $20.5 million, a 10.3% decrease from netrevenues of $22.9 million in fiscal 2004. This decrease is primarily due tochanges in market conditions in our North America region and management changesin our sales organization.

 

22

----

 

•                  Ournet loss increased by 21.3% from $12.0 million in fiscal 2004 to $14.6 millionin fiscal 2005. In fiscal 2005, we incurred impairment charges of $12.9 millionrelated to the write downs of goodwill and intangible assets and restructuringcharges of $638,000, compared to impairment charges of $1.0 million forgoodwill and intangible assets and restructuring charges of $3.3 million infiscal 2004.

 

•                  Ourcombined sales and marketing, research and development and general andadministrative expenses decreased by $3.3 million (or 18.5%), or from $17.7million in fiscal 2004 to $14.4 million in fiscal 2005, due to cost reductionsas a result of our restructuring activities.

 

•                  Cashprovided by operations in fiscal 2005 was $485,000, compared to $6.5 million ofcash used in operations in fiscal 2004. During fiscal 2005, our cash and cashequivalents balance increased by approximately $700,000 to $4.0 million at October 31,2005, compared to $3.3 million at October 31, 2004.

 

***Fiscal 2005 and Beyond***

 

During fiscal 2005, our primary focus was onthe following areas:

 

•                  Fullintegration of Poet and FastObjects database access technologies into ourVersant Object Database product line.

 

•                  Initiationand execution on a multi-element restructuring plan to refocus Versant on itscore object database business.

 

•                  TheSpin-off of tangible assets, technology rights and contracts related to ourVersant Open                Access.NET (“VOA.NET”)business to Vanatec GmbH, a privately held company based in Germany, pursuantto the above-mentioned restructuring plan.

 

We nevertheless remained committed in ourongoing sales, marketing and research and development activities to sustain andgrow our revenues from our software products and services.

 

We expect to derive most of our revenues infiscal 2006 from Versant Object Database and FastObjects licenses and relatedservices. We continue to experience significant quarterly fluctuations in ourtotal revenues and believe this trend, which is similar to many companies inour industry, will continue in fiscal 2006.

 

Like many other software companies, we do notoperate with a significant backlog of orders. Our license revenues, inparticular, are difficult to forecast. Information technology spending,particularly in the U.S., has been relatively depressed over the recent yearsand customers manifest very conservative purchasing behavior. We expect amodest growth in our license and maintenance revenues and some improvements inthe North America region in fiscal 2006. We anticipate that our internationalrevenues, mainly from Europe, will continue to moderately increase as a percentageof our total revenues in the future as the European market for our productscontinues to improve.

 

We expect our sales and marketing, research and development and generaland administrative expenses in fiscal 2006 to modestly decline compared tofiscal 2005, due to the restructuring plan that we announced on June 14,2005 and began to implement during the remainder of fiscal 2005. We will adoptthe principles of SFAS 123(R) during fiscal 2006, which will require theCompany to reflect the fair value of stock-based compensation as expenses.Consequently, we expect the adoption of SFAS 123(R) to adversely impact ouroperating expenses in fiscal 2006.

 

23

----

 

**Critical Accounting Policies and Estimates**

 

The preparation of our consolidated financialstatements requires us to make estimates and judgments that affect the reportedamount of the assets and liabilities at the date of the financial statementsand of the revenues and expenses during the reporting period.  We basethese estimates and judgments on information reasonably available to us, suchas our historical experience and trends and industry, economic and seasonalfluctuations, and on our own internal projections that we derive from thatinformation.  Although we believe our estimates to be reasonableunder the circumstances, there can be no assurances that such estimates will beaccurate given that the application of these accounting policies necessarilyinvolves the exercise of subjective judgment and the making of assumptionsregarding future uncertainties.  We consider “critical” those accountingpolicies that require our most difficult, subjective or complex judgments, andthat are the most important to the portrayal of our financial condition andresults of operations.  These critical accounting policies relate torevenue recognition, goodwill and acquired intangible assets, the determinationof allowance for doubtful accounts, determination of stock-based compensation,restructuring charges, and income taxes.

 

***Revenue Recognition***

 

We recognize revenues in accordance with theprovisions of Statement of Position (SOP) 97-2, *SoftwareRevenue Recognition,* SOP 98-9, Modification of SOP 97-2*, Software Revenue Recognition with Respect to Certain Transactions,*andSOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*. Revenues consist mainly ofrevenues earned under software license agreements, maintenance supportagreements (otherwise known as post-contract customer support, “PCS”), andagreements for consulting and training activities.

 

We use the residual method to recognizerevenues when a license agreement includes one or more elements to be deliveredat a future date.  If there is an undelivered element under thelicense arrangement, we defer revenues based on vendor-specific objectiveevidence, or VSOE, of the fair value of the undelivered element, as determinedby the price charged when the element is sold separately. If VSOE of fair valuedoes not exist for all undelivered elements of a transaction, we defer allrevenues from that transaction until sufficient evidence exists or all elementshave been delivered. Under the residual method, discounts are allocated only tothe delivered elements in a multiple element arrangement, with any undeliveredelements being deferred based on the vendor-specific objective evidence of thevalue of such undelivered elements. We typically do not offer discounts onfuture undeveloped products.

 

Revenues from software license arrangements,including prepaid license fees, are recognized when all of the followingcriteria are met:

 

•                  Persuasiveevidence of an arrangement exists.

•                  Deliveryhas occurred and there are no future deliverables except PCS.

•                  Feeis fixed and determinable. If we cannot conclude that a fee is fixed anddeterminable, then assuming all other criteria have been met, revenues arerecognized as payments become due in accordance with paragraph 29 of SOP 97-2;

•                  Collectionis probable. Probability of collection is assessed using the following customerinformation: credit service reports, bank and trade references, public filings,and/or current financial statements.  Prior payment experience is reviewedon all existing customers.  Payment terms in excess of our standard paymentterms of 30-90 days net are granted on an exception basis, typically insituations where customers elect to purchase development and deploymentlicenses simultaneously for an entire project and are attempting to align theirpayments with their deployment schedules. Extended payment terms are onlygranted to customers with a proven ability to pay at the time the order isreceived, and with prior approval of our senior management. In accordance withparagraph 27 of SOP 97-2, we have an established history of collection, withoutconcessions, on longer-term receivables. We typically do not grantextended payment terms beyond 90 days.

 

24

----

 

If an acceptance period or other contingencyexists, revenues are not recognized until customer acceptance or expiration ofthe acceptance period, or satisfaction of the contingency, as applicable. Ourlicense fees are non-cancelable and non-refundable and we do not makeconcessions or grant a refund for any unused amount. Also, our customeragreements for prepaid deployment licenses do not make payment of our licensefees contingent upon the actual deployment of its software. Therefore, acustomer’s delay or acceleration in its deployment schedule does notimpact our revenue recognition. Revenues from related PCS for all product linesare usually billed in advance of the service being provided and are deferredand recognized on a straight-line basis over the term of the PCS, which isgenerally twelve months. In some cases PCS revenues are paid in arrears of theservice being provided and are recognized as revenues at the time the customerprovides a report to us for deployments made during a given time period.Training and consulting revenues are recognized when a purchase order isreceived, the services have been performed and collection is deemedprobable.  Consulting services are billed on an hourly, daily or monthlyrate.  Training classes are billed based on group or individualattendance.

 

We categorize our customers into two broadgroups, End-Users and Value Added Resellers (VARs). End User customers arecompanies who use our products internally and do not redistribute the productoutside of their corporate organizations. VAR customers include traditionalValue Added Resellers, Systems Integrators, OEMs and other vendors whoredistribute our products to their external third party customers, eitherindividually or as part of an integrated product. We license our datamanagement products through two types of perpetual licenses—development andtest licenses and deployment licenses. Development and test licenses aretypically sold on a per seat basis and authorize a customer to develop and testan application program that uses our software product. Before an End-Usercustomer may deploy an application that it has developed under our developmentlicense, it must purchase deployment licenses based on the number of computersconnected to the server that will run the application using our databasemanagement system.  For certain applications, we offer deployment licensespriced on a per user basis.  Pricing of Versant Object Database andFastObjects licenses varies according to several factors, including the numberof computer servers on which the application runs and the number of users thatare able to access the server at any one time.  Customers may elect tosimultaneously purchase development and deployment licenses for an entireproject. These development and deployment licenses may also provide forprepayment of a nonrefundable amount for future deployment*.*

 

VARs and distributors purchase developmentlicenses from us on a per seat basis on terms similar to those of developmentlicenses sold directly to End-Users.  VARs are authorized to sublicensedeployment copies of our data management products that are either bundled orembedded in the VAR’s applications and sold directly to End-Users.  VARsare required to report their distribution of our software and are charged aroyalty that is based either on the number of copies of our applicationsoftware that are distributed or computed as a percentage of the selling pricecharged by the VARs to their end-user customers. These royalties from VARs maybe prepaid in full or paid upon deployment. Provided that all other conditionsfor revenue recognition have been met, revenues from arrangements with VARs arerecognized, (i) as to prepaid license arrangements, when the prepaidlicenses are sold to the VARs, and (ii) as to other license arrangements,at the time the VAR provides a royalty report to us for sales made by the VARduring a given period.

 

Revenues from the resale of third-partyproducts or services are recorded at total contract value with thecorresponding cost included in the cost of sales when we act as a principal inthese transactions by assuming the risks and rewards of ownership (includingthe risk of loss for collection, delivery or returns). When we do not assumethe risks and rewards of ownership, revenues from the resale of third-partyproducts or services are recorded at contract value net of the cost of sales.

 

In rare cases that a customer requestsengineering work for porting our products to an unsupported platform orcustomization of our software for specific functionality, or any othernon-routine technical work, we recognize revenues in accordance with SOP 81-1and use either time and material percentage of completion or completed contractmethods for recognizing revenues.  We use the percentage of completionmethod if we can make reasonable and dependable estimates of labor costs andhours required to complete the work in question.  We periodically reviewthese estimates in connection with work performed and rates actually

 

25

----

 

charged and recognize any losses when identified. Progress to completion is determined using the cost-to-cost method, wherebycost incurred to date as a percentage of total estimated cost determines thepercentage completed and revenue recognized.  When using the percentage ofcompletion method, the following conditions must exist:

 

•                  Anagreement must include provisions that clearly specify the rights regardinggoods or services to be provided and received by both parties, theconsideration to be exchanged and the manner and terms of settlement.

•                  Thecustomers are able to satisfy their obligations under the contract.

•                  Versantis able to satisfy its obligations under the contract.

 

The completed contract method is used whenreasonable or dependable estimates cannot be made. As a result, in such situations,we defer all revenues until such time that the work is fully completed.

 

Management makes significant judgments andestimates in connection with the determination of the revenue recognized ineach accounting period. If we had made different judgments or utilizeddifferent estimates for any period, material differences in the amount andtiming of revenue recognized would have resulted.

 

***Goodwill and AcquiredIntangible Assets***

 

We account for purchases of acquiredcompanies in accordance with SFAS No. 141, *BusinessCombinations* and account for the related acquired intangible assetsin accordance with SFAS No. 142, *Goodwill and OtherIntangible Assets*.  In accordance with SFAS 141, we allocatethe cost of the acquired companies to the identifiable tangible and intangibleassets acquired according to their respective fair values as of the date ofcompletion of the acquisition, with the remaining amount being classified asgoodwill.  Certain intangible assets, such as “acquired technology,” areamortized to expense over time, while in-process research and development costs(“IPR&D”), if any, are charged to operations expenditures at the time ofacquisition.

 

We test for any goodwill impairment withinour single Data Management operating segment. All our goodwill has beenaggregated from, and acquired in connection with, the following acquisitions:

 

•                  VersantEurope, acquired in 1997;

•                  PoetHoldings, Inc., acquired in March 2004;

•                  Technologyof JDO Genie (PTY) Ltd, acquired in June 2004; and

•                  FastObjects, Inc.,acquired in July 2004.

 

We test goodwill for impairment in accordancewith SFAS 142, which requires that goodwill be tested for impairment at thereporting unit level, at least annually and more frequently upon the occurrenceof certain events, as provided in SFAS 142. We use the market approach toassess the fair value of our assets and this value is compared with thecarrying value of those assets to test for impairment. The total fair value ofour assets is estimated by summing the fair value of our equity, less ourliabilities. Under this approach, if the estimated fair value of our assets isgreater than the carrying value of these assets, then there is no goodwillimpairment.  If the estimated fair value of our assets is less than thecarrying value of these assets, then we allocate the reporting unit’s estimatedfair value to its assets and liabilities as though the reporting unit had justbeen acquired in a business combination. The impairment loss is the amount, ifany, by which the implied fair value of goodwill allocable to the reportingunit is less than that reporting unit’s goodwill carrying amount and would berecorded in operation results during the period of such impairment.

 

As required by SFAS 142, we ceased amortizinggoodwill effective November 1, 2002.  Prior to November 1, 2002,we amortized goodwill over five years using the straight-line method. Identifiable intangibles are currently amortized over five years in relation tothe JDO Genie (PTY) Ltd acquisition, six

 

26

----

 

years in relation to the FastObjects, Inc.acquisition, and seven years in relation to our acquisition of Poet, using thestraight-line method in each of these cases.

 

In July 2005, we performed an evaluationof our goodwill and intangible assets based on the requirements of SFAS 142 andSFAS 144. As a result of this impairment test and valuation analysis, wedetermined that the value of our goodwill and intangible assets had beenimpaired and recorded impairment charges of $10.3 million and $2.6 millionagainst our goodwill and intangible asset related to Poet and FastObjectsacquisition, respectively.

 

***Allowance for Doubtful Accounts***

 

We make judgments as to our ability to collect outstanding accountsreceivable and provide an allowance for a portion of our accounts receivable ifcollection becomes doubtful. We also make judgments about the creditworthinessof our customers, based on ongoing credit evaluations and the aging profile ofcustomers’ accounts receivable as well as the current economic trends thatmight impact the level of credit losses in the future. Historically, ourallowance for doubtful accounts has been sufficient to cover our actual creditlosses. However, since we cannot predict changes in the financial stability ofour customers, we cannot guarantee that our allowance will continue to besufficient. If actual credit losses exceed the allowance that we haveestablished, it would increase our operating expenses and reduce our reportednet income or increase our net loss. We evaluate and revise our bad debtallowance as part of our quarter end process at each subsidiary and corporatelevel. Our management assigns a risk factor and percentage of risk to eachaccount receivable, the collection of which is considered non-routine. We alsoassign a general reserve to all our overdue accounts, excluding the non-routineitems.  Our allowance for doubtfulaccounts amounted to $114,000, or 4% of gross accounts receivable, at October 31,2005, and $368,000, or 7% of gross accounts receivable, at October 31,2004. The reduction in the allowance for doubtful accounts at October 31,2005 as compared to October 31, 2004, resulted from a continued favorablecollection history that we experienced during the past fiscal year.

 

## ***Stock-Based Compensation Expense***

 

We have elected to account for compensation expense related to stockoptions issued to employees in accordance with the intrinsic value method asprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB 25). Under APB25, compensation expense for fixed stock options is based on the differencebetween the market value of our stock and the exercise price of the option onthe date of grant, if any. This election is available to companies under SFAS No. 123,*Accounting for Stock-Based Compensation*(SFAS 123).

 

In December 2004, FASB revised SFAS No. 123 and issued SFASNo.123(R), *Share-Based Payment*, which requirescompanies to expense the estimated fair value of employee stock options andsimilar awards. In March 2005, the SEC staff issued Staff AccountingBulletin No. 107 (SAB 107). SAB 107 creates a framework that is premisedon two overarching themes: (a) considerable judgment will be required bypreparers to successfully implement SFAS 123(R), specifically when valuingemployee stock options; and (b) reasonable individuals, acting in goodfaith, may conclude differently on the fair value of employee stock options. Wewill apply the principles of SAB 107 in conjunction with our adoption of SFAS123(R) in fiscal 2006. We expect that the adoption of SFAS 123(R) to have anadverse impact on our net income (or loss) and net income (or loss) per share.

 

***Restructuring***

 

We have streamlined and restructured our operations from time to timein the past. Our restructuring expenses and accruals require significantestimates by management using the best information available at the time. Theseestimates include: facility exit costs such as demise and lease terminationcosts; timing of future sublease occupancy; sublease income based on expectedfuture market conditions; and other fees associated with our restructuringexpenses, such as brokerage fees.

 

27

----

 

We evaluate a number of factors to determine the appropriateness andreasonableness of our restructuring accruals on a regular basis. Such factorsinclude, but are not limited to, available market data, information from thirdparty real estate brokers, and ongoing negotiations in order to estimate thelikelihood, timing, lease terms and rates to be realized from potentialsubleases of restructured facilities held under operating leases. In addition,our restructuring estimates for facilities could be materially and adverselyimpacted by the financial condition of sub-lessees and changes in their abilityto meet their financial obligations throughout the term of any subleaseagreement. The impact of these estimated costs and sublease proceeds aresignificant factors in determining the appropriateness of our restructuringaccrual balance presented in our Consolidated Balance Sheet at October 31,2005. Our actual expenses may differ significantly from our estimates and assuch, may require adjustments to our restructuring accruals, which will impact ouroperating results in future periods.

 

During the third quarter of fiscal 2005, wecommitted to and began implementing a restructuring program to realign ourresources to refocus the company on our Versant Object Database product. As aresult, we recorded total restructuring charges of $638,000 ($280,000 of whichis related to severance costs) for the fiscal year ended October 31, 2005.

 

***Income Taxes***

 

We must estimate our income taxes in each ofthe jurisdictions in which we operate as part of the preparation of ourconsolidated financial statements. This process involves estimating our actualcurrent tax expense as well as assessing temporary differences resulting fromdiffering treatment of items, such as depreciation and amortization, forfinancial and tax reporting purposes. These differences result in deferred taxassets and liabilities, which are included in our consolidated balance sheet tothe extent deemed realizable. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and the extentwe believe that recovery is not likely. We must establish a valuation allowanceagainst our U.S. net deferred tax assets. If we establish a valuation allowanceor increase it in a given period, then we must increase the tax provision inour statement of operations.

 

Significant management judgment is required in determining ourprovision for income taxes, our deferred tax assets and liabilities, and anyvaluation allowance recorded against our net deferred tax assets. Due touncertainties related to our ability to utilize our deferred tax assets, wehave established full valuation allowances at October 31, 2005 for ourdeferred tax assets.

 

**Results of Operations**

 

The acquisitions of Mokume, Poet, the JDO Genie assets and FastObjects, Inc.became effective on November 19, 2002, March 18, 2004, June 30,2004 and July 6, 2004, respectively. Therefore, our consolidatedstatements of operations for fiscal 2003 and 2004 incorporated the results fromthe effective dates of the respective acquisitions.

 

The following table sets forth the historical results of operations forVersant expressed as a percentage of total revenues.

 

28

----

 
| ** **                                                               | ** ** | **Percentage of Revenues  Fiscal year ended October 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                     |       |                                                           |       |   |   |   |   |
| Revenues:                                                                |       |                                                           |       |   |   |   |   |
| License                                                                  |       | 43                                                             | %          | 42 | % | 41 | % |
| Maintenance                                                              |       | 31                                                             |       | 30 |   | 28 |   |
| Professional  services                                                   |       | 26                                                             |       | 28 |   | 31 |   |
| Total  revenue                                                           |       | 100                                                            | %          | 100 | % | 100 | % |
|                                                                     |       |                                                           |       |   |   |   |   |
| Cost of revenues:                                                        |       |                                                           |       |   |   |   |   |
| License                                                                  |       | 1                                                              |       | 2 |   | 4 |   |
| Amortization  of intangible assets                                       |       | 3                                                              |       | 3 |   | 0 |   |
| Maintenance                                                              |       | 7                                                              |       | 7 |   | 6 |   |
| Professional  services                                                   |       | 26                                                             |       | 26 |   | 27 |   |
| Total cost  of revenue                                                   |       | 37                                                             | %          | 38 | % | 37 | % |
|                                                                     |       |                                                           |       |   |   |   |   |
| Gross profit margin                                                      |       | 63                                                             | %          | 62 | % | 63 | % |
|                                                                     |       |                                                           |       |   |   |   |   |
| Operating expenses:                                                      |       |                                                           |       |   |   |   |   |
| Marketing  and sales                                                     |       | 28                                                             |       | 35 |   | 35 |   |
| Research and  development                                                |       | 19                                                             |       | 22 |   | 20 |   |
| General and  adminstrative                                               |       | 23                                                             |       | 20 |   | 20 |   |
| Impairment  of goodwill                                                  |       | 50                                                             |       | 3 |   | 0 |   |
| Impairment  of intangibles                                               |       | 13                                                             |       | 1 |   | 0 |   |
| Restructuring                                                            |       | 3                                                              |       | 14 |   | 0 |   |
| Total  operating expenses                                                |       | 136                                                            | %          | 95 | % | 75 | % |
| Loss from operations                                                     |       | -73                                                            | %          | -33 | % | -12 | % |
| Variable  interest, net                                                  |       | 2                                                              |       | 0 |   | 0 |   |
| Other  income(loss), net                                                 |       | 1                                                              |       | 1 |   | 2 |   |
| Loss from  continuing operations before taxes and deemed dividend        |       | -70                                                            | %          | -32 | % | -10 | % |
| Provision for income taxes                                               |       | 0                                                              |       | 0 |   | 0 |   |
| Net loss from continuing operations before  deemed dividend              |       | -70                                                            | %          | -32 | % | -10 | % |
| Deemed dividend to preferred shareholders                                |       | 0                                                              |       | -11 |   | 0 |   |
| Net loss  from continuing operations attributable to common shareholders |       | -70                                                            | %          | -43 | % | -10 | % |
| Loss from discontinued operations, net of  income tax                    |       | 0                                                              |       | -7 |   | 0 |   |
| Loss from sale of discontinued operations,  net of income tax            |       | 0                                                              |       | -1 |   | 0 |   |
| Net loss                                                                 |       | -70                                                            | %          | -51 | % | -10 | % |

 

### **Revenues**

 

***Total Revenues***:The following table summarizes total revenues (in thousands, exceptpercentages) for fiscal 2005, 2004 and 2003:

 
| ** **     | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|----------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **     | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| ** **     | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues |       | $                                      | 20,509     |                                         | $          | 22,875                                       |       | $ | 22,059 |   | $ | (2,366 | ) | -10 | % | $ | 816 |   | 4 | % |
|                |            |                                        |            |                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total revenues are comprised of license fees, maintenance, training,consulting, technical and other support services. Fluctuations in our totalrevenues can be attributed to changes in product and customer mix, generaltrends in information technology spending, changes in geographic mix, and thecorresponding impact of changes in foreign exchange rates. Further, productlife cycles impact revenues periodically as old contracts expire and newproducts are released.

 

29

----

 

Our total revenues declined $2.4 million (or 10%) in fiscal 2005compared to fiscal 2004. Our total revenues increased $816,000 (or 4%) infiscal 2004 compared to fiscal 2003.

 

Like many other enterprise software companies, we do not operate with asignificant backlog of orders. Information Technology spending in general hasbeen considerably depressed over the recent years and customers’ purchasingbehavior has changed to a more “as needed” approach, which makes it even moredifficult for us to forecast our revenues. Therefore, the inherentlyunpredictable business cycle of an enterprise software company together withthe cautious consumer behavior in the macro-economic environment, make discernmentof continued and meaningful business trends more difficult. We expect, however,that maintenance revenues will grow modestly in fiscal 2006. In terms oflicense revenues, we are still experiencing extremely cautious behaviors in ITpurchasing in North America: lengthy sales cycles and customers’ preference forlicensing our software on an “as needed” basis, versus the historical practiceof prepaying license fees in advance of usage, are factors adversely affectingour license revenues. This trend is more apparent in the telecommunications andtechnology industries. We expect our international revenues to be modestlyhigher in fiscal 2006.

 

***Revenues by Geographic Area****:* The following table summarizes total revenues bygeographic area (in thousands, except percentages) in fiscal 2005, 2004 and2003:

 

Fiscal 2005 Compared to Fiscal 2004

 
| ** **                                      | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total revenues by geographic area**           | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                                   |       | $                                      | 10,069     |                                         | $          | 14,457                                       |       | $ | 16,622 |   | $ | (4,388 | ) | -30 | % | $ | (2,165 | ) | -13 | % |
| Europe                                          |       | 10,087                                 |       | 7,689                                        |       | 4,690                                        |       | 2,398 |   | 31 | % | 2,999 |   | 64 | % |
| Asia                                            |       | 353                                    |       | 729                                          |       | 747                                          |       | (376 | ) | -52 | % | (18 | ) | -2 | % |
| Total                                           |       | $                                      | 20,509     |                                         | $          | 22,875                                       |       | $ | 22,059 |   | $ | (2,366 | ) | -10 | % | $ | 816 |   | 4 | % |
|                                            |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Percentage  of revenues by geographic area:** |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| North America                                   |       | 49                                     | %          | 63                                           | %          | 76                                           | %          |   |   |   |   |   |   |   |   |
| Europe                                          |       | 49                                     | %          | 34                                           | %          | 21                                           | %          |   |   |   |   |   |   |   |   |
| Asia                                            |       | 2                                      | %          | 3                                            | %          | 3                                            | %          |   |   |   |   |   |   |   |   |
| Total                                           |       | 100                                    | %          | 100                                          | %          | 100                                          | %          |   |   |   |   |   |   |   |   |

 

Total revenues decreased $2.4 million (or 10%) in fiscal 2005 comparedto fiscal 2004. The decrease in revenues is primarily due to a decline of $4.4million in our North America region revenues offset by an increase of $2.4million in the revenues of our Europe region. The revenue decline in NorthAmerica was due to weak market conditions in this region. Further, due to ourrestructuring, we had an organizational change in our sales department and thenew management team was not fully established until the fourth quarter offiscal 2005, which resulted because of delays and losses in closure of some ofour revenue contracts.

 

In fiscal 2005, international revenues represented approximately 51% ofour total revenues, compared to 37% in fiscal 2004. The increase ininternational revenues, as a percentage of our total revenues in fiscal 2005over fiscal 2004, partially reflects the fact that Poet’s operations, whichrepresents a major component of our European revenues, was included in theentire period in fiscal 2005, but was only partially included in fiscal 2004from March 18, 2004. Further, we have a more established sales force inEurope and operate in a more favorable market condition.

 

*Revenues from North America*:The $4.4 million (or 30%) decline in North America revenues in fiscal 2005compared to fiscal 2004, occurred across all three categories of revenues inthis region. We attribute this outcome more to cautious purchasing behavior inthe region rather than a discernable trend that customers are moving away fromusing Versant’s technology. Lower license revenues in North America were mainlydue to softness of demand for our Versant Object Database product line and thelack of execution of any major contract. Lower maintenance revenues in NorthAmerica were due to a decline of new license revenues and termination of somemajor maintenance contracts. Lower professional services revenues in

 

30

----

 

North America were primarily due to completion of several long-termconsulting engagements that were not renewed or replaced during the fiscalyear.

 

*Revenues from Europe*:The $2.4 million (or 31%) increase in European revenues in fiscal 2005 comparedto fiscal 2004 was primarily due to the following: receipt of a significantfollow on order from a European telecommunications company for $1.8 millionduring the three months ended January 31, 2005, existence of an overallstrong demand for our products, a well established sales force in our Europeregion, and the impact of favorable foreign currency exchange rates of$359,000.

 

Fiscal 2004 Compared to Fiscal 2003

 

Total revenues increased $816,000 (or 4%) in fiscal 2004 compared tofiscal 2003. The increase in revenues was primarily due to an increase of $3.0million in our Europe region revenues offset by decreases of $2.2 million inthe revenues of our North America region.

 

In fiscal 2004, our international revenues represented approximately37% of our total revenues, compared to 24% in fiscal 2003. The increase ininternational revenues, as a percentage of our total revenues in fiscal 2004compared to fiscal 2003, was mainly due to our acquisition of Poet, whichderives a significant amount of its revenue from European customers.

 

*Revenues from North America*:The $2.2 million (or 13%) decrease in North America revenues in fiscal 2004compared to fiscal 2003 was attributed mainly to cautious purchasing behaviorin the region and overall market condition.

 

*Revenues from Europe*:The $3.0 million (or 64%) increase in European revenues in fiscal 2004 comparedto fiscal 2003 was primarily due to our merger with Poet, although revenuesfrom Versant’s data management products grew in this region as well.

 

***Revenues by Industry****:*The following table summarizes our revenues by industry(in thousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **                               | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total revenues by industry**           | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Technology                               |       | $                                      | 7,655      |                                         | $          | 8,693                                        |       | $ | 7,279 |   | $ | (1,038 | ) | -12 | % | $ | 1,414 |   | 19 | % |
| Telecommunications                       |       | 4,084                                  |       | 4,575                                        |       | 5,736                                        |       | (491 | ) | -11 | % | (1,161 | ) | -20 | % |
| Defense                                  |       | 1,353                                  |       | 3,202                                        |       | 3,529                                        |       | (1,849 | ) | -58 | % | (327 | ) | -9 | % |
| Other                                    |       | 7,417                                  |       | 6,405                                        |       | 5,515                                        |       | 1,012 |   | 16 | % | 890 |   | 16 | % |
| Total                                    |       | $                                      | 20,509     |                                         | $          | 22,875                                       |       | $ | 22,059 |   | $ | (2,366 | ) | -10 | % | $ | 816 |   | 4 | % |
|                                     |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Percentage  of revenues by industry:** |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Technology                               |       | 37                                     | %          | 38                                           | %          | 33                                           | %          |   |   |   |   |   |   |   |   |
| Telecommunications                       |       | 20                                     | %          | 20                                           | %          | 26                                           | %          |   |   |   |   |   |   |   |   |
| Defense                                  |       | 7                                      | %          | 14                                           | %          | 16                                           | %          |   |   |   |   |   |   |   |   |
| Other                                    |       | 36                                     | %          | 28                                           | %          | 25                                           | %          |   |   |   |   |   |   |   |   |
| Total                                    |       | 100                                    | %          | 100                                          | %          | 100                                          | %          |   |   |   |   |   |   |   |   |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

For the past few years, the technology industry has been our largestrevenue source. The incorporation of Versant products into the applicationofferings of independent software vendors (ISVs), such as PeopleSoft (sinceacquired by Oracle) and Borland as well as increasing sales of the ISV’sproducts has generated most of the license revenues in this industry. Ourproducts are used by the technology industry mainly for demand consensusforecasts, collaborative planning and requirements definition. In addition, revenuesfor Versant WebSphere Professional Services are mainly derived from thetechnology industry. Our revenues in the technology industry decreased $1.0million (or 12%) in fiscal 2005 compared to fiscal 2004. This was primarilymainly due to a decline in our North America professional services revenues, asseveral major WebSphere projects were completed during the first part of fiscal2005, which were not renewed or

 

31

----

 

replaced during that fiscal year as a result of economic conditions andorganizational changes in our WebSphere practice.

 

The telecommunications industry continues to be a very significantvertical market industry for us.  We market our products to thetelecommunications industry in strategic distributed applications such asnetwork modeling and management, fault diagnosis, fraud prevention, serviceactivation and assurance, and customer billing. Our revenues from thetelecommunications industry declined $491,000 (or 11%) in fiscal 2005 comparedto fiscal 2004, primarily due to a continued weak demand for our products inthe telecommunications industry.

 

Defense industry revenues declined $1.8 million (or 58%) in fiscal 2005compared to fiscal 2004, mainly due to a decline in demands for our products inthe defense industry and the absence of any major defense industry contracts asa result of economic conditions and centralization of our sales management aswell as some organizational changes in our U.S sales operation.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

Our revenues in the technology industry increased $1.4 million (or 19%)in fiscal 2004 compared to fiscal 2003. This was mostly due to an increase inour WebSphere consulting practice revenues because of signing several majorconsulting agreements.

 

Our revenues from the telecommunications industry decreased $1.2million (or 20%) in fiscal 2004 compared to fiscal 2003, which reflected theongoing economic challenges in this industry.

 

Our revenues from the defense industry decreased $327,000 (or 9%) infiscal 2004 compared to fiscal 2003. We attributed this decline to changes ineconomic conditions and centralization of our sales management as well as someorganizational changes in our U.S sales operation.

 

***Revenues by Category****:* The following table summarizes our revenues bycategory (in thousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **                              | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total revenues by category**          | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License revenues                        |       | $                                      | 8,828      |                                         | $          | 9,686                                        |       | $ | 9,082 |   | $ | (858 | ) | -9 | % | $ | 604 |   | 7 | % |
| Maintenance revenues                    |       | 6,305                                  |       | 6,783                                        |       | 6,076                                        |       | (478 | ) | -7 | % | 707 |   | 12 | % |
| Professional services revenues          |       | 5,376                                  |       | 6,406                                        |       | 6,901                                        |       | (1,030 | ) | -16 | % | (495 | ) | -7 | % |
| Total                                   |       | $                                      | 20,509     |                                         | $          | 22,875                                       |       | $ | 22,059 |   | $ | (2,366 | ) | -10 | % | $ | 816 |   | 4 | % |
|                                    |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Percentage of revenues by category:** |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| License revenues                        |       | 43                                     | %          | 42                                           | %          | 41                                           | %          |   |   |   |   |   |   |   |   |
| Maintenance revenues                    |       | 31                                     | %          | 30                                           | %          | 28                                           | %          |   |   |   |   |   |   |   |   |
| Professional services revenues          |       | 26                                     | %          | 28                                           | %          | 31                                           | %          |   |   |   |   |   |   |   |   |
| Total                                   |       | 100                                    | %          | 100                                          | %          | 100                                          | %          |   |   |   |   |   |   |   |   |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

*License revenues:*Licenserevenues represent perpetual license fees received and recognized from ourEnd-Users and Value Added Resellers.

 

License revenues declined $858,000 (or 9%) in fiscal 2005 compared tofiscal 2004. This decline was largely attributable to $2.7 million decline inlicense revenues in our North America region as result of adverse marketconditions and softness of demand for our Versant Object Database line ofbusiness. Further, due to our restructuring, we had organizational changes inour sales department and the new management team was not fully establisheduntil the fourth quarter of fiscal 2005, which resulted to delay in closure andlosses in some of our revenue contracts. The decline was partially offset by a$1.8 million increase in license revenues in our Europe region as a result of asignificant follow through order from a European telecommunications companyduring the first quarter of fiscal 2005, overall strong demand for our productsin Europe, and the presence of an established sales force in our Europe region.

 

32

----

 

*Maintenance revenues:*Maintenance and technical support revenues include revenues derived frommaintenance agreements, under which we provide customers with Internet andtelephone access to support personnel and software upgrades, dedicatedtechnical assistance and emergency response support options. Our maintenancerevenues decreased approximately $478,000 (or 7%) in fiscal 2005 compared tofiscal 2004. The decrease was primarily due to a decline of $1.1 million inmaintenance revenues in our North America region as a result of termination ofa few major maintenance agreements for approximately $650,000, which wereterminated towards the end of the fourth quarter in fiscal 2004, andelimination of product lines for approximately $450,000. The decrease waspartially offset by an increase of $600,000 in maintenance revenues from ourEurope region due to increased license revenues, the addition of Poet’smaintenance and support contracts, and the impact of a favorable foreigncurrency exchange gain of $106,000. Growth in maintenance revenues is highlydependent on our ability to generate additional license revenues as well asretaining our customer base.

 

*Professional services revenues:*Professional services revenues consist of revenues from consulting,training and technical support as well as billable travel expenses incurred byour professional services organization.

 

Our professional services revenues decreased approximately $1.0 million(or 16%) in fiscal 2005 compared to fiscal 2004. The decline was primarily dueto an overall decline of the backlog in our new professional services contractsin our North America region and a decrease in Versant’s WebSphere consultingrevenues due to the completion of several long-term WebSphere engagements thatdid not get renewed or replaced in fiscal 2005, mainly due to economicconditions and organizational changes in our WebSphere practice. WebSphereconsulting represented 70% of our total professional services revenues infiscal 2005, compared to 60% in fiscal 2004.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

*License revenues:*License revenues increased approximately $604,000 (or 7%) in fiscal 2004compared to fiscal 2003, due to approximately $1.9 million of license revenuesfrom Poet products, which was primarily generated in Europe, offset by anapproximately $1.3 million decline in Versant’s core data management licenserevenues. This shortfall was due to weakness in our Value Added Reseller (VAR)revenues in the second and third quarters of fiscal 2004. Resale of third partyproducts comprised approximately 1% of our total license revenues in fiscal2004, down considerably from 8% of our total license revenues in fiscal 2003.In fiscal 2003, we had several third party products that we were marketing inour normal course of business, this practice discontinued in fiscal 2004 due tochanges in customer demands.

 

*Maintenance revenues: *Maintenance revenues increasedapproximately $707,000 (or 12%) in fiscal 2004 compared to fiscal 2003, mainlydue to the addition of Poet’s maintenance and support contracts in Europe.  However, maintenance revenues from Versant’sObject Database customers, in fiscal 2004 remained at a level comparable tofiscal 2003.

 

*Professional service revenues:*Professional services revenues decreased approximately $495,000 (or 7%) infiscal 2004 compared to fiscal 2003, primarily due to a decrease in Versant’sWebSphere consulting revenues. WebSphere consulting represented 60% of ourtotal professional services revenues in fiscal 2004 compared to 62% in fiscal2003.

 

**Cost of Revenues**

 

***Cost of Revenues****:* The following table summarizes the cost of revenues (inthousands, except percentages) in fiscal 2005, 2004 and 2003:

 

33

----

 
| ** **                  | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues              |       | $                                      | 20,509     |                                         | $          | 22,875                                       |       | $ | 22,059 |   | $ | (2,366 | ) | -10 | % | $ | 816 |   | 4 | % |
|                        |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Cost of license revenues    |       | 274                                    |       | 457                                          |       | 843                                          |       | (183 | ) | -40 | % | (386 | ) | -46 | % |
| Cost of maintenace revenues |       | 1,456                                  |       | 1,516                                        |       | 1,312                                        |       | (60 | ) | -4 | % | 204 |   | 16 | % |
| Cost of service revenues    |       | 5,164                                  |       | 5,858                                        |       | 6,011                                        |       | (694 | ) | -12 | % | (153 | ) | -3 | % |
| Amortization of intangibles |       | 671                                    |       | 698                                          |       | 91                                           |       | (27 | ) | -4 | % | 607 |   | 667 | % |
| Total cost  of revenues     |       | $                                      | 7,565      |                                         | $          | 8,529                                        |       | $ | 8,257 |   | $ | (964 | ) | -11 | % | $ | 272 |   | 3 | % |
|                        |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Gross margin                |       | $                                      | 12,944     |                                         | $          | 14,346                                       |       | $ | 13,802 |   | $ | (1,402 | ) | -10 | % | $ | 544 |   | 4 | % |
| Gross margin percentage     |       | 63                                     | %          | 62                                           | %          | 63                                           | %          |   |   |   |   |   |   |   |   |

 

Cost of revenues was $7.6 million (or 37% of total revenues) in fiscal2005, a decline of $964,000 (or 11%) over the cost of revenues of $8.5 million(or 38% of total revenues) reported in fiscal 2004.

 

Cost of revenues was $8.5 million (or 38% of total revenues) in fiscal2004, an increase of $272,000 (or 3%) over the cost of revenues of $8.3 million(or 37% of total revenues) reported in fiscal 2003.

 

Gross margin percentages (cost of revenues as a percentage of totalrevenues) were relatively flat at 63%, 62% and 63% in fiscal 2005, 2004 and2003, respectively.

 

*Cost of license revenues:*Cost of license revenues consists primarily of royalties and cost of thirdparty products, which we resell to our customers, as well as product media andshipping and packaging costs.

 

The following table summarizes the cost of license revenues (inthousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **         | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **License**        | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues           |       | $                                      | 8,828      |                                         | $          | 9,686                                        |       | $ | 9,082 |   | $ | (858 | ) | -9 | % | $ | 604 |   | 7 | % |
| Cost               |       | 274                                    |       | 457                                          |       | 843                                          |       | (183 | ) | -40 | % | (386 | ) | -46 | % |
| Margin             |       | $                                      | 8,554      |                                         | $          | 9,229                                        |       | $ | 8,239 |   | $ | (675 | ) | -7 | % | $ | 990 |   | 12 | % |
|               |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Margin  percentage |       | 97                                     | %          | 95                                           | %          | 91                                           | %          |   |   |   |   |   |   |   |   |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

Cost of license revenues was $274,000 (or 3% of license revenues) infiscal 2005, a decrease of $183,000 (or 40%) over the cost of license revenuesof $457,000 (or 5% of license revenues) in fiscal 2004. The decrease wasprimarily due to a $250,000 decline in the cost of license revenues in ourNorth America region related to a decline in royalty expenses associated withthe termination of a contract with one of our third party vendors for licensesthat we no longer embed in our standard product line.  The termination of this royalty contractresulted in a reduction of royalty expenditures for approximately $100,000 perquarter. This decrease was partially offset by an increase of $69,000 in ourEurope region related to royalty expenses for third party products that weembed in our standard product line in Europe.

 

License margin improved by 2% in fiscal 2005 compared to fiscal 2004,due to the fact that our revenue mix included fewer revenues from the sale ofthird party products, which have lower margins.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

Cost of license revenues was $457,000 (or 5% of license revenues) infiscal 2004, a decrease of $386,000 (or 46%) over the cost of license revenuesof $843,000 (or 4% of license revenues) in fiscal 2003. Cost of licenserevenues decreased by $386,000 (or 46%) in fiscal 2004 compared to fiscal 2003.The decrease was

 

34

----

 

primarily due to approximately $500,000 lower cost of resold licensesand offset by approximately $100,000 in higher product royalty payments infiscal 2004 compared to fiscal 2003.

 

License margin improved by 4% in fiscal 2004,due to the fact that our revenue mix included fewer revenues from lower marginsales of third party products.

 

*Cost of maintenance revenues:*Cost of maintenance revenues consists primarily of customer supportpersonnel and related expenses, including payroll, employee benefits andallocated overhead.

 

The following table summarizes the cost of maintenance revenues (inthousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **         | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Maintenance**    | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues           |       | $                                      | 6,305      |                                         | $          | 6,783                                        |       | $ | 6,076 |   | $ | (478 | ) | -7 | % | $ | 707 |   | 12 | % |
| Cost               |       | 1,456                                  |       | 1,516                                        |       | 1,312                                        |       | (60 | ) | -4 | % | 204 |   | 16 | % |
| Margin             |       | $                                      | 4,849      |                                         | $          | 5,267                                        |       | $ | 4,764 |   | $ | (418 | ) | -8 | % | $ | 503 |   | 11 | % |
|               |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Margin  percentage |       | 77                                     | %          | 78                                           | %          | 78                                           | %          |   |   |   |   |   |   |   |   |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

Cost of maintenance revenues was $1.5 million (or 23% of maintenancerevenues) in fiscal 2005, a decline of $60,000 (or 4%) over the cost ofmaintenance revenues of $1.5 million (or 22% of maintenance revenues) infiscal 2004. This was primarily due to a $195,000 decline in the cost oflicense revenues in our North America region related to reduction of headcountof three employees and their associated salary and benefits expenses andfacilities allocation costs. The decrease in our North America region was partiallyoffset by a $140,000 increase in expenses in our Europe region, as the resultof the Poet acquisition and our decision to maintain a technical supportpresence in Europe to accommodate the requirements for technical services fromour European customer base subsequent to the Poet merger.

 

Maintenance margin declined by 1% in fiscal 2005 compared to fiscal2004, because the reduction in maintenance revenues outpaced the reduction incost during the period.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

Cost of maintenance revenues was $1.5 million (or 22% of maintenancerevenues) in fiscal 2004, an increase of $204,000 (or 16%) over the cost ofmaintenance revenues of $1.3 million (or 22% of maintenance revenues) infiscal 2003, primarily as a result of the addition of Poet’s customer supportorganization in Europe.

 

Maintenance margin remained unchanged at 78% in fiscal 2004 compared tofiscal 2003.

 

*Cost of professional services revenues:*Cost of professional services consists of salaries, bonuses, third partyconsulting fees and other costs associated with supporting our professionalservices organization.

 

The following table summarizes the cost of professional servicesrevenues (in thousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **                | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|---------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Professional services** | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                  |       | $                                      | 5,376      |                                         | $          | 6,406                                        |       | $ | 6,901 |   | $ | (1,030 | ) | -16 | % | $ | (495 | ) | -7 | % |
| Cost                      |       | 5,164                                  |       | 5,858                                        |       | 6,011                                        |       | (694 | ) | -12 | % | (153 | ) | -3 | % |
| Margin                    |       | $                                      | 212        |                                         | $          | 548                                          |       | $ | 890 |   | $ | (336 | ) | -61 | % | $ | (342 | ) | -38 | % |
|                      |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Margin  percentage        |       | 4                                      | %          | 9                                            | %          | 13                                           | %          |   |   |   |   |   |   |   |   |

 

35

----

 

#### Fiscal 2005 Compared to Fiscal 2004

 

Cost of professional services revenues was $5.2 million (or 96% ofprofessional services revenues) in fiscal 2005, a decline of $694,000 (or 12%)over the cost of professional services revenues of $5.9 million (or 91% ofprofessional services revenues) in fiscal 2004. This was primarily due to adecline of $500,000 related to reduction of third party consulting expenses inour North America region as result of the completion of several long termcontracts, a decline of $260,000 in our North America region related toheadcount reduction of one employee and the associated salary and benefitsexpenses and facility allocation cost. The decline was partially offset by anincrease of $72,000 in our Europe region due to increased service revenues inthat region.

 

Professional services revenues margins declined by 5% in fiscal 2005compared to fiscal 2004, due to lower utilization rates of our professionalpersonnel.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

Cost of professional services revenues was $5.9 million (or 91% ofprofessional services revenues) in fiscal 2004, a decline of $153,000 (or 3%)over the cost of professional services revenues of $6.0 million (or 87% ofprofessional services revenues) in fiscal 2003. This was mainly due toheadcount reduction of two employees and the associated salary and benefitsexpenses and facilities allocation of approximately $300,000. This decline wasoffset by approximately $100,000 increase in subcontract consulting costs, as someof our employees transitioned to subcontractor status.

 

Professional services revenues margin declined by 4% in fiscal 2004compared to fiscal 2003, as the decline in revenues outpaced the reduction incost.

 

*Amortization of Intangible Assets:*The following table summarizes the amortization of intangible assets (inthousands, except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **                                   | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| ** **                                   | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mokume Software, Inc.                   |       | $                                      | —     |                                         | $          | 72                                           |       | $ | 91 |   | $ | (72 | ) | -100 | % | $ | (19 | ) | -21 | % |
| Poet Holdings, Inc.                     |       | 507                                    |       | 571                                          |       | —                                       |       | (64 | ) | -11 | % | 571 |   | — |   |
| JDO Genies (PTY), LTD.                       |       | 112                                    |       | 35                                           |       | —                                       |       | 77 |   | 220 | % | 35 |   | — |   |
| FastObjects, Inc.                       |       | 52                                     |       | 20                                           |       | —                                       |       | 32 |   | 160 | % | 20 |   | — |   |
| Total  amortization of purchased intangibles |       | $                                      | 671        |                                         | $          | 698                                          |       | $ | 91 |   | $ | (27 | ) | -4 | % | $ | 607 |   | 667 | % |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

The amortization of intangible assets in fiscal 2005 consists of theamortization of intangible assets acquired in 2004 acquisitions of PoetHoldings, Inc., FastObjects, Inc. and JDO Genie technology.

 

Amortization of intangible assets was $671,000 (or 3% of totalrevenues) in fiscal 2005, as compared to $698,000 (or 3% of totalrevenues) in fiscal 2004. The decline in absolute dollars of $27,000 infiscal 2005 compared to fiscal 2004, was due to several write offs of ourintangible assets, which occurred in late fiscal 2005.

 

We expect to incur approximately $79,000 per quarter for amortizationof intangible assets quarterly in fiscal 2006.

 

**Operating Expenses**

 

***Operating Expenses****. *The following table summarizes our operatingexpenses (in thousands, except percentages) for fiscal 2005, 2004 and 2003:

 

36

----

 
| ** **                              | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Operating  expenses**                 | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                    |       | $                                      | 5,815      |                                         | $          | 8,051                                        |       | $ | 7,703 |   | $ | (2,236 | ) | -28 | % | $ | 348 |   | 5 | % |
| Research and  development               |       | 3,925                                  |       | 5,137                                        |       | 4,340                                        |       | (1,212 | ) | -24 | % | 797 |   | 18 | % |
| General and  administrative             |       | 4,687                                  |       | 4,514                                        |       | 4,471                                        |       | 173 |   | 4 | % | 43 |   | 1 | % |
| Impairment  of goodwill and intangibles |       | 12,913                                 |       | 1,024                                        |       | —                                       |       | 11,889 |   | 1161 | % | 1,024 |   | — |   |
| Restructuring                           |       | 638                                    |       | 3,271                                        |       | —                                       |       | (2,633 | ) | -80 | % | 3,271 |   | — |   |
| Total                                   |       | $                                      | 27,978     |                                         | $          | 21,997                                       |       | $ | 16,514 |   | $ | 5,981 |   | 27 | % | $ | 5,483 |   | 33 | % |

 

#### Fiscal 2005 Compared to Fiscal 2004

 

Operating expenses were $28.0 million (or 136% of total revenues) infiscal 2005, an increase of $6.0 million (or 27%), compared to $22.0million (or 96% of total revenues) in fiscal 2004. This increase included$12.9 million of non-cash changes for impairment of goodwill and intangibleassets and restructuring charges of $638,000 in fiscal 2005, compared to $1.0million of non-cash charges for impairment of goodwill and intangible assets,and restructuring charges of $3.3 million in fiscal 2004. This increase alsoincluded $187,000 of foreign currency exchange losses.

 

*Sales and Marketing:*Sales and marketing expenses consist primarily of personnel and relatedexpenses, commissions earned by sales personnel, trade shows, travel and othermarketing communication costs, such as advertising and other marketingprograms.

 

Sales and marketing expenses were $5.8 million (or 28% of totalrevenues) in fiscal 2005, a decrease of $2.2 million (or 28%), compared to $8.1million  (or 35% of total revenues) infiscal 2004. The decrease was mainly due to a decline of $1.4 million in thecosts of our North America sales organization as a result of headcountreduction of seven employees and their related salaries and benefits expensesand commission and traveling expenses and facilities allocation costs, as wellas a decline of $180,000 in the consulting expenses in our North Americamarketing organization as a result of lower activities in various marketingprograms. In addition, there was a decline of $600,000 in sales and marketingexpenses in our Europe region due primarily to a decline in salary and benefitexpenses and commission and traveling expenses in our European saleorganization related to a headcount reduction of nine sales employees.

 

*Research and Development:*Research and development expenses consist primarily of personnel andrelated expenses, including payroll and employee benefits, expenses forfacilities and payments made to outside software development contractors.

 

Research and development expenses were $4.0 million (or 19% ofrevenues) in fiscal 2005, a decrease of $1.2 million (or 24%), compared to $5.1 million (or 22% of revenues) infiscal 2004. The decrease was primarily due to a decrease of $1.6 million inour North America operations related to headcount reduction of twelve employeesand their related salaries and benefits expenses due to our restructuring inthe fourth quarter of fiscal 2004. These cost reductions were partially offsetby an increase of $314,000 in our European operation costs for an additionalsix employees who joined Versant pursuant to the Poet acquisition and theirrelated salary and benefit expenses. We also experienced an increase of $74,000in our Indian operation for an additional headcount of nine employees for theirrelated salary and benefit expenses.

 

We anticipate that we will continue to invest significant resources inresearch and development activities in the future to develop new products,advance the technology of our existing products and develop new businessopportunities. We also expect that the consulting expenses related to JDO Genieto be replaced by some additional research and development payrollexpenditures.

 

*General and Administrative:*General and administrative expenses consist primarily of personnel andrelated expenses and general operating expenses.

 

37

----

 

General and administrative expenses were $4.7 million (or 23% of totalrevenues) in fiscal 2005, an increase of $173,000 (or 4%), compared to $4.5million (or 20% of total revenues) in fiscal 2004. This increase was due to$820,000 increase in North America expenses for professional services feeswhich were primarily associated with accounting and legal services for SECcompliance, offset by a decline of $473,000 in North America region expensesrelated to the headcount reduction of four employees and their associatedsalary and benefits expenses and facility allocation costs. These costs werefurther offset by a decline of $200,000 in our Europe operation expensesrelated to the headcount reduction of six employees and their associated salaryand benefit expenses due to consolidation of Versant Europe operation withPoet.

 

We expect an increase in general and administrative expenses in fiscal2006 mainly due to the costs associated with compliance with SEC reportingregulations and the Sarbanes-Oxley Act of 2002.

 

#### Fiscal 2004 Compared to Fiscal 2003

 

Operating expenses were $22.0 million (or 96% of total revenues) infiscal 2004, an increase of $5.5 million (or 33%), compared to $16.5million (or 75% of total revenues) in fiscal 2003. This increase included$1.0 million of non-cash changes for impairment of goodwill and intangibleassets, and restructuring charges of $3.3 million in fiscal 2004.

 

*Sales and Marketing:*Sales and marketing expenses were approximately $8.0 million (or 35% oftotal revenues) in fiscal 2004, an increase of $300,000 (or 5%), compared to $7.7 million  (or 35% of total revenues) in fiscal 2003.The increase was comprised of approximately $800,000 due to the addition ofPoet’s marketing and sales organization in Europe, offset by an approximately$500,000 reduction in Versant’s pre-existing marketing and sales organization.In fiscal 2004, we reduced our sales and marketing headcount reductions in bothNorth America and Europe and reduced the commission expense in North Americadue to lower revenue levels in Versant’s core data management products in thatregion. Average headcount in fiscal 2004 remained unchanged compared to fiscal2003 on a worldwide basis, but the Europe headcount was slightly higher thanthe North America.

 

*Research and Development:*Research and development expenses were $5.1 million (or 22% of revenues) infiscal 2004, an increase of approximately $800,000 (or 18%), compared to $4.3million (or 20% of revenues) in fiscal 2003. This was primarily due to additionof Poet’s research and development organization in Europe for approximately$700,000, and also additional expenses for the engineering work contracted to athird party in China for approximately $100,000. Headcount in our research anddevelopment organization in fiscal 2004 was slightly lower compared to fiscal2003 on a worldwide basis, but the geographic mix of the headcount wasdifferent. We reduced our headcount slightly in North America, but weexperienced a higher turnover and inflationary pressures on salaries in ourIndian organization, similar to many other “high tech” employers in thisregion.

 

*General and Administrative:*General and administrative expenses were $4.5 million (or 20% of totalrevenues) in fiscal 2004 and $3.3 million (excluding non cash stock expenseallocation of $1.2 million) in fiscal 2003. The increase of $1.2 million iscomprised of approximately $800,000 attributable to the addition of Poet’sgeneral and administrative organization in Europe, approximately $300,000 oflegal, accounting and consulting costs resulting primarily from our merger andacquisition activities and approximately $100,000 for executive bonuses. Ouraverage total worldwide headcount during fiscal 2004 was higher compared tofiscal 2003 primarily due to additional accounting and information technologystaff that we assumed, as a result of Poet merger.

 

***Other Income, Net***

 

Other income, net primarily represents the foreign currency gain orloss as a result of settling transactions denominated in currencies other thanour functional currency. It also represents the interest expense due to ourfinancing activities offset by interest income earned for our cash and cashequivalents.

 

38

----

 

The following table summarizes our other income, net (in thousands,except percentages) in fiscal 2005, 2004 and 2003:

 
| ** **                      | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Other income (expense), net** |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Foreign exchange gain (loss)    |       | $                                      | 132        |                                         | $          | (47                                          | )          | $ | 343 |   | $ | 179 |   | -381 | % | $ | (390 | ) | -114 | % |
| Interest income                 |       | 63                                     |       | 77                                           |       | 41                                           |       | (14 | ) | -18 | % | 36 |   | 88 | % |
| Interest expense                |       | (26                                    | )          | (3                                           | )          | (2                                           | )          | (23 | ) | 767 | % | (1 | ) | 50 | % |
| Other income (expense)          |       | 28                                     |       | 57                                           |       | 15                                           |       | (29 | ) | -51 | % | 42 |   | 280 | % |
| Variable interest, net          |       | 320                                    |       | —                                       |       | —                                       |       | 320 |   | — |   | — |   | — |   |
| Effect of accounting change     |       | —                                 |       | 35                                           |       | —                                       |       | (35 | ) | -100 | % | 35 |   | — |   |
| Total                           |       | $                                      | 517        |                                         | $          | 119                                          |       | $ | 397 |   | $ | 398 |   | 334 | % | $ | (278 | ) | -70 | % |

 

Fiscal 2005 Compared to Fiscal 2004

 

Other income, net was $517,000 (or 3% of revenues) in fiscal 2005,compared to $119,000 (or 1% of revenues) in fiscal 2004. The increase inabsolute dollars of $398,000 was due primarily to foreign exchange fluctuationof $180,000 as a result of a stronger local currencies compared to U.S. dollar,and also the variable interest liability of $320,000, as a result of theconsolidation of our variable interest entity, Vanatec, GmbH.

 

In July 2005, through our subsidiary Versant GmbH, we entered intocertain agreements to effect a spin-off of tangible assets, technology rightsand contracts related to our Versant Open Access .NET (“VOA.NET”) business toVanatec GmbH (“Vanatec”) (a newly formed privately held German based company).In connection with that spin-off, seven of our former employees departed us tojoin Vanatec, and a partnership formed by those individuals, which received an80.4% equity interest in Vanatec, with we retaining the remaining 19.6% equityinterest in Vanatec.

 

VOA.NET was one of the aforementioned non-strategic product lines,which we decided to spin off. We believe that the dissolution of the VOA.NETbusiness would have caused us to incur cash outlays and expenses for severanceand other contractual obligations in amounts comparable to the restructuringcharge from the Vanatec spin-off.  Thespin-off of the VOA.NET business will allow us focus on our core databasebusiness and progress towards our long-term profitability goal.

 

We determined that equity at risk in Vanatec is not sufficient topermit it to finance its activities without additional subordinated financialsupport; therefore, we have determined that Vanatec is a variable interestentity in accordance with FIN 46(R), *Consolidation of VariableInterest Entities* (As Amended). As a result, Vanatec’s results areincluded in Versant’s consolidated financial statements, with the 80.4% equityinterest held by former Versant employees reflected as a variable interestliability.

 

Fiscal 2004 Compared to Fiscal 2003

 

Other income, net was $119,000 (or 1% ofrevenues) in fiscal 2004, compared to $397,000 (or 2% of revenues) in fiscal2003. The decrease in absolute dollars of $278,000 was due primarily to adecrease in foreign exchange fluctuation of $390,000, which was partiallyoffset by an increase of $35,000 for the effect of accounting change, due to anincrease in our percentage of ownership in FastObjects, Inc., from 19% to100%. This adjustment reflects the retroactive change to the equity method ofaccounting.

 

***Provision for Income Taxes***

 

Provision for income taxes primarily consistsof foreign withholding taxes and state and local taxes. The following tablesummarizes our provision for income taxes (in thousands, except percentages)for fiscal 2005, 2004 and 2003:

 

39

----

 
| ** **                     | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Provision for income taxes** | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for income taxes     |       | $                                      | 37         |                                         | $          | 88                                           |       | $ | 74 |   | $ | (51 | ) | -58 | % | $ | 14 |   | 19 | % |
|                                |            |                                        |            |                                              |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We incurred foreign withholding tax and statefranchise tax of approximately $37,000, $88,000 and $74,000 in fiscal 2005,2004 and 2003, respectively, which we have included in our income taxprovision.  The decline in provision for income taxes in fiscal 2005compared to fiscal 2004 was mainly due to lower foreign withholding taxes as aresult of a decline in revenues from our Asia region.

 

We record a valuation allowance to reduce netdeferred tax assets to an amount for which realization is more likely than not.We have recorded a valuation allowance for all of our net deferred tax assets,as we are presently unable to conclude that it is more likely than not that netdeferred tax assets will be realized.

 

At October 31, 2005, we had federal and state net operating losscarry forwards of approximately $82.7 million and $24.6 million, respectivelyand federal and state tax credit carry forwards of approximately $2.2 millionand 1.3 million, respectively.  Thefederal and state tax credit carry forwards and federal tax credit carryforwards expire on various dares through 2024, if not utilized. The state taxcredit can be carried forward indefinitely. Due to our history of operating losses, we believe that there issufficient uncertainty regarding the realizability of these carry forwards and,therefore, a valuation allowance of approximately $34.0 million has beenrecorded against our net deferred tax assets. We will continue to assess therealizability of the tax benefit available based on actual and forecastedoperating results.

 

A portion of deferred tax assets relating tonet operating losses, pertains to net operating loss carry forwards resultingfrom tax deductions upon the exercise of employee stock options ofapproximately $1.6 million. When recognized, the tax benefit of these loss carryforwards will be accounted for as a credit to additional paid-in capital ratherthan a reduction of income tax expense.

 

Due to “change in ownership” provisions of the Internal Revenue Code of1986, the availability of net operating loss and tax carry forwards to offsetfederal taxable income in future periods may be subject to an annuallimitation.

 

**Liquidity and Capital Resources**

 

***Cash and Cash Equivalents***

 

We financed our operations and met our capital expenditure requirementsthrough cash flows from operations in fiscal 2005.

 

As of October 31, 2005, $2.9 million of our cash and cashequivalents were held in foreign financial institutions. Currently, there areno legal restrictions or tax penalties if we decide to repatriate this cash.The following table summarizes our cash balances held in foreign currencies andtheir equivalent U.S. dollar amounts (in thousands):

 

40

----

 
| ** **                    | ** ** | **As of Octocber 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Local Currency**          | ** ** | **U.S. Dollar** | ** ** |
| **Cash in foreign currency:** |       |                        |       |   |   |
| Euro                          |       | 2,133                       |       | $ | 2,572 |   |
| British Pound                 |       | 146                         |       | 259 |   |
| India Rupee                   |       | 2,405                       |       | 53 |   |
| Total                         |       |                        |       | $ | 2,884 |   |

 

We transact business in various foreign currencies and, accordingly, weare exposed to any adverse movements of foreign currency exchange rates.  Todate, the effect of changes in foreign currency exchange rates in our netoperating results has not been significant. Operating expenses incurred byour foreign subsidiaries are denominated primarily in local currencies. Wecurrently do not use financial instruments to hedge these operatingexpenses. We intend to assess the need to utilize financial instruments tohedge currency exposures on an ongoing basis. In addition, a substantialportion of our cash balance is held in foreign financial institutions and isexposed to any adverse movements of foreign currency exchange rates. We do notuse derivative financial instruments for speculative trading purposes.

 

In relation to our cash balances held overseas, there were no EuropeanUnion foreign exchange restrictions on repatriating our overseas-held cash tothe United States.  However, we may be subject to income tax withholdingin the source countries and to U.S. federal and state income taxes if the cashpayment or transfer from our subsidiaries to the U.S. parent were to beclassified as a dividend.  Other payments made by our European overseassubsidiaries in the ordinary course of business (e.g. payment of royalties orinterest from the subsidiaries to the U.S. parent) were generally not subject toincome tax withholding due to tax treaties.

 

Our cash equivalents primarily consist of money market accounts;accordingly, our interest rate risk is not considered significant.

 

We believe that with our current cost structure, after therestructuring and the spin off of our Versant Open Access.NET assets toVanatec, we can realistically operate at a cash flow positive or breakevenposition in fiscal 2006.

 

***Cash Flow provided by (used in) OperatingActivities***

 

This table aggregates certain line items from the cash flow statementto present the key items affecting our operating activities (in thousands):

 
| ** **                                                   | ** ** | **Fiscal Year ended October 31,** | ** ** | **Fiscal 2005 vs 2004  Increase (Decrease)** | ** ** | **Fiscal 2004 vs 2003  Increase (Decrease)** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                               | ** ** | **2004**                                     | ** ** | **2003**                                     | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Net cash  provided by (used in) operating activities:**    |       |                                   |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Net loss                                                     |       | $                                      | (14,554    | )                                            | $          | (9,575                                       | )          | $ | (2,389 | ) | $ | (4,979 | ) | 52 | % | $ | (7,186 | ) | 301 | % |
| Non-cash  adjustments                                        |       | 13,734                                 |       | 3,328                                        |       | 2,086                                        |       | 10,406 |   | 313 | % | 1,242 |   | 60 | % |
| Restricted  cash                                             |       | 320                                    |       | —                                       |       | (320                                         | )          | 320 |   | — |   | 320 |   | -100 | % |
| Accounts  receivable                                         |       | 2,690                                  |       | (93                                          | )          | 106                                          |       | 2,783 |   | -2992 | % | (199 | ) | -188 | % |
| Prepaid  expense and other assets                            |       | 406                                    |       | 237                                          |       | 201                                          |       | 169 |   | 71 | % | 36 |   | 18 | % |
| Accounts  payable, accrued liabilities and other liabilities |       | (2,071                                 | )          | 1,360                                        |       | (1,500                                       | )          | (3,431 | ) | -252 | % | 2,860 |   | -191 | % |
| Deferred  revenue                                            |       | (40                                    | )          | (1,780                                       | )          | 405                                          |       | 1,740 |   | -98 | % | (2,185 | ) | -540 | % |
| Total                                                        |       | $                                      | 485        |                                         | $          | (6,523                                       | )          | $ | (1,411 | ) | $ | 7,008 |   | -107 | % | $ | (5,112 | ) | 362 | % |

 

The main source of our operating cash flows is cash collections fromcustomers who have purchased our products and services. Our primary uses ofcash in operating activities are for personnel related expenditures andfacilities costs.

 

41

----

 

Fiscal 2005

 

We generated $485,000 of cash flows fromoperations in fiscal 2005. This was primarily due to a $2.7 million reductionin accounts receivables as a result of improved collections procedures andimproved days sales outstanding, or DSO, and was partially offset by $2.1million cash used, as a result of reduction in accounts payables, accruedliabilities and other liabilities.

 

Non-cash adjustments were $13.7 million, asreflected in our cash flow statement in fiscal 2005, which were primarily dueto a $12.9 million impairment of goodwill and intangible assets, recorded atthe end of the third quarter of fiscal 2005. Non-cash adjustments may increaseor decrease in the future and, as a result, this might positively or negativelyimpact our future operating results, but they will not have a direct impact onour cash flows.

 

Changes in our assets and liabilities resultfrom the timing of payments to our vendors for accounts payable and from ourcustomers for accounts receivables, both of which will impact our operatingcash flows in the future. We typically pay our vendors and service providers inaccordance with their invoice terms and conditions. The timing of cash paymentsin the future periods will be impacted by the nature of accounts payable arrangementsand management’s assessment of our cash inflows. We measure the effectivenessof our collection efforts by an analysis of our accounts receivable and ourdays sales outstanding (DSO). We calculate DSO by taking the ending accountsreceivable balances (net of bad debt allowance) divided by the average dailysales amount. The average daily sales amount is calculated by dividing thetotal quarterly revenue recognized net of changes in deferred revenue dividedby 91.25 days. Collection of accounts receivable and related DSO couldfluctuate in the future periods, due to the timing and amount of our revenuesand the effectiveness of our collection efforts. Our DSOs were 45 days and 78days for the three months ended October 31, 2005 and October 31,2004, respectively.

 

The change in assets and liabilities of $1.3million in fiscal 2005 was due to the following:

 

•                                          Reductions in prepaid and other assets of $406,000, of which$223,000 was for the refund of a deposit related to the disposition of theCatalog Solutions Business.

 

•                                          Reductions in accounts payable and other accrued liabilities of $2.1million were primarily due to $1.4 million of payments made against ourrestructuring accrual, of which $504,000 was employee related and $926,000 wasfacilities related including adjustments of $122,000 against our restructuringaccrual due to the new sub-leasing agreement in our UK office. The remaining reductionof $725,000 was primarily due to payout for consulting, commission and bonus payablesof $149,000 in the U.S. in line with lower revenue levels; the reduction ofacquisition accr uals of $335,000 in the U.S. due to the pay out of theremaining JDO purchase price; the reduction of customer deposit account of$200,000 in U.S. and payout of consulting accrual of $ 178,000 in U.S as resultof decreased third party consultants expenses.

 

•                                          Decrease of $2.7 million in accounts receivable was primarily due toa decrease in revenues and also better collection procedures that resulted in adecline in our DSO in fiscal 2005.

 

Due to the execution of our June 2005and October 2004 restructuring plans, we are forecasting a positive netincome and cash flow in fiscal 2006.

 

Fiscal 2004

 

We used $6.5 million cash in operatingactivities in fiscal 2004, which was comprised of the following:

 

•      Approximately $4.9 million netcash outflow in our data management business, comprised of the following:

 

•                  Approximately $24.3 million of cash expenses, mainly employeerelated, an increase of $1.9

 

42

----

 

million overcash expenses paid in operating activities in fiscal 2003, primarily due to additionof Poet’s employees since March 18, 2004, plus

 

•                  approximately $700,000 of restructuring expenses paid in fiscal2004, offset by

 

•                  approximately $20.1 million cash collected from our customers.

 

•      Approximately $1.6 million netoutflow of cash from operations in our catalog business (incurred from March 18,2004 through to the sale of this business in September 2004).

 

Fiscal 2003

 

In fiscal 2003, net cash used in operationswas $1.4 million, comprised of the following:

 

•      cashexpense, mainly employee related for approximately $22.4 million, and

 

•      legal andinvestment banking fees attributable to our merger with Poet for approximately$400,000, offset by

 

•      collectionsfrom our customers for approximately $21.7 million.

 

## ***Cash Flow provided by (used in) InvestingActivities***

 

The primary uses of our cash in investingactivities are typically for the purchases of property and equipment and acquiredtechnology.

 

Fiscal 2005

 

In fiscal 2005, net cash used in investingactivities was approximately $47,000, comprised of the following:

 

•                  cash used in purchases of property and equipment of $20,000 and cashgenerated from sales of property and equipment of $32,000. We anticipate asimilar level of activities for the purchases of property and equipment infiscal 2006, and

 

•                  $59,000 related to acquisition of a 19.6% of interest in Vanatec, aprivate held company to whom we spun-out our VOA.Net assets.

 

Our primary uses of cash in investingactivities have typically been for the purchases of property and equipment(mostly information technology related equipment). However, in fiscal 2004 and2003, we made a number of acquisitions (Mokume, Poet, FastObjects, Inc.and the JDO Genie technology) and incurred significant costs in connection withsuch acquisitions. Additionally, in fiscal 2004, we sold our catalog solutionsbusiness for cash, the proceeds from which are reflected in investingactivities. We expect to incur additional information technologyinvestments in fiscal 2006 to prepare for SOX 404 implementation in fiscal2007.

 

Fiscal 2004

 

In fiscal 2004, net cash provided byinvesting activities was approximately $6.4 million, comprised of the following:

 

•                  cash inflows from the acquisition of Poet (net of transaction costs)and the sale of our catalog business for approximately $7.2 million, offset by

 

•                  investing outflows representing the net acquisition costs ofFastObjects Inc. and the JDO Genie technology in fiscal 2004 for approximately$500,0000 and purchases of property and equipment for approximately $262,000.

 

43

----

 

Fiscal 2003

 

In fiscal 2003 net cash used in investingactivities was approximately $527,000 comprised of the following:

 

•                  acquisition costs for Mokume Software, Inc. for $260,000, and

 

•                  purchases of property and equipment for $267,000.

 

## ***Cash Flow Provided by (used in) FinancingActivities***

 

Fiscal 2005

 

Our main source of cash from financingactivities is proceeds from sale of common stock under our employee stockoption and stock purchase plans and, in the periods that we had a receivableline of credit in place, periodic draw-downs on the credit line that weretypically repaid within a month.

 

In fiscal 2005, $380,000 cash provided byfinancing activities, comprised of the following:

 

•                  cash inflows of $334,000 due to proceeds from the sale of commonstock under our employee stock option and stock purchase plans, and

 

•                  cash inflows of $50,000 due to proceeds from the borrowing from theline of credit during the fourth quarter of fiscal 2005. On June 21, 2005,Versant and a bank entered into a Loan and Security Agreement, a StreamlineFacility Agreement and an Intellectual Property Security Agreement (collectively,the “Loan Agreements”). Under the terms of these Loan Agreements, we may borrowup to a maximum of $3.0 million from the bank at****anyone time under a revolving secured accounts receivable-based line ofcredit.  This line of credit permitsVersant to obtain short-term loan advances from the bank equal to 80% of theface amount of specific eligible accounts receivable of Versant.  The interest rate on each advance will beeither 4.0% or 4.5% above the bank’s prime rate.

 

Our future liquidity and capital resourcescould be impacted by the exercise of outstanding common stock options and thecash proceeds we receive upon exercise of these securities. Further, we haveapproximately 267,000 shares available to issue under our current equityincentive plans. The timing of the issuance, the duration of their vestingprovision and the grant price will all impact the timing of any proceeds.Accordingly, we cannot estimate the amount of such proceeds at this time.

 

Fiscal 2004

 

On September 3, 2004, our asset basedcredit line for $5 million with a financial institution expired and we electednot to renew the facility at that time due to our very low historic usage ofthis credit line. The last time we borrowed under this line was in October 2003for $500,000, and this amount was repaid within a month.

 

Our primary uses of cash in financingactivities were typically for the repayments under our receivables line that,as mentioned above, expired in September 2004.

 

In fiscal 2004, cash provided and used infinancing activities were as follows:

 

•                  Repayment of the amount drawn-down on the receivables line of creditfor $500,000 in October 2003, offset by

 

•                  the proceeds for the sale of common stock for $468,000, under ouremployee stock option and stock purchase plans.

 

44

----

 

Fiscal 2003

 

In fiscal 2003, financing activities asfollows provided approximately $673,000 of cash, comprised of the following:

 

•                  A draw-down on our receivables line of credit for $500,000 in October 2003,and

 

•                  the proceeds for the sale of common stock for approximately $177,000under our employee stock option and stock purchase plans.

 

***Commitments and Contingencies***

 

Our principal commitments as of October 31,2005 consist of obligations under operating leases for facilities, equipmentsand contract commitments.

 

In November 1996, we entered into aten-year operating lease agreement for our corporate headquarters in Fremont,California that commenced on June 1, 1997 and expires on May 31,2007. The terms of the lease provide for certain increases in rental paymentsduring the lease term. Rental expense under this agreement, includingcontractual rent increases, is recognized on a straight-line basis. We alsolease field office space in Europe and India, generally under multi-yearoperating lease agreements. Consolidated rent expenses in fiscal years ended October 31,2005, October 31, 2004 and October 31, 2003, were approximately $1.0million, $1.7 million, and $1.4 million, respectively.

 

We have recorded approximately $1.6 millionof our commitments on the October 31, 2005 Balance Sheet. Our annualminimum commitments as of October 31, 2005 under non-cancelable operatingleases, not recorded on the October 31, 2005 balance sheet, are asfollows:

 
| ** **                          | ** ** | **Rental** | ** ** | **Equipments** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                          | ** ** | **Lease**  | ** ** | **Lease**      | ** ** | **Total**  | ** ** |
| Fiscal year ending October 31, |       |       |       |           |       |       |       |
| 2006                                |       | 1,621      |       | 101            |       | 1,722      |       |
| 2007                                |       | 875        |       | 63             |       | 938        |       |
| 2008                                |       | —     |       | 28             |       | 28         |       |
| 2009                                |       | —     |       | 24             |       | 24         |       |
| 2010                                |       | —     |       | 9              |       | 9          |       |
| Thereafter                          |       | —     |       | 8              |       | 8          |       |
| Total                               |       | $          | 2,496      |           | $          | 233        |       | $ | 2,729 |   |
|                                     |            |            |            |                |            |            |            |  |  |  |

 

We believe that our existing cash and cashequivalents and cash to be generated from operations will be sufficient tofinance our operations during the next twelve months. However, if we fail togenerate adequate cash flow from operations in the future, due to an unexpecteddecline in our revenues, or due to a sustained increase in cash expenditures inexcess of the revenues generated; then our cash balances may not be sufficientto fund our continuing operations without obtaining additional debt or equityfinancing. Additional cash may also be needed to acquire or invest incomplementary businesses or products or to obtain the right to usecomplementary technologies, and we expect that, in the event of such anacquisition or investment, if significant, it will be necessary for us to seekadditional debt or equity financing.

 

As part of our recent restructuring plan, wespun-off the assets of our VOA.Net product to Vanatec, and we committed to thecapital contribution of an additional 212,500 euros (or $260,000), which wecontributed on November 3, 2005. Vanatec itself has projected cashdisbursements of approximately $550,000 for the next six months ending April 30,2006.

 

45

----

 

On June 21, 2005, we entered into a Loanand Security Agreement with a financial institution, a Streamline FacilityAgreement and an Intellectual Property Security Agreement (collectively, the “LoanAgreements”). Under the terms of these Loan Agreements, we may borrow up to amaximum of $3.0 million at any time under a revolving secured accountsreceivable-based line of credit.  Thisline of credit permits us to obtain short-term loan advances from the bankequal to 80% of the face amount of our specific eligible. The interest rate oneach advance will be either 4.0% or 4.5% above the financial institution’sprime rate.

 

Our obligations to the financial institutionunder the Loan Agreements are secured by a first security interest in all ofour assets, including our equipment, cash and intellectual property. The creditfacility provided by the Loan Agreements will expire by June 21, 2007.

 

If we are required to obtain additionalfinancing for our working capital, there can be no assurance that suchfinancing will be available to us on reasonable financial terms, or at all. Theprices at which new investors might be willing to purchase our securities maybe lower than the market value or the trading price of our common stock. Thesale of additional equity or convertible debt securities could also result indilution to our shareholders, which could be substantial and may involve theissuance of preferred securities that would have liquidation preferences thatentitle holders of the preferred securities to receive certain amounts beforeholders of our common stock in connection with an acquisition or businesscombination involving Versant or a liquidation of Versant. New investors mayalso seek agreements giving them additional voting control or seats on ourboard of directors.

 

Further, if our common stock were everdelisted from trading on the NASDAQ Capital Market, our ability to obtainfinancing through sales of our stock would be materially impaired. Even if wewere able to obtain additional debt or equity financing, the terms of thisfinancing might significantly restrict our business activities and in somecircumstances, might require us to obtain the approval of our shareholders,which could delay or prevent consummation of the financing transaction.

 

In order to be able to comply with the NASDAQCapital Market’s continued listing requirements regarding the minimum bid priceof our common stock, at our annual meeting of shareholders held on August 22,2005, our shareholders approved an amendment of our articles of incorporationto effect a 1-for-10 reverse split of our outstanding Common Stock, and toreduce the number of authorized shares of our Common Stock, Series APreferred Stock and undesignated Preferred Stock in proportion to the ratio ofthe reverse split.

 

Subsequent to the reverse split, on September 8,2005, we received notice from NASDAQ market that we regained compliance withMarketplace Rule and the matter of possible delisting is now closed.

 

***Recent Accounting Pronouncement*s**

 

In December 2004,the Financial Accounting Standards Board, or FASB issued SFAS No. 123(R),Share*-Based Payment*(SFAS 123(R)), whichrequires companies to expense the estimated fair value of employee stockoptions and similar awards. In March 2005, the SEC issued Staff AccountingBulletin No. 107 (SAB 107) regarding the Staff’s interpretation ofShare-Based Payments. This interpretation expresses the views of the Staffregarding the interaction between SFAS 123(R) and certain SEC rules andregulations and provides the Staff’s views regarding the valuation ofshare-based payment arrangements for public companies. The Company will adoptSAB 107 in connection with its adoption of SFAS 123(R). Versant will adopt SFASNo. 123(R) in the first quarter of fiscal 2006 and will recognize stock-basedcompensation related to employee equity awards in its condensed consolidatedstatements of operations using a fair value-based method on a modifiedprospective basis. Since Versant currently accounts for equity awards grantedto its employees using the intrinsic value method under APB No. 25, itexpects the adoption of SFAS No. 123(R) to have an adverse impact on thefinancial position and results of operations of the Company.

 

In October 2005,the Financial Accounting Standards Board, or FASB issued FASB Staff PositionNo, SFA 123(R)-2, *Practical Accommodation to the Applicationof Grant Date as Defined in FASB Statement No. 123(R)*(SFAS123(R)), which requires the grant date be a date that a mutual understanding ofthe key terms and conditions of an award to an individual employee shall bepresumed to exist at the date the award is

 

46

----

 

approved inaccordance with the relevant corporate governance requirements (that is, by theBoard or management with the relevant authority). Adoption of this standard isnot expected to have a material impact on the Company’s financial position orresults of operations.

 

In December 2004, the FASB issued twoFASB Staff Positions (FSP) related to the American Jobs Creation Act (“AJCA”).FSP No. 109-1 *Application of FASBStatement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities provided by the American Jobs Creation Act*(FSP109-1) requires companies that qualify for a deduction for domestic productionactivities under the AJCA to account for the deduction as a special deductionunder FASB Statement No. 109 and reduce their tax expense in the period orperiods the amounts are deductible on the tax return. FSP No. 109-2, *Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004*(FSP 109-2) allows companies additional time to evaluate whether foreignearnings will be repatriated under the repatriation provisions of the AJCA andrequires specified disclosures for companies needing the additional time tocomplete the evaluation. Once a decision is made to repatriate the foreignearnings, companies must reflect the deferred tax liabilities attributable toforeign earnings in the period that the decision is made to remit thoseearnings. Adoption of this standard is not expected to have a material impacton the Company’s financial position or results of operations.

 

In May 2005, the FASB issued SFAS 154, *Accounting Changes and Error Corrections*. This new standardreplaces APB Opinion 20, *Accounting Changes*and SFAS 3, *Reporting Accounting Changes in Interim FinancialStatements*. Among other changes, SFAS 154 requires that a voluntarychange in accounting principle be applied retrospectively with all prior periodfinancial statements presented on the new accounting principle, unless it isimpracticable to do so. SFAS 154 also provides that a change in method ofdepreciating or amortizing a long-lived non-financial asset be accounted for asa change in estimate (prospectively) that was effected by a change inaccounting principle, and that corrections of previously issued financialstatements should be termed a *restatement*.The new standard is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. Adoption of thisstandard is not expected to have a material impact on the Company’s financialposition or results of operations.

 

***Risk Factors***

 

*This annual report on Form 10-KSBcontains forward-looking statements regarding the Company that involve risksand uncertainties, including, but not limited to, those set forth below, thatcould cause our actual results of operations to differ materially from thosecontemplated in the forward-looking statements. The matters set forth belowshould be carefully considered when evaluating our business and prospects.*

 

***Risks Related to Our Business***

 

***We are dependent on a limitednumber of products, especially Versant Object Database***. Nearly all of our license revenues to date have been derived fromour Versant Object Database product and its predecessors. Consequently, if ourability to generate revenues from Versant Object Database were negativelyimpacted, our business, cash flows and results of operations would bematerially adversely affected. Many factors could negatively impact our abilityto generate revenues from Versant Object Database, including without limitationsoftness in the North American market for enterprise software, slowness in thegeneral economy or in key industries we serve, such as the technology,telecommunications and financial services industries, the success ofcompetitive products of other vendors, reduction in the prices we can obtainfor our products due to competitive factors, the adoption of new technologiesor standards that make our products technologically obsolete or customerreluctance to invest in object-oriented technologies. Although we have takensteps to diversify our product line through our acquisition of Poet and itsFastObjects data management product, we still expect that sales of VersantObject Database will continue to be critical to our revenues for theforeseeable future. Accordingly, any significant reduction in revenue levelsfrom our Versant Object Database products can be expected to have a materialnegative impact on our business and results of operation.

 

47

----

 

***Our revenue levels are notpredictable.***Our revenues havefluctuated dramatically on a quarterly basis, and we expect this trend tocontinue. For example, in fiscal 2005 our quarterly revenues have fluctuatedfrom a high of $6.6 million in the first quarter of fiscal 2005 to a low of$4.3 million in the second quarter of fiscal 2005, with revenue in the fourthquarter of fiscal 2005 being $5.1 million. These quarterly fluctuations resultfrom a number of factors, including the following items:

 

**•** delays by our customers (including customers who are resellers) insigning revenue-bearing contracts that were expected to be entered into in aparticular fiscal quarter and the timing of any significant sales;

**•** the status of the market for enterprise software and generalmacroeconomic factors that impact information technology, or “IT”, capitalpurchasing decisions;

**•** the lengthy sales cycle associated with our products;

**•** customer and market perceptions of the value and currency ofobject-oriented software technology;

**•** uncertainty regarding the timing and scope of customer deploymentschedules of applications based on Versant Object Database where revenues arecontingent upon the customer’s deployment of our product;

**•** failure by us to timely develop and launch successful new products;

**•** fluctuations in domestic and foreign demand for our products andservices, particularly in the telecommunications, technology, and defensemarkets;

**•** the impact of new product introductions, both by us and by ourcompetitors;

**•** our unwillingness to lower prices significantly to meet prices setby our competitors or reductions of our prices to meet competition;

**•** the effect of publications of opinions about us and our competitorsand their products;

**•** customer deferrals of orders in anticipation of productenhancements or new product offerings by us or our competitors;

**•** potential customers’ unwillingness to invest in our products givenour perceived financial instability.

 

***We may not be able to managecosts effectively given the unpredictability of our revenues.***We expect to continue to maintain a relatively high percentage offixed expenses, and we might be unable to reduce certain fixed expenses toaccommodate any revenue reductions. If planned revenue growth does notmaterialize, then our business, financial condition and results of operationswill be materially harmed.

 

***Our customer concentrationincreases the potential volatility of our operating results.*** A significant portion of our total revenues has been, and webelieve will continue to be, derived from a limited number of orders placed bylarge organizations. For example, one of our customers contributed 16% and 17%of our total revenues for fiscal 2005 and fiscal 2004 respectively, and two ofour customers each contributed 14% and 12% to our total revenues respectivelyfor the quarter ended October 31, 2005. The timing of large orders and oftheir fulfillment has caused, and in the future is likely to cause, materialfluctuations in our operating results, particularly on a quarterly basis. Inaddition, our major customers tend to change from year to year. The loss of anyone or more of our major customers, or our inability to replace a customermaking declining purchases with a new customer of comparable significance,could each have a material adverse effect on our business.

 

***Our future revenues are substantiallydependent upon our installed customers renewing maintenance agreements for ourproducts and licensing or upgrading additional Versant Products; our futureprofessional services and maintenance revenues are dependent on future sales ofour software products***We dependon our installed customer base for future revenues from maintenance renewalfees and licenses or upgrades of additional products. If our customers do notpurchase additional products, upgrade existing products or cancel or fail torenew their maintenance agreements, this could materially adversely affect ourbusiness and future quarterly and annual operating results. The terms of our standardlicense arrangements provide for a one-time license fee and a prepayment of oneyear of software maintenance and support fees. The maintenance agreements arerenewable annually at the option of the customer and there are no minimumpayment obligations or obligations to license additional software. Therefore,our current customers may not necessarily generate significant maintenancerevenues in future periods. In addition, our customers may choose not topurchase additional products, upgrades or professional services. Ourprofessional services and maintenance revenues are also dependent upon the continueduse of these services by our installed customer base. Any downturn in oursoftware license revenues would have a corresponding negative impact on thegrowth of our professional service revenues.

 

48

----

 

***We have limited working capitaland may experience difficulty in obtaining needed funding, which may limit ourability to effectively pursue our business strategies.***At October 31, 2005, we had approximately $4.0 million in cashand cash equivalents and working capital of approximately $870,000. To date, wehave not achieved profitability or positive cash flow on a sustained basis. Inresponse to this situation, in the fourth quarter of fiscal 2004 and startingthe third quarter of fiscal 2005, we restructured our business operations toreduce our operating expenses by streamlining our operating processes. Theserestructuring efforts continued into the fourth quarter of fiscal 2005 and willbe completed in fiscal 2006. Although with such restructuring, we believe thatour current cash, cash equivalents, and any net cash provided by operationswill be sufficient to meet our anticipated cash needs for working capital andcapital expenditures for the next twelve months, we may choose to make furthercost reductions and it is possible that events may occur that could render ourcurrent working capital reserves insufficient. Because our revenues areunpredictable and a significant portion of our expenses is fixed (and moredifficult to reduce further given previous cost reductions), a reduction in ourprojected revenues or unanticipated requirements for cash outlays could depleteour limited financial resources. For example, our acquisition of Poet and itsoperations increased certain operating expenses even after our fiscal 2004restructuring, and if revenues from Poet’s product line do not materialize whenanticipated, our working capital could be adversely impacted. Impairment of ourworking capital would require us to make expense reductions and/or to raisefunds through borrowing or debt or equity financing. There can be no assurancethat any equity or debt funding will be available to us on favorable terms, ifat all. If we cannot secure adequate financing sources, then we would berequired to further reduce our operating expenses, which would restrict ourability to pursue our business objectives.

 

***Reduced demand for our productsand services may prevent us from achieving targeted revenues and profitability.***Our revenues and our ability toachieve and sustain profitability depend on the overall demand for the softwareproducts and services we offer. Reduced demand for our product line may resultfrom competition offered by alternative technologies or negative customerperception of our object-oriented technology. General economic conditions canalso have a significant adverse effect on our revenues and results ofoperations. The slowdown in the world economy that began in the early 2000scaused many of our customers or potential customer to experience declines in theirrevenues and results of operations. This in turn caused potential or existingcustomers to defer purchases of capital equipment, particularly for critical ITinfrastructure, which is the market sector we serve. We cannot predict theimpact of these or similar events in the future, or of any related or unrelatedmilitary action, on our customers or our business. We believe that, in light ofthese concerns, some businesses may continue to curtail or eliminate capitalspending on information technology. In addition, we have experienced continuedhesitancy on the part of our existing and potential customers to commit to newproducts or services from us, particularly in our North American markets. IfU.S. or global economic conditions worsen, this revenue impact may worsen aswell and have a material adverse impact on our business, operating results andfinancial condition.

 

***We rely for revenues on thetechnology, telecommunications, and defense industries, and these industriesare characterized by complexity, intense competition and changes in purchasingcycles.*** Historically, we havebeen highly dependent upon the telecommunications industry and, more recently,we are becoming increasingly dependent upon the technology and defenseindustries for sales of Versant Object Database. Our success in these areas isdependent, to a large extent, on general economic conditions affecting theseindustries, our ability to compete with alternative technology providers, ourability to develop products that can successfully operate in differentcomputing environments and whether our customers and potential customersbelieve we have the expertise and financial stability necessary to provideeffective solutions in these markets on an ongoing basis. If these conditions,among others, are not satisfied, we may not be successful in generatingadditional opportunities in these markets. Currently, companies in thesemarkets are tending to scale back their technology expenditures and thetelecommunications industry has in particular experienced significant economicdifficulties and consolidation trends in recent years which could jeopardizeour ability to continue to derive revenues from customers in that industry. Thetechnology industry has also generally experienced volatility in recent yearsthat may adversely affect demand for our products and services from thatindustry and the defense industry may experience new cycles of lower availabletechnology budgets due to high levels of U.S. defense spending for operationsin Iraq and Afghanistan. In addition, the types of applications and commercial

 

49

----

 

products for the technology,telecommunications and defense markets are continuing to develop and arerapidly changing, and these markets are characterized by an increasing numberof new entrants whose products may compete with ours. As a result, we cannotpredict the future growth of (or whether there will be future growth in) thesemarkets, and demand for object-oriented databases applications in these marketsmay not develop or be sustainable. We also may not be successful in attaining asignificant share of these markets due to competition and other factors, suchas our limited working capital. Moreover, potential customers in these marketsgenerally develop sophisticated and complex applications that requiresubstantial consulting expertise to implement and optimize. There can be noassurance that we can hire and retain adequate personnel for this practice.

 

***We depend increasingly on ourinternational operations for our revenues as North American revenues havedeclined.*** A large and increasingportion of our revenues is derived from customers located outside NorthAmerica, and it is critical for us to maintain our international revenues. Followingour acquisition of Poet, which had a strong European presence, internationalrevenues have represented a larger percentage of our total revenues than it hadhistorically and consequently we must conduct our operations internationallyand maintain a significant presence in international markets. For fiscal 2005,our international revenues derived from customers outside North America made upapproximately 51% of our total revenues, compared to 37% for fiscal 2004. Bycontrast, North American-sourced revenues were 49% of our total revenues forfiscal 2005, down from 63% of total revenues for fiscal 2004. North Americanrevenues for fiscal 2005 were $10.0 million, down significantly from NorthAmerican revenues of $14.5 million for fiscal 2004. We believe that thesereductions in our North American revenues are due largely to cautiouspurchasing behavior in the region for the past few quarters as well as theimpact of changes in our sales management and organization with new strategiesin the North America. European revenues grew significantly, primarily due toour merger with Poet, although revenues from our core data management productsalso grew in this region. It is possible that the North America revenues willcontinue to remain depressed for fiscal 2006, making the international revenueseven more critical to our operations and cash flows.

 

In fiscal 2002, we transitioned some of ourinternational sales efforts to a business model that engages localdistributors. While use of local distributors reduces certain sales andoperating expenses, it also makes our business more dependent on the skills andefforts of third parties and can decrease our profit margins.

 

Our international operations are subject to anumber of unique risks in addition to the risks faced by our domesticoperations. These risks include, but are not limited to the following items:

 

**•** longer receivable collection periods;

**•**adverse changes in regulatoryrequirements;

**•**dependence on independent resellers;

**•** fluctuations in foreign exchange rates;

**•** compliance with multiple and conflicting regulations and technologystandards in different jurisdictions;

**•** import and export restrictions, tariffs and other regulatoryrestrictions;

**•**difficulties in, and increased costsof, staffing and managing foreign operations;

**•** potentially adverse tax consequences arising from internationaloperations and inter-company transactions;

**•** the burdens of complying with a variety of foreign laws, includingmore protective employment laws in Germany;

**•** the impact of business cycles, economic and political instabilityand potential hostilities outside the United States; and

**•** limited ability to enforce agreements, intellectual property rightsand other rights in some foreign countries.

 

In addition, in light of increasing globalsecurity and terrorism, there may be additional risks of disruption to ourinternational sales activities. Any prolonged disruption in the markets inwhich we derive significant revenues may potentially have a material adverseimpact on our revenues and results of operations.

 

***In order to be successful,Versant must attract, retain and motivate key employees and failure to do socould seriously harm the company.***In order to be successful, we must attract, retain and motivate our executives andother key employees, including those in managerial, sales and technicalpositions and those

 

50

----

 

who became our employees as a result of ourmerger with Poet Holdings. In recent months our stock price has declined and wereduced our workforce in connection with a restructuring of our operations inthe fourth quarter of fiscal 2004 and the third quarter of fiscal 2005. Theseand other circumstances may adversely affect our ability to attract and retainkey management, sales and technical personnel who are critical to the successof our operations and we have experienced some continued losses in ourworkforce in fiscal 2005. We must continue to motivate employees and keep themfocused on the achievement of our strategies and goals. In addition, as aresult of our merger with Poet in March of 2004, we now employ a sizableGerman workforce subject to German law, which generally provides greaterfinancial protection to terminated employees than does United States law.Consequently, failure to retain our German employees may cause us to incursignificant severance costs, which could adversely affect our operating resultsand financial condition.

 

***Our personnel, management teamand operations are located in different countries and as a result, we mayexperience difficulty in coordinating our activities and successfullyimplementing Company goals.***Following our 2004 merger with Poet, we acquired significant operations andpersonnel in Europe, and now have approximately 29 employees based in Europewhose activities must be well coordinated with those of our U.S. workforce andother employees. In addition, we also perform a significant amount ofengineering work in India through our wholly owned subsidiary located in Pune,India. We currently employ about 35 employees in India. As a result of the Poetmerger and recent management changes, our management team resides in both ourU.S. headquarters in Fremont, California and our office in Hamburg, Germany andour Chief Executive Officer resides in Hamburg, Germany. The fairly largegeographic dispersion of our management team and our workforce may make it moredifficult for us to successfully manage our long-term objectives, coordinateactivity across the company, and integrate our operations and business plans.

 

***Our products have a lengthysales cycle.*** The sales cycle forour Versant Object Database and FastObjects products varies substantially fromcustomer to customer, and often exceeds nine months and can sometimes extend toa year or more, especially for sales to defense sector customers. Due in partto the strategic nature of our products and the expenditures associated withtheir purchase, potential customers are typically cautious in making productacquisition decisions. Influencing our customers’ decision to license ourproducts generally requires us to provide a significant level of education toprospective customers regarding the uses and benefits of our products, and wefrequently commit that without any charge or reimbursement. Generally,pre-sales support efforts, such as assistance in performing benchmarking andapplication prototype development, are conducted with no charge to customers.Because of the lengthy sales cycle for our products and the relatively large averagedollar size of individual licenses, a lost or delayed sales transaction couldpotentially have a significant impact on our operating results for a particularfiscal period.

 

***We are subject to litigationand the risk of future litigation.*** We and certain of our present and former officers and directorswere named as defendants in four class action lawsuits filed in the UnitedStates District Court for the Northern District of California in 1998. Thecomplaint alleged violations of Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, or Exchange Act, and Securities and ExchangeCommission Rule 10b-5 promulgated under the Exchange Act, in connectionwith public statements about our financial performance. Although this case wasdismissed, there can be no assurance that we will not be subject to similarlitigation in the future. In addition, we recently settled a litigation thatcommenced in the last quarter of fiscal 2004 when we were sued by SystemsAmerica, Inc., a privately held company, in an action which alleged that,prior to our acquisition of Mokume Software, Inc. in November 2002,persons associated with Mokume Software misappropriated trade secrets andconfidential information of Systems America, unfairly competed with SystemsAmerica with respect to its customer relationships, and infringed SystemsAmerica’s trademarks and trade names. Litigation can be expensive to defend,can consume significant amounts of management time and could result in anadverse judgment or settlement that could have adverse effects on our resultsof operations and financial condition.

 

***We will incur increased costsas a result of recently enacted laws and regulations relating to corporategovernance matters and public disclosure.***Recently enacted and proposed changes in the laws and regulationsaffecting public companies, including the provisions of the Sarbanes-Oxley Actof 2002, rules

 

51

----

 

adopted or proposed by the SEC and by theNASDAQ Stock Market and new accounting pronouncements, including new accountingrules regarding the expensing of stock options, will increase our costs toevaluate the implications of these laws, regulations and standards and complywith their requirements. To maintain high standards of corporate governance andpublic disclosure, we intend to invest resources to comply with evolvingstandards. We expect that this investment will result in increased general andadministrative expenses in fiscal years 2006 and 2007 and a diversion of managementtime and attention from strategic revenues generating and cost managementactivities. In addition, these new laws and regulations could make it moredifficult or more costly for us to obtain certain types of insurance, includingdirector and officer liability insurance, and we may be forced to acceptreduced policy limits and coverage or incur substantially higher costs toobtain the same or similar coverage. The impact of these events could also makeit more difficult for us to attract and retain qualified persons to serve onour board of directors, on our board committees or as executive officers. Weare taking steps to comply with the recently enacted laws and regulations inaccordance with the deadlines by which compliance is required, but we cannotpredict or estimate the amount or timing of additional costs that we may incurto respond to their requirement and cannot be certain that we will be able tofully comply with the provisions of Section 404 of the Sarbanes-Oxley Actregarding compliance with certain assessments and auditor attestationsregarding internal control structure reporting.

 

***The requirement to account forstock options we grant as compensation expense will significantly reduce ournet income and our earnings per share, and may result in or increaselosses. ***Statement of Financial Accounting Standards No.123 (revised 2004)(SFAS No. 123(R)), Shared-Based Payment, will require us to account forequity under our stock plans using a fair value-based model on the option grantdate and record it as a stock-based compensation expense. Our net income andour earnings per share will be significantly reduced, and may result in orincrease losses. We currently calculate stock-based compensation expense usingthe Black-Scholes option-pricing model and disclose the pro forma impact on netincome (loss) and net income (loss) per share in Note 2 to our Notes toConsolidated financial statements included in this report. A fair value-basedmodel, such as the Black-Scholes option-pricing model, requires the input ofhighly subjective assumptions and does not necessarily provide a reliablesingle measure of the fair value of our stock options. Assumptions used underthe Black-Scholes option-pricing model that are highly subjective include theexpected stock price volatility, expected life of an option and forfeiturerate. We plan to adopt SFAS No. 123(R) in our first quarter of fiscal2006, which will require us to expense shares issued under employee stockpurchase plans and stock options as a stock-based compensation expense using afair value based model.

 

***Adoption and application ofaccounting regulations and related interpretations and policies regardingrevenue**recognitioncould cause us to defer recognition of revenue or recognize lower revenue and profits.***Although we use standardized licenseagreements designed to meet current revenue recognition criteria undergenerally accepted accounting principles, we must often negotiate and reviseterms and conditions of these standardized agreements, particularly inmulti-product or multi-year transactions. As our transactions increase incomplexity with the sale of larger, multi-product, multi-year licenses,negotiation of mutually acceptable terms and conditions can extend the salescycle and, in certain situations, may require us to defer recognition ofrevenue on such licenses. We believe that we are in compliance with Statementof Position 97-2, *Software Revenue Recognition,*asamended, however these future, more complex, multi-product, multi-year licensetransactions may require additional accounting analysis to account for themaccurately, could lead to unanticipated changes in our current revenueaccounting practices and may contain terms affecting the timing of revenuerecognition.

 

***Charges to earnings resultingfrom the application of the purchase method of accounting for the merger withPoet and FastObjects may adversely affect the market value of Versant’s commonstock.*** In accordance with UnitedStates generally accepted accounting principles, Versant accounts for themerger with Poet and FastObjects, Inc. using the purchase method ofaccounting, which results in charges to earnings that could have a materialadverse effect on the market value of Versant common stock. Under the purchasemethod of accounting, Versant has allocated the total estimated purchase priceof Poet and FastObjects to net tangible assets and amortizable intangibleassets based on their fair values as of the respective dates of the closing ofthese acquisition, and recorded the excess of the purchase price over thosefair values as goodwill. Versant will incur additional depreciation andamortization expense over the useful

 

52

----

 

lives of certain of the net tangible andintangible assets acquired in connection with these acquisitions, which willextend into future fiscal years. In addition, to the extent the value ofgoodwill or intangible assets becomes impaired, Versant may be required toincur material charges relating to the impairment of those assets. Thesedepreciation, amortization, and potential impairment charges could have amaterial impact on Versant’s results of operations.

 

***Risks Related to Our Industry***

 

***Our products face significantcompetition.***For Versant Object Database and FastObjects products, we competewith other organizations offering other database management systems. We facesubstantial competition from traditional relational database managementcompanies including Oracle, Computer Associates, Sybase, IBM, and Microsoft. Wealso face competition from object database companies including Object Design(which was acquired by Progress Software Corporation in 2002) and Objectivity.Additionally, some prospective customers might attempt to build specializeddata storage capability themselves using their own internal engineeringresources, sometimes starting with low level operating system functionality,and other times utilizing lower level data storage routines that arecommercially available, such as Berkeley DB, a simplified database withoutquery processing capability.

 

Many of our competitors, especially Oracle,have longer operating histories, significantly greater financial, technical,marketing, service and other resources, significantly greater name recognition,broader suites of product offerings, stronger sales and distribution channelsand a much larger installed base of customers than ours. In addition, many ofour competitors have well-established relationships with our current andpotential customers. Our competitors may be able to devote greater resources tothe development, promotion, and sale of their products. They may further havemore direct access to corporate decision-makers of key customers based on theirprevious relationships with customers. Our competitors may also be able torespond more quickly to new or emerging technologies and changes in customerrequirements and may be able to obtain sales of products competitive to oursthrough package sales of a suite of a variety of products that we do not offer.We may not be able to compete successfully against current or futurecompetitors, and competitive pressures could have a material adverse effect onour business, operating results, and financial condition.

 

***We depend on successfultechnology development.*** Webelieve that significant research and development expenditures will continue tobe necessary for us to remain competitive. While we believe our research anddevelopment expenditures will improve our product lines, because of theuncertainty of software development projects, these expenditures will notnecessarily result in successful product introductions. Uncertainties affectingthe success of software development project introductions include technicaldifficulties, delays in introductions of new products, market conditions,competitive products, and consumer acceptance of new products and operatingsystems. In addition, if we are required to adopt cost-conservation measures,we may be compelled to reduce the amounts of our investment in research anddevelopment activities, which could adversely affect our ability to maintainthe competitiveness of our existing products, our ability to develop newproducts, and our future research and development capabilities. Recentreductions in our revenues and operating expenses could require us to limit ourresearch and development expenditures which in turn could adversely affect ourability to continue to timely develop technologies and products necessary forus to remain competitive.

 

We also face certain challenges inintegrating third-party technology embedded in our products. These challengesinclude the technological challenges of integration, which may result indevelopment delays, and uncertainty regarding the economic terms of ourrelationship with the third-party technology providers, which may result indelays of the commercial release of new products. We expect that evolving industry standards will affect ourbusiness. For example, the EJB 3.0 standard (JSR 220) for data storage in theJava 2 Enterprise Edition will offer risks and opportunities for Versant. Theprincipal risk is that this technology may stimulate the creation of a broaderrange of competitors, and some of them could potentially be able to offerapplications bundled with application servers. The opportunity is that weexpect a very large number of applications to be built with programminginterfaces that can readily use Versant products to gain performance and otheradvantages.

 

53

----

 

***We depend on our personnel, forwhom competition is intense.*** Ourfuture performance depends in significant part upon the continued service ofour key technical, sales and senior management personnel. The loss of theservices of one or more of our key employees could have a material adverseeffect on our business. Our future success also depends on our continuingability to attract, train and motivate highly qualified technical, sales andmanagerial personnel. Our current financial position, expense reductions andrecent declines in our stock price may make it more difficult for us to attractand retain highly talented individuals due to constraints on our ability tooffer compensation at levels that may be offered by larger competitors.

 

***We must protect our intellectualproperty.***Despite our efforts toprotect our proprietary rights, unauthorized parties may attempt to copyaspects of our products, obtain or use information that we regard asproprietary or use or make copies of our products in violation of license agreements.Policing unauthorized use of our products is difficult and potentiallyexpensive. In addition, the laws of many jurisdictions do not protect ourproprietary rights to as great an extent as do the laws of the United States.Shrink-wrap licenses may be wholly or partially unenforceable under the laws ofcertain jurisdictions, and copyright and trade secret protection for softwaremay be unavailable in certain foreign countries. Our means of protecting ourproprietary rights may not be adequate, and our competitors may independentlydevelop similar technology.

 

***We may be subject to claims ofintellectual property infringement.*** We expect that developers of object-oriented technology willincreasingly be subject to infringement claims as the number of products,competitors and patents in our industry sector grows. For example, in the lastquarter of fiscal 2004 we were served with a complaint filed by Systems America, Inc.alleging that we received misappropriated intellectual property from MokumeSoftware, Inc. when we acquired Mokume in November 2002 and thatMokume had interfered with certain business relationships of Systems America.While this action has since been settled, any claim of this type, whethermeritorious or not, could be time-consuming, result in costly litigation, causeproduct shipment delays and require us to enter into royalty or licensingagreements. If any of our products or technologies were found to infringethird-party rights, royalty or licensing agreements to use such third-partyrights might not be available on terms acceptable to us, or at all, which couldhave a material adverse effect upon our business, operating results andfinancial condition.

 

***Risks Related to our Stock***

 

***Our common stock is listed onthe NASDAQ Capital Market.***We donot currently meet the listing requirements necessary for our common stock tobe listed on the NASDAQ National Market System (“NMS”). Effective October 1,2002, we transferred the listing of our common stock from the NMS to the NASDAQCapital Market. The listing of our common stock on The NASDAQ Capital Marketmay be perceived as a negative by investors and may adversely affect theliquidity and trading price of our common stock. We may be unable to re-listour common stock on the NMS.

 

***In order for our common stockto continue to be listed on the Nasdaq Capital Market, we must satisfy******the Nasdaq Capital listing requirements, andthere can be no assurance that we will be able to do so***.Although the continued listing requirements of the Nasdaq Capital Market arenot as demanding as those of the NMS, they do, among other things, require thatour stock have a minimum bid price of $1.00 per share, which we sometimes referto below as the $1.00 minimum price requirement, and that either (i) wehave shareholders’ equity of $2,500,000, or (ii) we have $500,000 in netincome or (iii) the market value of our publicly held shares be $35million or more. As reported in our September 17, 2004 report on Form 8-K,on September 15, 2004, we received notification from the Nasdaq StockMarket that, because our common stock had traded at a price below $1.00 pershare for thirty consecutive trading days, we are required to regain compliancewith the $1.00 minimum price requirement to avoid delisting of our common stockfrom the Nasdaq Capital Market. As a result of our adoption of a 1-for-10reverse stock split that was approved by our shareholders on August 22,2005, as of September 12, 2005 the closing bid price of our common stockexceeded $1.00 per share for more than ten consecutive trading days and on September 8,2005 we received written notification from the Nasdaq Stock Market that weregained compliance with this minimum bid price requirement. Our stockholders’equity as of October 31, 2005 was $9.0 million, reflecting a decrease ofapproximately $13.9 million in our shareholders’ equity since October 31,2004.

 

54

----

 

Approximately $12.9 million of this decreaseresulted from non-cash impairment charges against our goodwill and intangibleassets in the third quarter of 2005. Our shareholders’ equity is stillsubstantially above the Nasdaq Capital Market continued listing requirementthat our shareholders’ equity be $2,500,000 or greater. However there can be noassurance that we might not experience non-compliance with these listingrequirements at some time in the future. If our common stock be delisted fromtrading on the Nasdaq Capital Market, then the trading market for our commonstock and the ability of our shareholders to trade our shares and obtainliquidity and fair market prices for their Versant shares are likely to besignificantly impaired. As a result, the market price of Versant’s common stockmay decline significantly.

 

***We may engage in future acquisitionsthat dilute our shareholders and cause us to incur debt or assume contingentliabilities.***As part of ourstrategy, we may review opportunities to buy other businesses or technologiesthat would complement our current products, expand the breadth of our marketsor enhance technical capabilities, or that may otherwise offer growthopportunities. In the event of any future acquisitions, we could:

 

**•** pay amounts of cash to acquire assets or businesses;

**•** issue stock that would dilute current shareholders’ percentageownership;

**•** incur debt; or

**•** assume liabilities.

 

Such acquisitions also involve numerousrisks, including:

 

**•**problems combining the acquiredoperations, technologies or products or integration of new personnel;

**•** the incurrence of unanticipated costs in completing suchacquisitions or in inheriting unforeseen liabilities and expenses of acquiredbusinesses;

**•** diversion of management’s attention from our core business;

**•** adverse effects on existing business relationships with suppliersand customers;

**•** risks associated with entering markets in which we have no orlimited prior experience; and

**•** potential loss of key employees of purchased organizations.

 

There can be no assurance that we will beable to successfully integrate any acquired businesses, products ortechnologies that we might purchase in the future.

 

***Our stock price is volatile.*** Our revenues, operating results and stock price have been and maycontinue to be subject to significant volatility, particularly on a quarterlybasis. We have previously experienced revenues and earnings results that weresignificantly below levels expected by securities analysts and investors, whichhave had an immediate and significant adverse effect on the trading price ofour common stock. This may occur again in the future. Additionally, as asignificant portion of our revenues often occurs late in the quarter, we maynot learn of revenues shortfalls until late in the quarter, which, whenannounced, could result in an even more immediate and adverse effect on thetrading price of our common stock. The recent 1-for-10 reverse split of ourcommon stock may also have the effect of increasing the volatility of our stock’sprice.

 

***We may desire or need to raiseadditional funds through debt or equity financings, which would dilute theownership of our existing shareholders and possible subordinate certain oftheir rights to rights of new investors.***We may choose to raise additional funds in debt or equity financingsif they are available to us on terms we believe reasonable to increase ourworking capital, strengthen our financial position or to make acquisitions. Anysales of additional equity or convertible debt securities would result indilution of the equity interests of our existing shareholders, which could besubstantial. Additionally, if we issue shares of preferred stock or convertibledebt to raise funds, the holders of those securities might be entitled tovarious preferential rights over the holders of our common stock, includingrepayment of their investment, and possibly additional amounts, before anypayments could be made to holders of our common stock in connection with anacquisition of the company. Such preferred shares, if authorized, might begranted rights and preferences that would be senior to, or otherwise adverselyaffect, the rights and the value of Versant’s common stock. Also, new investorsmay require that we enter into voting arrangements that give them additionalvoting control or representation on our board of directors.

 

55

----

 

**Item 7.  Financial Statements andSupplementary Data**.

 

**VERSANT CORPORATION**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

###### **ANDOTHER INFORMATION**

 
| Report of Independent Registered Public  Accounting Firm                                      |                                                      |
|-----------------------------------------------------------------------------------------------|-----------------------------------------------------------|
|                                                                                          |                                                      |
| Consolidated Balance Sheets as of October 31,  2005 and 2005                             |                                                      |
|                                                                                          |                                                      |
| Consolidated Statement of Operations for  the Year Ended October 31, 2005, 2004 and 2003 |                                                      |
|                                                                                          |                                                      |
| Consolidated Statement of Stockholders’  Equity                                          |                                                      |
|                                                                                          |                                                      |
| Consolidated Statement of Cash Flows for  the Year Ended October 31, 2005, 2004 and 2003 |                                                      |
|                                                                                          |                                                      |
| Notes to  Consolidated Financial Statements:                                                  |                                                      |
|                                                                                          |                                                      |
|                                                                                          | Note 1 - The  Company and Basis of Presentation           |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 2 -  Summary of Significant Accounting Policies      |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 3 - Acquisitions                                     |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 4 -  Discontinued Operations                         |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 5 - Restructuring                                    |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 6 - Lease  Obligation and Other Commitments          |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 7 - Line of Credit                                   |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 8 -  Shareholders’ Equity and Loss Per Share    |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 9 - Income Taxes                                     |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 10 -  Employee and Director Benefit Plans            |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 11 -  Related Party Transactions                     |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 12 -  Valuation and Qualifying Accounts and Reserves |   |
|                                                                                          |                                                      |   |
|                                                                                          | Note 13 -  Quarterly Information                          |   |

 

56

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholders

Versant Corporation

 

We have audited the accompanying consolidatedbalance sheets of Versant Corporation and subsidiaries (the “Company”) as of October 31,2005 and 2004 and the related consolidated statements of operations andcomprehensive income (loss), shareholders’ equity, and cash flows for each ofthe three years in the period ended October 31, 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform an audit of itsinternal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Versant Corporation and subsidiaries as of October 31,2005 and 2004, and the consolidated results of their operations and theirconsolidated cash flows for each of the three years in the period ended October 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ Grant Thornton LLP    |   |
|---------------------------|--------|
| December 6, 2005     |
| San Francisco, California |

 

57

----

 

**VERSANTCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands)

 
| ** **                                       | ** ** | **October 31,** | ** ** | **October 31,** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2005**             | ** ** | **2004**             | ** ** |
| **ASSETS**                                       |       |                 |       |                 |       |
| **Current assets:**                              | ** ** | ** **           | ** ** | ** **           | ** ** |
| Cash  and cash equivalents                       |       | $                    | 3,958      |                 | $          | 3,313 |   |
| Restricted  cash                                 |       | —               |       | 320                  |       |
| Trade  accounts receivable, net                  |       | 2,529                |       | 5,121                |       |
| Other  current assets                            |       | 744                  |       | 823                  |       |
| Total  current assets                            |       | 7,231                |       | 9,577                |       |
|                                             |       |                 |       |                 |       |
| Property  and equipment, net                     |       | 489                  |       | 742                  |       |
| Goodwill                                         |       | 6,720                |       | 16,895               |       |
| Intangible  assets, net                          |       | 1,512                |       | 4,770                |       |
| Other  assets                                    |       | 294                  |       | 561                  |       |
| Total  assets                                    |       | $                    | 16,246     |                 | $          | 32,545 |   |
|                                             |       |                 |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**   |       |                 |       |                 |       |
|                                             |       |                 |       |                 |       |
| **Current liabilities:**                         |       |                 |       |                 |       |
| Accounts  payable                                |       | $                    | 779        |                 | $          | 839 |   |
| Accrued  liabilities                             |       | 2,667                |       | 4,307                |       |
| Deferred  revenues                               |       | 2,779                |       | 3,027                |       |
| Deferred  rent                                   |       | 136                  |       | 93                   |       |
| Total  current liabilities                       |       | 6,361                |       | 8,266                |       |
|                                             |       |                 |       |                 |       |
| Long  term restructuring accrual                 |       | 448                  |       | 1,120                |       |
| Deferred  revenues                               |       | 184                  |       | 43                   |       |
| Deferred  rent                                   |       | 128                  |       | 237                  |       |
| Variable  interest entity liability              |       | 137                  |       | —               |       |
| Total  liabilities                               |       | 7,258                |       | 9,666                |       |
|                                             |       |                 |       |                 |       |
| **Stockholders’ equity:**                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Common  stock, no par value                      |       | 94,755               |       | 94,021               |       |
| Deferred  stock-based compensation               |       | (44                  | )          | (146                 | )          |
| Other  comprehensive income, net                 |       | 396                  |       | 569                  |       |
| Accumulated  deficit                             |       | (86,119              | )          | (71,565              | )          |
| Total  stockholders’ equity                 |       | 8,988                |       | 22,879               |       |
| Total  liabilities and stockholders’ equity |       | $                    | 16,246     |                 | $          | 32,545 |   |

 

See accompanying notes toconsolidated financial statements.

 

58

----

 

**VERSANTCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except forper share amounts)

 
| ** **                                                               | ** ** | **Fiscal Year Ended October 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated statement of  operation data:**                           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                            |       |                                   |       |   |   |   |   |
| License                                                                  |       | $                                      | 8,828      |   | $ | 9,686 |   | $ | 9,082 |   |
| Maintenance                                                              |       | 6,305                                  |       | 6,783 |   | 6,076 |   |
| Professional  services                                                   |       | 5,376                                  |       | 6,406 |   | 6,901 |   |
| Total  revenues                                                          |       | 20,509                                 |       | 22,875 |   | 22,059 |   |
|                                                                     |       |                                   |       |   |   |   |   |
| **Cost of revenues:**                                                    |       |                                   |       |   |   |   |   |
| License                                                                  |       | 274                                    |       | 457 |   | 843 |   |
| Amortization  of intangible assets                                       |       | 671                                    |       | 698 |   | 91 |   |
| Maintenance                                                              |       | 1,456                                  |       | 1,516 |   | 1,312 |   |
| Professional  services                                                   |       | 5,164                                  |       | 5,858 |   | 6,011 |   |
| Total  cost of revenues                                                  |       | 7,565                                  |       | 8,529 |   | 8,257 |   |
|                                                                     |       |                                   |       |   |   |   |   |
| Gross  profit                                                            |       | 12,944                                 |       | 14,346 |   | 13,802 |   |
|                                                                     |       |                                   |       |   |   |   |   |
| **Operating expenses:**                                                  |       |                                   |       |   |   |   |   |
| Sales  and marketing                                                     |       | 5,815                                  |       | 8,051 |   | 7,703 |   |
| Research  and development                                                |       | 3,925                                  |       | 5,137 |   | 4,340 |   |
| General  and administrative                                              |       | 4,687                                  |       | 4,514 |   | 4,471 |   |
| Impairment  of goodwill                                                  |       | 10,300                                 |       | 707 |   | — |   |
| Impairment  of intangibles                                               |       | 2,613                                  |       | 317 |   | — |   |
| Restructuring                                                            |       | 638                                    |       | 3,271 |   | — |   |
| Total  operating expenses                                                |       | 27,978                                 |       | 21,997 |   | 16,514 |   |
|                                                                     |       |                                   |       |   |   |   |   |
| Loss  from operations                                                    |       | (15,034                                | )          | (7,651 | ) | (2,712 | ) |
| Variable  interest, net                                                  |       | 320                                    |       | — |   | — |   |
| Other  income, net                                                       |       | 197                                    |       | 119 |   | 397 |   |
| Loss  from continuing operations before taxes and deemed dividend        |       | (14,517                                | )          | (7,532 | ) | (2,315 | ) |
| Provision  for income taxes                                              |       | 37                                     |       | 88 |   | 74 |   |
| Net  loss from continuing operations before deemed dividend              |       | (14,554                                | )          | (7,620 | ) | (2,389 | ) |
| Deemed  dividend to preferred shareholders                               |       | —                                 |       | (2,422 | ) | — |   |
| Net  loss from continuing operations attributable to common shareholders |       | (14,554                                | )          | (10,042 | ) | (2,389 | ) |
| Loss  from discontinued operations, net of income tax                    |       | —                                 |       | (1,646 | ) | — |   |
| Loss  from sale of discontinued operations, net of income tax            |       | —                                 |       | (309 | ) | — |   |
| Net  loss                                                                |       | $                                      | (14,554    | ) | $ | (11,997 | ) | $ | (2,389 | ) |
|                                                                     |       |                                   |       |   |   |   |   |
| **Comprehensive loss:**                                                  |       |                                   |       |   |   |   |   |
| Net  loss                                                                |       | $                                      | (14,554    | ) | $ | (11,997 | ) | $ | (2,389 | ) |
| Foreign  currency translation adjustment                                 |       | (173                                   | )          | 547 |   | (171 | ) |
| Total  comprehensive loss                                                |       | $                                      | (14,727    | ) | $ | (11,450 | ) | $ | (2,560 | ) |
|                                                                     |       |                                   |       |   |   |   |   |
| **Basic and diluted loss per  share:**                                   |       |                                   |       |   |   |   |   |
| Net  loss from continuing operations attributable to common shareholders |       | $                                      | (4.11      | ) | $ | (3.22 | ) | $ | (1.75 | ) |
| Loss  from discontinued operations, net of income tax                    |       | —                                 |       | (0.53 | ) | — |   |
| Loss  from sale of discontinued operations, net of income tax            |       | —                                 |       | (0.10 | ) | — |   |
| Net  loss attibutable to common shareholders                             |       | $                                      | (4.11      | ) | $ | (3.85 | ) | $ | (1.75 | ) |
|                                                                     |       |                                   |       |   |   |   |   |
| **Shares used in per share  calculation:**                               |       |                                   |       |   |   |   |   |
| Basic &  diluted                                                |       | 3,539                                  |       | 3,117 |   | 1,368 |   |
|                                                                     |       |                                   |       |   |   |   |   |
| **Non-cash stock-based  compensation included in the above expenses:**   |       |                                   |       |   |   |   |   |
| Cost  of revenues                                                        |       | $                                      | 27         |   | $ | — |   | $ | — |   |
| Sales  and marketing                                                     |       | 12                                     |       | 25 |   | 5 |   |
| Research  and development                                                |       | 44                                     |       | 25 |   | — |   |
| General  and administrative                                              |       | 13                                     |       | 36 |   | 1,204 |   |
| Total                                                                    |       | $                                      | 96         |   | $ | 86 |   | $ | 1,209 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

59

----

 

**VERSANTCORPORATION AND SUBSIDIARIES**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

(in thousands, except forshare amount)

 
| ** **                                                                                                    | ** ** | ** **                | ** ** | ** ** | ** ** | ** **   | ** **    | ** **      | ** ** | ** **              | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | **Total**   | ** ** | **Total**          | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------|------------|--------------|---------------|-----------------|------------|-------------------------|------------|-------------------|------------|-------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                                                    | ** ** | **Convertible Preferred** | ** ** | **Common** | ** ** | **Deferred** | ** **    | **Accumulated** | ** ** | **Other Comprehensive** | ** ** | **Shareholders'** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                                    | ** ** | **Shares**                | ** ** | **Amount** | ** ** | **Shares**   | ** **    | **Amount**      | ** ** | **Compensation**        | ** ** | **Deficit**       | ** ** | **Income**        | ** ** | **Equity**  | ** ** | **Income  (loss)** | ** ** |
| ** **                                                                                                    | ** ** | ** **                | ** ** | ** ** | ** ** | ** **   | ** **    | ** **      | ** ** | ** **              | ** ** | ** **        | ** ** | ** **        | ** ** | ** **  | ** ** | ** **         | ** ** |
| **Balance at October 31, 2002, as  restated**                                                            |       | 1,313,743                 |       | $          | 7,772      |         | 1,237,632     |            | $          | 52,790                  |       | $                 | —     |              | $          | (57,179     | )          | $                  | 193        |   | $ | 3,576 |   | $ | — |   |
|                                                                                                          |       |                      |       |       |       |         |          |            |       |                    |       |              |       |              |       |        |       |               |       |
| ESPP and exercises of stock options                                                                           |       | —                    |       | —     |       | 9,770        |          | 72              |       | —                  |       | —            |       | —            |       | 72          |       | —             |       |
| Exercise of stock options                                                                                     |       | —                    |       | —     |       | 11,323       |          | 105             |       | —                  |       | —            |       | —            |       | 105         |       | —             |       |
| Stock based compensation                                                                                      |       | —                    |       | —     |       | 67,480       |          | 1,209           |       | —                  |       | —            |       | —            |       | 1,209       |       | —             |       |
| Issuance of common stock in Mokume acquisition                                                                |       | —                    |       | —     |       | 138,559      |          | 920             |       | —                  |       | —            |       | —            |       | 920         |       | —             |       |
| Net loss                                                                                                      |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | (2,389            | )          | —            |       | (2,389      | )          | (2,389             | )          |
| Other comprehensive income, net of tax                                                                        |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| Foreigh currency translation adjustments                                                                      |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | (171              | )          | (171        | )          | (171               | )          |
| Total comprehensive loss                                                                                      |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| **Balance at October 31, 2003, as  restated**                                                            |       | 1,313,743                 |       | $          | 7,772      |         | 1,464,764     |            | $          | 55,096                  |       | $                 | —     |              | $          | (59,568     | )          | $                  | 22         |   | $ | 3,322 | ** ** | **$** | **(2,560** | **)** |
|                                                                                                          |       |                      |       |       |       |         |          |            |       |                    |       |              |       |              |       |        |       |               |       |
| ESPP                                                                                                          |       | —                    |       | —     |       | 29,927       |          | 198             |       | —                  |       | —            |       | —            |       | 198         |       | —             |       |
| Exercise of stock options                                                                                     |       | —                    |       | —     |       | 28,394       |          | 270             |       | —                  |       | —            |       | —            |       | 270         |       | —             |       |
| Conversion of preferred stock to common                                                                       |       | (1,313,743                | )          | (7,772     | )          | 394,123      |          | 7,772           |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| Inducement to preferred stock holders  relating to conversion of preferred stock and modification of warrants |       | —                    |       | —     |       | —       |          | 2,422           |       | —                  |       | (2,422            | )          | —            |       | —      |       | (2,422             | )          |
| Issurance of common stock and options in  connection with Poet acquisition                                    |       | —                    |       | —     |       | 1,552,534    |          | 28,330          |       | (299                    | )          | —            |       | —            |       | 28,031      |       | —             |       |
| Amortization of unearned stock based  compensation                                                            |       | —                    |       | —     |       | —       |          | —          |       | 86                      |       | —            |       | —            |       | 86          |       | —             |       |
| Cancellation of unvested Poet stock  options                                                                  |       | —                    |       | —     |       | —       |          | (67             | )          | 67                      |       | —            |       | —            |       | —      |       | —             |       |
| Net loss before deemed dividend                                                                               |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | (9,575            | )          | —            |       | (9,575      | )          | (9,575             | )          |
| Foregn currency translation adjustments                                                                       |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | 547               |       | 547         |       | 547                |       |
| Total comprehensive loss                                                                                      |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| **Balance at October 31, 2004**                                                                          |       | —                    |       | $          | —     |         | 3,469,742     |            | $          | 94,021                  |       | $                 | (146       | )                 | $          | (71,565     | )          | $                  | 569        |   | $ | 22,879 | ** ** | **$** | **(11,450** | **)** |
|                                                                                                          |       |                      |       |       |       |         |          |            |       |                    |       |              |       |              |       |        |       |               |       |
| ESPP                                                                                                          |       | —                    |       | —     |       | 15,985       |          | 73              |       | —                  |       | —            |       | —            |       | 73          |       | —             |       |
| Exercise of stock options                                                                                     |       | —                    |       | —     |       | 52,137       |          | 267             |       | —                  |       | —            |       | —            |       | 267         |       | —             |       |
| Reverse split adjustments                                                                                     |       | —                    |       | —     |       | (42          | )             | —          |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| Issurance of common stock in connection  with purchase of JDO assets                                          |       | —                    |       | —     |       | 23,015       |          | 400             |       | —                  |       | —            |       | —            |       | 400         |       | —             |       |
| Amortization of unearned stock based  compensation                                                            |       | —                    |       | —     |       | —       |          | —          |       | 96                      |       | —            |       | —            |       | 96          |       | —             |       |
| Cancellation of unvested Poet stock  options                                                                  |       | —                    |       | —     |       | —       |          | (6              | )          | 6                       |       | —            |       | —            |       | —      |       | —             |       |
| Net loss before deemed dividend                                                                               |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | (14,554           | )          | —            |       | (14,554     | )          | (14,554            | )          |
| Foregn currency translation adjustments                                                                       |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | (173              | )          | (173        | )          | (173               | )          |
| Total comprehensive loss                                                                                      |       | —                    |       | —     |       | —       |          | —          |       | —                  |       | —            |       | —            |       | —      |       | —             |       |
| **Balance at October 31, 2005**                                                                          | ** ** | **—**                | ** ** | **$**      | **—** | ** **   | **3,560,837** | ** **      | **$**      | **94,755**              | ** ** | **$**             | **(44**    | **)**             | **$**      | **(86,119** | **)**      | **$**              | **396**    | ** ** | **$** | **8,988** | ** ** | **$** | **(14,727** | **)** |

 

See accompanying notes toconsolidated financial statements

 

60

----

 

**VERSANTCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                                                        | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **October 31,**  | ** ** |
| ** **                                                                                        | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating  activities:**                                                        |       |                  |       |   |   |   |   |
| Net  loss after cumulative effect of accounting change but before deemed dividend                 |       | $                     | (14,554    | ) | $ | (7,620 | ) | $ | (2,389 | ) |
| Net  loss from discontinued operations                                                            |       | —                |       | (1,955 | ) | — |   |
| Net  loss                                                                                         |       | $                     | (14,554    | ) | $ | (9,575 | ) | $ | (2,389 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                      |       |                  |       |   |   |   |   |
| Write  off of leasehold improvements in conjunction with restructuring                            |       | —                |       | 200 |   | — |   |
| Depreciation  and amortization                                                                    |       | 976                   |       | 1,557 |   | 987 |   |
| Stock-based  compensation                                                                         |       | 96                    |       | 86 |   | 1,209 |   |
| Write  off of equipment                                                                           |       | —                |       | 65 |   | 22 |   |
| Impairment  of goodwill                                                                           |       | 10,300                |       | 707 |   | — |   |
| Impairment  of intangibles                                                                        |       | 2,613                 |       | 317 |   | — |   |
| Loss  on sale of Catalog business                                                                 |       | —                |       | 309 |   | — |   |
| Provision  (recovery) of bad debt allowance                                                       |       | (251                  | )          | 87 |   | (132 | ) |
| Changes  in current assets and liabilities:                                                       |       |                  |       |   |   |   |   |
| Restricted  cash                                                                                  |       | 320                   |       | — |   | (320 | ) |
| Accounts  receivable                                                                              |       | 2,690                 |       | (93 | ) | 106 |   |
| Prepaid  expenses and other assets                                                                |       | 406                   |       | 237 |   | 201 |   |
| Accounts  payable and accrued liabilities                                                         |       | (1,988                | )          | 1,402 |   | (1,469 | ) |
| Deferred  revenue                                                                                 |       | (40                   | )          | (1,780 | ) | 405 |   |
| Deferred  rent                                                                                    |       | (83                   | )          | (42 | ) | (31 | ) |
| Net  cash provided by (used in) operating activities                                              |       | 485                   |       | (6,523 | ) | (1,411 | ) |
|                                                                                              |       |                  |       |   |   |   |   |
| **Cash flows from investing  activities:**                                                        |       |                  |       |   |   |   |   |
| Mokume  acquisition costs                                                                         |       | —                |       | — |   | (260 | ) |
| Cash  acquired in Poet acquisition, net of transaction costs                                      |       | —                |       | 5,931 |   | — |   |
| Proceeds  from sale of Catalog Business                                                           |       | —                |       | 1,223 |   | — |   |
| Proceeds  from sales of property and equipment                                                    |       | 32                    |       | — |   | — |   |
| Purchase  of JDO Genie (PTY) Ltd.                                                                 |       | —                |       | (200 | ) | — |   |
| Purchase  of FastObjects, Inc.                                                               |       | —                |       | (301 | ) | — |   |
| Investment  in Vanatec                                                                            |       | (59                   | )          |   |   |   |   |
| Purchases  of property and equipment                                                              |       | (20                   | )          | (262 | ) | (267 | ) |
| Net  cash provided by (used in) investing activities                                              |       | (47                   | )          | 6,391 |   | (527 | ) |
|                                                                                              |       |                  |       |   |   |   |   |
| **Cash flows from financing  activities:**                                                        |       |                  |       |   |   |   |   |
| Proceeds  from sale of common stock, net                                                          |       | 334                   |       | 468 |   | 177 |   |
| Proceeds  from (net payments) under short-term note and bank loan                                 |       | 50                    |       | (500 | ) | 500 |   |
| Principal  payments under capital lease obligations                                               |       | (6                    | )          | — |   | (4 | ) |
| Net  cash provided by (used in) financing activities                                              |       | 378                   |       | (32 | ) | 673 |   |
|                                                                                              |       |                  |       |   |   |   |   |
| Effect of foreign exchange rate changes on  cash and cash equivalents                             |       | (171                  | )          | 486 |   | (171 | ) |
| Net increase (decrease) in cash and cash  equivalents                                             |       | 645                   |       | 322 |   | (1,436 | ) |
| Cash and cash equivalents at beginning of  period                                                 |       | 3,313                 |       | 2,991 |   | 4,427 |   |
| **Cash and cash equivalents at  end of period**                                                   |       | $                     | 3,958      |   | $ | 3,313 |   | $ | 2,991 |   |
|                                                                                              |       |                  |       |   |   |   |   |
| **Supplemental disclosures of  cash flows information:**                                          |       |                  |       |   |   |   |   |
| Cash  paid for:                                                                                   |       |                  |       |   |   |   |   |
| Interest                                                                                          |       | $                     | 26         |   | $ | 3 |   | $ | 2 |   |
| Foreign  withholding and state income taxes                                                       |       | 37                    |       | 88 |   | 74 |   |
|                                                                                              |       |                  |       |   |   |   |   |
| **Supplemental schedule of  noncash investing and financing activities:**                    |       |                  |       |   |   |   |   |
| Conversion  of preferred shares                                                                   |       | $                     | —     |   | $ | 7,772 |   | $ | — |   |
| Deemed  dividend to preferred shareholders                                                        |       | —                |       | 2,422 |   | — |   |
| Common  stock issued in conjunction with purchase of JDO Genie (PTY) Ltd.                         |       | 400                   |       | — |   |   |   |
| Common  stock issued in conjunction with Poet acquisition                                         |       | —                |       | 25,928 |   | — |   |
| Options  issued in conjunction with Poet acquisition, net of intrinsic value of  unvested options |       | —                |       | 2,103 |   | — |   |
| Mokume  acquisition for common stock                                                              |       | —                |       | — |   | 920 |   |
| Non  cash stock compensation                                                                      |       | 96                    |       | 86 |   | 1,209 |   |

 

See accompanyingnotes to consolidated financial statements

 

61

----

 

**VERSANTCORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**October 31,2005**

 

**NOTE 1.      THECOMPANY AND BASIS OF PRESENTATION**

 

Versant Corporation was incorporated in California in August 1988(with its subsidiaries, collectively referred to in this report as “Versant” or“the Company”).  The Company is involved in the design, development,marketing and support of high performance object data base management, dataaccess and data integration software systems. The Company is headquartered inFremont, California and has international operations in Germany, the UnitedKingdom and India. The Company markets its software products and relatedmaintenance services directly through telesales and field sales organizationsin North America, Germany and the United Kingdom, and indirectly throughdistributors and resellers worldwide.

 

The Company is subject to the risks associated with similar companiesin a comparable stage of development. These risks include, but are not limitedto, fluctuations of operating results, seasonality, lengthy sales cycles forits products, product concentration, dependence on the continued customeracceptance of object database technology, competition, limited customer base,dependence on key individuals, dependence on international operations, foreigncurrency exchange rate fluctuations, and the Company’s ability to adequatelyfinance its ongoing operations.

 

As of October 31, 2005, the Company had not achieved businessvolume sufficient to consistently restore profitability and positive cash flow,on an annual basis.  The Company had net losses of $14.6 million, $12.0million, and $2.4 million in fiscal 2005, 2004 and 2003, respectively.Management anticipates funding the Company’s future operations from currentcash resources and future cash flows from its operating activities.  Iffinancial results fall short of projections, additional debt or equityfinancing may be required, and the Company may need to implement further costreduction measurements.  There are no assurances that the Company will beable to obtain additional or adequate debt or equity financing or that any costcontrol efforts will be successful or sufficient, if required.

 

The Company completed its merger with Poet Holdings, Inc. in March of2004, its acquisition of technology assets from JDO Genie (PTY) Limited in June 2004,and its acquisition of FastObjects, Inc. in July 2004.  Poet washeadquartered in Hamburg, Germany, and as a result of this merger, the Companyconsolidated its European operations in Hamburg.  At the end of fiscal2005, Versant had a total of 100 employees.

 

### **NOTE 2.**      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

### ***Principles of Consolidation***

 

The consolidated financial statements include 100% of the assets,liabilities, revenues, expenses and cash flows of Versant and all entities inwhich Versant has a controlling voting interest (subsidiaries) and the variableinterest entity (VIE) required to be consolidated in accordance withU.S. generally accepted accounting principles (see Note 5). Intercompanyaccounts and transactions between consolidated companies have been eliminatedin consolidation.

 

The financial position and operating results of foreign operations areconsolidated using the local currency as their functional currency. Localcurrency assets and liabilities are translated at the rates of exchange on thebalance sheet date, and local currency revenues and expenses are translated ataverage rates of exchange during the period. Resulting translation gains orlosses are included in the accompanying consolidated statement of shareholders’equity as a component of accumulated other comprehensive income, net.

 

62

----

 

### ***Use of Estimates***

###  

The preparation of financial statements, in conformity with generallyaccepted accounting principles (GAAP), requires management to make estimatesand assumptions, which affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amount of revenues and expenses during thereporting period.

 

### ***Cash and Cash Equivalents***

###  

Cash and cash equivalents include all highly liquid investments with anoriginal maturity of three months or less at the time of purchase. The Company’scash and other cash equivalents at October 31, 2005 and October 31,2004 consisted of deposits in banks and money market funds.  As of October 31, 2005 and 2004 cashbalances held in foreign financial institutions were $2.9 million and $1.7million, respectively.

 

## ***Restricted Cash***

##  

The Company’s payroll processing arrangement required Versant tomaintain certain amount of cash in a restricted form. The Companymaintained  $320,000 at October 31,2004 as restricted cash and did not have any restricted cash as of October 31,2005.

 

## ***Concentration of Credit Risk***

##  

The Company’s financial instruments, which potentially subject theCompany to concentrations of credit risk, consist primarily of cash and cashequivalents and trade accounts receivable. The Company maintains its cash andcash equivalents with high quality financial institutions and invests in highlyrated short-term securities. The Company maintains an allowance for doubtfulaccounts resulting from the inability of our customers to make requiredpayments. The allowance was $114,000 and $368,000 at October 31, 2005 and October 31,2004, respectively. The amount of the Company’s allowance is based onhistorical experience and an analysis of the current accounts receivablebalances. Credit losses to date have been within management’s expectations.However, actual results could differ from such estimates. As of October 31,2005 and October 31, 2004, there were one and two customers, respectively,the balance of whose accounts exceeded 10% of aggregate accounts receivable.

 

## ***Property and Equipment***

##  

Property and equipment are stated at cost less accumulateddepreciation, computed using the straight-line method based on the estimateduseful lives of the assets, generally ranging from three to five years.Depreciation commences upon placing the asset in service. Capital leases arerecorded at the lesser of the fair value of the leased asset at the inceptionof the lease or the present value of the minimum lease payments as of thebeginning of the lease term. Leased assets are amortized on a straight-linebasis over the estimated useful life of the asset or the lease term. Leaseholdimprovements are amortized over the shorter of the useful life or the remaininglease term. The Company reviews its property and equipment for impairmentperiodically or whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.

 

The following table summarizes the breakdown of the Company’s propertyand equipment as of October 31, 2005 and October 31, 2004 (inthousands):

 

63

----

 
| ** **                                       | ** ** | **As of October 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                                             |       |                       |       |   |   |
| Computer equipment                               |       | $                          | 4,295      |   | $ | 4,845 |   |
| Furniture and fixtures                           |       | 2,084                      |       | 2,167 |   |
| Software                                         |       | 1,446                      |       | 1,428 |   |
| Leasehold improvements                           |       | 1,198                      |       | 1,178 |   |
| Capital leases and others                        |       | 81                         |       | — |   |
|                                             |       | 9,104                      |       | 9,618 |   |
| Less: accumulated depreciation and  amortization |       | (8,615                     | )          | (8,876 | ) |
|                                             |       | $                          | 489        |   | $ | 742 |   |

 

The total depreciation expenses for fiscal 2005 and fiscal 2004 were$305,000 and $859,000 respectively.

 

## ***Impairment of Goodwill and Intangible Assets***

##  

Goodwill represents the excess of the purchase price over the fairvalue of net assets acquired in business combinations.  In July 2001, the Financial AccountingStandards Board (FASB) approved the issuance of Statement of FinancialAccounting Standards (SFAS) No. 142, *Goodwill and OtherIntangible Assets*. SFAS No. 142 provides guidance on how toaccount for goodwill and certain intangible assets after an acquisition is completed.**As required by SFAS 142, Versant ceased amortizing itsgoodwill effective November 1, 2002. Prior to November 1, 2002, theCompany amortized goodwill over five years using the straight-line method.

 

Goodwill is subject to an annual impairment test.  Versant uses the market approach to assessthe fair value of its goodwill and intangible assets, which is then compared tothe carrying value of those assets to test for impairment. The total fair valueof Versant’s assets is estimated by summing the fair value of Versant’s equity(as indicated by Versant publicly traded share price and shares outstandingplus a control premium), debt and current liabilities. Under this approach, ifthe estimated fair value of Versant’s assets is greater than the carrying valueof these assets, then there is no apparent goodwill impairment. If theestimated fair value of Versant assets is less than the carrying value of theseassets, then Versant allocates the reporting unit’s estimated fair value to itsassets and liabilities as though the reporting unit had just been acquired in abusiness combination. The impairment loss is the amount, if any, by which theimplied fair value of goodwill is less than that reporting unit’s goodwillcarrying amount and would be recorded in earnings during the period of suchimpairment.

 

As the result of the aforementioned impairment test on August 25,2004, Versant determined that the carrying value of goodwill acquired throughits acquisition of Mokume Software Inc., in November 2002 had been fullyimpaired. Consequently, for the quarter ended July 31, 2004, the Companyrecorded a charge of approximately $707,000 related to the write-off ofremaining Mokume goodwill.

 

Further, due to the recent decline in the trading price of Versant’scommon stock and revised revenue projections, most notably for the FastObjectsproduct line, the Company prepared an updated valuation with regard to itsgoodwill as of July 31, 2005. The affected goodwill was acquired byVersant as a result of its merger with Poet in March 2004, its acquisitionof technology assets from JDO Genie (PTY) Limited in June 2004, and itsacquisition of FastObjects, Inc. in July 2004. Consequently, for thequarter ended July 31, 2005, the Company recorded an impairment charge of$10.3 million related to the write down of its goodwill.

 

For the purpose of testing for goodwill impairment in its single DataManagement operating segment Versant has aggregated the goodwill for thefollowing acquisitions:

 

• VersantEurope, acquired in 1997;

• Poet,acquired on March 18, 2004;

 

64

----

 

•Technology of JDO Genie, acquired on June 30, 2004; and

•FastObjects, Inc., acquired on July 6, 2004.

 

The goodwill balances as of October 31, 2005 and October 31,2004, are as follows (in thousands):

 
| ** **               | ** ** | **As of October 31, 2005** | ** ** | **As of October 31, 2004** | ** ** |
|--------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Gross**                       | ** ** | ** **                      | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **               | ** ** | **Carrying**                    | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **               | ** ** | **Amount**                      | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Goodwill:                |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Versant Europe and India |       | $                               | 3,277      |                            | $          | 3,036 |   | $ | 241 |   | $ | 3,277 |   | $ | 3,036 |   | $ | 241 |   |
| Poet Holdings, Inc. |       | 5,752                           |       | —                          |       | 5,752 |   | 16,052 |   | — |   | 16,052 |   |
| FastObjects, Inc.   |       | 677                             |       | —                          |       | 677 |   | 602 |   | — |   | 602 |   |
| JDO Genie (PTY), LTD.    |       | 50                              |       | —                          |       | 50 |   | — |   | — |   | — |   |
| Total                    |       | $                               | 9,756      |                            | $          | 3,036 |   | $ | 6,720 |   | $ | 19,931 |   | $ | 3,036 |   | $ | 16,895 |   |

 

Identifiable intangibles are currently amortized over five years inrelation to the acquisition of technology of JDO Genie (PTY) Ltd, six years inrelation to the FastObjects, Inc. acquisition and seven years in relationto the merger with Poet, using the straight-line method in each of thesecases.  Intangible assets consist ofacquired technology and customer relationships.

 

Versant tests and evaluates its intangible assets for impairmentwhenever indicators of potential impairment are identified. As a result, on August 25,2004, the Company determined that the carrying value of intangible assetsacquired through its acquisition of Mokume Software Inc. in November 2002had been fully impaired. Consequently, for the quarter ended July 31,2004, the Company recorded a charge of approximately $317,000 related to thewrite-off of remaining Mokume intangible assets.

 

Versant also performed tests and valuations on its intangible assets onJuly 31, 2005. As a result, the Company recorded a charge of $2.6 millionrelated to the write down of intangible assets, of which $2.4 million wasrecorded as impairment of Poet intangible assets and $232,000 was recorded asimpairment of FastObjects, Inc. intangible assets.

 

The Company’s intangible assets’ balances as of October 31, 2005and October 31, 2004 are as follows (in thousands):

 
| ** **                                       | ** ** | **As of October 31, 2005** | ** ** | **As of October 31, 2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **Gross**                       | ** ** | ** **                      | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                       | ** ** | **Carrying**                    | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                                       | ** ** | **Amount**                      | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Intangible assets:                               |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Poet Holdings, Inc.  (Amortized over 7 yrs) |       | $                               | 1,919      |                            | $          | 887 |   | $ | 1,032 |   | $ | 4,300 |   | $ | 380 |   | $ | 3,920 |   |
| JDO Genie (PTY), LTD.  (Amortized over 5 yrs)    |       | 550                             |       | 146                             |       | 404 |   | 525 |   | 35 |   | 490 |   |
| FastObjects, Inc.  (Amortized over 6 yrs)   |       | 148                             |       | 72                              |       | 76 |   | 380 |   | 20 |   | 360 |   |
| Total                                            |       | $                               | 2,617      |                            | $          | 1,105 |   | $ | 1,512 |   | $ | 5,205 |   | $ | 435 |   | $ | 4,770 |   |

 

The projected amortization of intangible assets is as follows (inthousands):

 
| ** **                          | ** ** | **Amortization** | ** ** |
|-------------------------------------|------------|------------------|------------|
| Fiscal year ending October 31, |       |             |       |
| 2006                                |       | $                | 315        |   |
| 2007                                |       | 315              |       |
| 2008                                |       | 315              |       |
| 2009                                |       | 279              |       |
| 2010                                |       | 201              |       |
| Thereafter                          |       | 87               |       |
| Total                               |       | $                | 1,512      |   |

 

65

----

 

### **Impairment ofLong-Lived Assets**

###  

Versant evaluates its long-lived assets, including intangible assetsother than goodwill, for impairment in accordance with the provisions of SFAS No. 144*Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS 144). SFAS 144 requires that long-livedassets and intangible assets other than goodwill be evaluated for impairmentwhenever events or changes in circumstances indicate that the carrying value ofan asset may not be recoverable. The recoverability test compares the carryingamount of the asset or asset group to the expected undiscounted net cash flowsto be generated by these assets. If the carrying amount of the asset or assetgroup is less than the expected undiscounted net cash flows to be generated by theseassets, an impairment loss in recorded in earnings during the period of suchimpairment and is calculated as the excess of the carrying amount of the assetor asset group over its estimated fair value.

 

## ***Revenue Recognition***

##  

Versant recognizes revenues in accordancewith the provisions of Statement of Position (SOP) 97-2, *SoftwareRevenue Recognition,* SOP 98-9, Modification of SOP 97-2*, Software Revenue Recognition with Respect to Certain Transactions,*andSOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*. Revenues consist mainly ofrevenues earned under software license agreements, maintenance supportagreements (otherwise known as post-contract customer support, “PCS”), andagreements for consulting and training activities.

 

Versant uses the residual method to recognizerevenues when a license agreement includes one or more elements to be deliveredat a future date.   If there is an undelivered element under thelicense arrangement, Versant defers revenues based on vendor-specific objectiveevidence, or VSOE, of the fair value of the undelivered elements, as determinedby the price charged when the element is sold separately. If VSOE of fair valuedoes not exist for all undelivered elements of a transaction, the Companydefers all revenues from that transaction until sufficient evidence exists orall elements have been delivered. Under the residual method, discounts areallocated only to the delivered elements in a multiple element arrangement,with any undelivered elements being deferred based on the VSOE of the value ofsuch undelivered elements. Versant typically does not offer discounts on futureundeveloped products.

 

Revenues from software license arrangements,including prepaid license fees, are recognized when all of the followingcriteria are met:

 

**•****                 **Persuasiveevidence of an arrangement exists.

•**                 **Deliveryhas occurred and there are no future deliverables except PCS.

**•****                 **Feeis fixed and determinable. If we cannot conclude that a fee is fixed anddeterminable, then assuming all other criteria have been met, revenues arerecognized as payments become due in accordance with paragraph 29 of SOP 97-2;

**•****                 **Collectionis probable. Probability of collection is assessed using the following customerinformation: credit service reports, bank and trade references, public filings,and/or current financial statements.  Prior payment experience is reviewedon all existing customers.  Payment terms in excess of our standardpayment terms of 30-90 days net are granted on an exception basis, typically insituations where customers elect to purchase development and deploymentlicenses simultaneously for an entire project and are attempting to align theirpayments with their deployment schedules. Extended payment terms are onlygranted to customers with a proven ability to pay at the time the order isreceived, and with prior approval of our senior management. In accordance withparagraph 27 of SOP 97-2, the Company has an established history of collection,without concessions, on longer-term receivables. The Company typicallydoes not grant extended payment terms beyond 90 days.

 

If an acceptance period or other contingencyexists, revenues are not recognized until customer acceptance or expiration ofthe acceptance period, or satisfaction of the contingency, as applicable. TheCompany’s license fees are non-cancelable and non-refundable and Versant doesnot make concessions or grant a

 

66

----

 

refund for any unused amount. Also, the Company’scustomer agreements for prepaid deployment licenses do not make payment of theCompany’s license fees contingent upon the actual deployment of itssoftware. Therefore, a customer’s delay or acceleration in its deployment schedule doesnot impact the Company’s revenue recognition. Revenues from related PCS for allproduct lines are usually billed in advance of the service being provided andare deferred and recognized on a straight-line basis over the term of the PCS,which is generally twelve months. In some cases PCS revenues are paid inarrears of the service being provided and are recognized as revenues at thetime the customer provides a report to the Company for deployments made duringa given time period. Training and consulting revenues are recognized when apurchase order is received, the services have been performed and collection isdeemed probable.  Consulting services are billed on an hourly, daily ormonthly rate.  Training classes are billed based on group or individualattendance.

 

Versant categorizes its customers into twobroad groups, End-Users and Value Added Resellers (VARs). End User customersare companies who use the Company’s products internally and do not redistributethe product outside of their corporate organizations. VAR customers includetraditional Value Added Resellers, Systems Integrators, OEMs and other vendorswho redistribute the Company’s products to their external third partycustomers, either individually or as part of an integrated product. Versantlicenses its data management products through two types of perpetuallicenses—development and test licenses and deployment licenses. Development andtest licenses are typically sold on a per seat basis and authorize a customerto develop and test an application program that uses the Company’s softwareproduct. Before an End-User customer may deploy an application that it hasdeveloped under our development license, it must purchase deployment licensesbased on the number of computers connected to the server that will run theapplication using the Company’s database management system.  For certainapplications, the Company offers deployment licenses priced on a per userbasis.  Pricing of Versant Object Database and FastObjects licenses variesaccording to several factors, including the number of computer servers on whichthe application runs and the number of users that are able to access the serverat any one time.  Customers may elect to simultaneously purchasedevelopment and deployment licenses for an entire project. These developmentand deployment licenses may also provide for prepayment of a nonrefundableamount for future deployment*.*

 

VARs and distributors purchase developmentlicenses from the Company on a per seat basis on terms similar to those ofdevelopment licenses sold directly to End-Users.  VARs are authorized tosublicense deployment copies of the Company’s data management products that areeither bundled or embedded in the VAR’s applications and sold directly toEnd-Users.  VARs are required to report their distribution of Versant’ssoftware and are charged a royalty that is based either on the number of copiesof its application software that are distributed or computed as a percentage ofthe selling price charged by the VARs to their end-user customers. Theseroyalties from VARs may be prepaid in full or paid upon deployment. Providedthat all other conditions for revenue recognition have been met, revenues fromarrangements with VARs are recognized, (i) as to prepaid licensearrangements, when the prepaid licenses are sold to the VARs, and (ii) asto other license arrangements, at the time the VAR provides a royalty report tothe Company for sales made by the VAR during a given period.

 

Revenues from the resale of third-partyproducts or services are recorded at total contract value with thecorresponding cost included in the cost of sales when the Company acts as aprincipal in these transactions by assuming the risks and rewards of ownership(including the risk of loss for collection, delivery or returns). When Versantdoes not assume the risks and rewards of ownership, revenues from the resale ofthird-party products or services are recorded at contract value net of the costof sales.

 

In rare cases that a customer requestsengineering work for porting the Company’s products to an unsupported platformor customization of its software for specific functionality, or any othernon-routine technical work, Versant recognizes revenues in accordance with SOP81-1 and use either time and material percentage of completion or completedcontract methods for recognizing revenues.  The Company uses thepercentage of completion method if the Company can make reasonable anddependable estimates of labor costs and hours required to complete the work inquestion.  Versant periodically reviews these estimates in connection withwork performed and rates actually charged and recognizes any losses whenidentified.

 

67

----

 

Progress to completion is determined usingthe cost-to-cost method, whereby cost incurred to date as a percentage of totalestimated cost determines the percentage completed and revenuerecognized.  When using the percentage of completion method, the followingconditions must exist:

 

**•****                 **Anagreement must include provisions that clearly specify the rights regardinggoods or services to be provided and received by both parties, theconsideration to be exchanged and the manner and terms of settlement.

•                  Thecustomers are able to satisfy their obligations under the contract.

•                  Versantis able to satisfy its obligations under the contract.

 

The completed contract method is used whenreasonable or dependable estimates cannot be made. As a result, in suchsituations, the Company defers all revenues until such time that the work isfully completed.

 

Management makes significant judgments andestimates in connection with the determination of the revenue recognized ineach accounting period. If Versant had made different judgments or utilizeddifferent estimates for any period, material differences in the amount andtiming of revenue recognized would have resulted.

 

## ***Foreign Currency Translation***

##  

The functional currencies of the Company’s foreign subsidiaries aretheir respective local currencies. The Company translates the assets andliabilities of international subsidiaries into the U.S. Dollar at the currentexchange rates in effect during each period. Revenues and expenses aretranslated using rates that approximate the average of those in effect duringthe period. Gains and losses from translation adjustments are included instockholders’ equity in the consolidated balance sheet caption, othercomprehensive income.

 

***Other Comprehensive Loss***

 

Other comprehensive loss consists entirely of cumulative translationadjustments resulting from the Company’s application of its foreign currencytranslation policy and unrealized gains (losses) on marketable securities. Thetax effects on the unrealized gains (losses) were not significant during any ofthe periods presented.

 

The following table summarizes the breakdown of other comprehensiveloss as of October 31, 2005 and October 31, 2004 (in thousands):

 
| ** **                              | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net loss, as reported                   |       | $                                      | (14,554    | ) | $ | (11,997 | ) |
| Foreign currency translation adjustment |       | (173                                   | )          | 547 |   |
| Other  comprehensive loss               |       | $                                      | (14,727    | ) | $ | (11,450 | ) |

 

## ***Warranties***

##  

The Company’s software license agreements generally include certainprovisions for indemnifying customers against liabilities if the Company’ssoftware products infringe a third party’s intellectual property rights. Todate, Versant has not incurred any material costs as a result of anyindemnification, and as such, Versant does not have any accrual to indemnifyfor such warranty expenses either in U.S. or in Europe.

 

The Company’s software license agreements also generally include awarranty that the Company’s software products will substantially operate asdescribed in the applicable program documentation. Versant also warrants thatservices the Company performs will be provided in a manner consistent withindustry

 

68

----

 

standards. To date, the Company has not incurred any material costsassociated with these warranties, and as such the Company has not provided forany accrual or liability.

 

## ***Deferred Revenue***

##  

Deferred revenue represents amounts received from customers undercertain maintenance, software and service contracts for which the revenueearning process has not been completed. The revenues will be recognized ratablyover the life of the contract or when the service is rendered and the Companyhas satisfied all the revenue recognition criteria.

 
| ** **              | ** ** | **As of October 31,** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                    |       |                       |       |   |   |
| License                 |       | $                          | —     |   | $ | 3 |   |
| Maintenance             |       | $                          | 2,910      |   | $ | 3,018 |   |
| Training and consulting |       | 53                         |       | 49 |   |
| Total                   |       | $                          | 2,963      |   | $ | 3,070 |   |

 

## ***Accrued Liabilities***

##  

The breakdown of short-term and long-term accrued liabilities for thefiscal years ended October 31, 2004 and October 31, 2005 were asfollows:

 
| ** **            | ** ** | **As of October 31,** | ** ** |
|-----------------------|------------|----------------------------|------------|
| ** **            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                  |       |                       |       |   |   |
| Payroll and related   |       | $                          | 725        |   | $ | 1,093 |   |
| Customer deposits     |       | 92                         |       | 457 |   |
| Taxes payable         |       | —                     |       | 81 |   |
| Restructuring accrual |       | 1,181                      |       | 2,611 |   |
| Other                 |       | 1,117                      |       | 1,185 |   |
| Total                 |       | $                          | 3,115      |   | $ | 5,427 |   |

 

***Software Development Costs***

 

Software development costs is included in product development and isexpensed as incurred. After technological feasibility is established, materialsoftware development costs is capitalized in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased orOtherwise Marketed*. The period between achieving technologicalfeasibility, which Versant has defined as the establishment of a working model,typically occurring when the beta testing commences, and the generalavailability of such software has been short, and software development costsqualifying for capitalization have been insignificant. No software developmentcosts have been capitalized for the periods ended October 31, 2005 and October 30,2004 since the timing of achieving technological feasibility and generalavailability has not been materially different.

 

## ***Income Taxes***

##  

The Company uses the asset and liability method of accounting forincome taxes based on Statement of Financial Accounting Standards (SFAS) No. 109,*Accounting for Income Taxes*. Under theasset and liability method, deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between financialstatement carrying amounts and the tax basis of existing assets andliabilities. The Company records a valuation allowance to reduce tax assets toan amount for which

 

69

----

 

realization is more likely than not. The Company has recorded avaluation allowance for substantially all of its deferred tax assets, except tothe extent of deferred tax liabilities, as it is presently unable to concludethat it is more likely than not that net deferred tax assets will be realized.

 

***Stock-Based Compensation***

 

Versant accounts for stock issued to employees in accordance withAccounting Principles Board Opinion (APB) No. 25, *Accountingfor Stock Issued to Employees,* as interpreted by FIN 44, *Accounting for Certain Transactions Involving Stock Compensation*and complies with the disclosure provision of SFAS No.123, *Accountingfor Stock-Based Compensation*. Under APB No. 25, compensationexpense is based on the difference, if any, on the date of the grant, betweenthe fair value of the Company’s stock and the exercise price of the option.Stock compensation is being amortized over the vesting period of the individualawards in a manner consistent with the method described in FASB Interpretation No. 28,*Accounting for Stock Appreciation Rights and OtherVariable Stock Option Award Plus*. In addition, the Company accountsfor stock issued to non-employees in accordance with the provisions of SFAS123. Pursuant to SFAS 123, stock-based compensation is accounted for at thefair value of the equity instruments issued, or at the fair value of theconsideration received, whichever is more reliably measurable.

 

Pursuant to SFAS No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure*, the Company is required todisclose the pro forma effects of stock-based compensation on net income andnet income per share as if the company had elected to use the fair valueapproach to account for all of its employee stock-based compensation plans. Ifthe compensation cost of the Company’s plans had been determined under the fairvalue approach in accordance with SFAS No. 123, the Company’s pro forma netloss and pro forma net loss per share during the periods indicated below wouldhave been (in thousands, except per share amounts) as follows:

 
| ** **                                       | ** ** | **Fiscal year ended October 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as reported                            |       | $                                      | (14,554    | ) | $ | (11,997 | ) | $ | (2,389 | ) |
| Stock based  compensation                        |       | 96                                     |       | 86 |   | 1,209 |   |
| Compensation expense under SFAS 123 related  to: |       |                                   |       |   |   |   |   |
| Stock option  plans                              |       | (425                                   | )          | (656 | ) | (2,461 | ) |
| Employee  stock purchase plan                    |       | (46                                    | )          | (157 | ) | (109 | ) |
| Pro forma net loss                               |       | $                                      | (14,929    | ) | $ | (12,724 | ) | $ | (3,750 | ) |
| Basic and diluted net loss per share:            |       |                                   |       |   |   |   |   |
| As reported                                      |       | $                                      | (4.11      | ) | $ | (3.85 | ) | $ | (1.75 | ) |
| Pro forma                                        |       | $                                      | (4.22      | ) | $ | (4.08 | ) | $ | (2.74 | ) |

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes method with the following weighted average assumptions:

 
| ** **                               | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life (in years)                 |       | 3                                      |       | 3 |   | 3 |   |
| Weighted-average Risk-free interest rate |       | 3.30-3.81                              | %          | 2.78 | % | 2.25 | % |
| Volatility                               |       | 115                                    | %          | 129 | % | 113 | % |
| Dividend yield                           |       | —                                 |       | — |   | — |   |

 

The fair value of employee stock purchase rights granted under the 1996Employee Stock Purchase Plan was estimated on the date of grant using the fairvalue method with the following weighted average assumptions:

 

70

----

 
| ** **                               | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life (in years)                 |       | 6 months                               |       | 0.5-2 years |   | 0.5-2 years |   |
| Weighted-average Risk-free interest rate |       | 3.30-3.81                              | %          | 1.97 | % | 1.81 | % |
| Volatility                               |       | 115                                    | %          | 145 | % | 107 | % |
| Dividend yield                           |       | —                                 |       | — |   | — |   |

 

The effects of applying SFAS No. 123 in this pro forma disclosureare not indicative of future stock-based compensation expense or operatingresults of the Company.

 

## ***Segment and Geographic Information***

##  

Statement of Financial Accounting Standards (SFAS) No. 131, *Disclosures about Segments of an Enterprise and Related Information*establishes standards for the manner in which public companies reportinformation about operating segments in annual and interim financialstatements. It also establishes standards for related disclosures aboutproducts and services, geographic areas, and major customers. The method fordetermining what information to report is based on the way management organizesthe operating segments within the Company for making operating decisions andassessing financial performance. The Company’s chief operating decision-makeris considered to be the Company’s chief executive officer (CEO). The CEOreviews financial information presented on an entity level basis accompanied bynon-aggregated information about revenues by product type and certaininformation about geographic regions for purposes of making operating decisionsand assessing financial performance. The entity level financial information isidentical to the information presented in the accompanying statements ofoperations. Therefore, the Company has determined that it operates in a singleoperating segment, Data Management.

 

The Company operates in North America, Europe and Asia. In general,revenues are attributed to the country in which the contract originates.

 

The following tables summarize revenues and long-lived assets by eachgeographic region (in thousands):

 
| ** **              | ** ** | **Fiscal year ended October 31,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues by region:** |       |                                   |       |   |   |   |   |
|                    |       |                                   |       |   |   |   |   |
| North  America          |       | $                                      | 10,069     |   | $ | 14,457 |   | $ | 16,622 |   |
| Europe                  |       | 10,087                                 |       | 7,689 |   | 4,690 |   |
| Asia                    |       | 353                                    |       | 729 |   | 747 |   |
| Total                   |       | $                                      | 20,509     |   | $ | 22,875 |   | $ | 22,059 |   |

 

71

----

 
| ** **                             | ** ** | **Fiscal year ended October 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Total long-lived assets by region:** |       |                                   |       |   |   |   |   |
| ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| North  America                         |       | $                                      | 496        |   | $ | 579 |   | $ | 1,290 |   |
| Europe                                 |       | 183                                    |       | 605 |   | 148 |   |
| Asia                                   |       | 104                                    |       | 119 |   | 151 |   |
| Total                                  |       | $                                      | 783        |   | $ | 1,303 |   | $ | 1,589 |   |

 

***Recent Accounting Pronouncement*s**

 

In December 2004,the Financial Accounting Standards Board, or FASB issued SFAS No. 123(R),Share*-Based Payment*(SFAS 123(R)), whichrequires companies to expense the estimated fair value of employee stockoptions and similar awards. In March 2005, the SEC issued Staff AccountingBulletin No. 107 (SAB 107) regarding the Staff’s interpretation ofShare-Based Payments. This interpretation expresses the views of the Staffregarding the interaction between SFAS 123(R) and certain SEC rules andregulations and provides the Staff’s views regarding the valuation ofshare-based payment arrangements for public companies. The Company will adoptSAB 107 in connection with its adoption of SFAS 123(R). Versant will adopt SFASNo. 123(R) in the first quarter of fiscal 2006 and will recognizestock-based compensation related to employee equity awards in its condensedconsolidated statements of operations using a fair value-based method on amodified prospective basis. Since Versant currently accounts for equity awardsgranted to its employees using the intrinsic value method under APB No. 25,it expects that the adoption of SFAS No. 123(R) to have an adverse impacton the financial position and results of operations of the Company.

 

In October 2005,the Financial Accounting Standards Board, or FASB issued FASB Staff PositionNo, SFA 123(R)-2, *Practical Accommodation to the Applicationof Grant Date as Defined in FASB Statement No. 123(R)*(SFAS123(R)), which requires the grant date be a date that a mutual understanding ofthe key terms and conditions of an award to an individual employee shall bepresumed to exist at the date the award is approved in accordance with therelevant corporate governance requirements (that is, by the Board or managementwith the relevant authority). Adoption of this standard is not expected to havea material impact on the Company’s financial position or results of operations.

 

In December 2004, the FASB issued two FASB Staff Positions (FSP)related to the American Jobs Creation Act (“AJCA”). FSP No. 109-1 *Application of FASB Statement No. 109, Accounting for IncomeTaxes, to the Tax Deduction on Qualified Production Activities provided by theAmerican Jobs Creation Act*(FSP 109-1) requires companies thatqualify for a deduction for domestic production activities under the AJCA toaccount for the deduction as a special deduction under FASB Statement No. 109and reduce their tax expense in the period or periods the amounts aredeductible on the tax return. FSP No. 109-2, *Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004* (FSP 109-2) allows companiesadditional time to evaluate whether foreign earnings will be repatriated underthe repatriation provisions of the AJCA and requires specified disclosures forcompanies needing the additional time to complete the evaluation. Once adecision is made to repatriate the foreign earnings, companies must reflect thedeferred tax liabilities attributable to foreign earnings in the period thatthe decision is made to remit those earnings. Adoption of this standard is notexpected to have a material impact on the Company’s financial position orresults of operations.

 

In May 2005, the FASB issued SFAS 154, *AccountingChanges and Error Corrections*. This new standard replaces APBOpinion 20, *Accounting Changes* and SFAS 3, *Reporting Accounting Changes in Interim Financial Statements*.Among other changes, SFAS 154 requires that a voluntary change in accountingprinciple be applied retrospectively with all prior period financial statementspresented on the new accounting principle, unless it is impracticable to do so.SFAS 154 also provides that a change in method of depreciating or amortizing along-lived non-financial asset be accounted for as a change in estimate(prospectively) that was effected by a change in accounting principle, and thatcorrections of previously

 

72

----

 

issued financial statements should be termed a *restatement*.The new standard is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. Adoption of thisstandard is not expected to have a material impact on the Company’s financialposition or results of operations.

 

### **NOTE 3.**      ACQUISITIONS

###  

Poet Holdings, Inc.

 

On March 18, 2004, Poet Holdings Inc., or Poet, was merged with awholly owned subsidiary of the Company. As a result of this merger, Poet becamea wholly owned subsidiary of Versant.  The merger with Poet wasconsummated to obtain a broader object database product suite and therebyincrease the size and variety of Versant’s customer base, as well as tocapitalize on Poet’s strong European presence and bring Poet’s cash assets intothe merged company. The total purchase price was $29,967,916, and consisted ofthe following: a) a total of 15,525,342 shares of Versant common stock, valuedat $25,927,321, using a fair value per share of $1.67 per share, which wereexchanged for 11,089,542 shares of Poet common stock; b) options to purchasea total of 1,784,780 shares of Versant common stock, valued at $2,402,825(reduced by the intrinsic value of unvested assumed options in the amount of$299,546) which were issued upon the conversion and assumption of 1,274,834options to purchase shares of Poet common stock in the merger; and c) directtransaction costs of $1,937,316. The fair value per Versant share of $1.67 wascomputed using Versant’s average stock price five days before and five daysafter the acquisition, eliminating the high and the low prices in that daterange. The results of operations of Poet Holdings are included in Versant’sstatement of operations from March 18, 2004 onwards.

 

FastObjects, Inc.

 

On July 6, 2004, the Company acquired FastObjects, Inc., theexclusive US and Canadian distributor for Poet’s FastObjects databasemanagement products. The acquisition of FastObjects was part of the post-mergerprocess of integrating Versant and Poet’s businesses. Prior to the acquisition,a Poet subsidiary owned preferred shares of FastObjects, Inc. representingapproximately 19% of FastObjects’ stock. In 2002, prior to its merger withVersant in March 2004, Poet had granted FastObjects, Inc. exclusiveNorth American distribution rights for Poet’s FastObjects product. Thisacquisition allowed Versant to re-acquire those rights and bring theFastObjects product back into its regional distribution network in NorthAmerica. The total purchase price was $636,249 and consisted of the following:a) pre-existing investment of 19% ownership in FastObjects, Inc. of$300,000; b) increase in investment of $35,020, based on conversion from costto equity method of accounting; c) net cash of $277,730, which includes apayment of $540,974 to the shareholders of Fast Objects, Inc, less cash of$263,244 received from Fast Objects; and d) direct transaction costs of$23,499.

 

JDO Genie

 

On June 30, 2004, Versant purchased the JDO Genie productline and its customers from JDO Genie (PTY) Ltd., or JDO Genie, a privatelyheld South African company. The JDO Genie product and technology provides asolution that can serve as the foundation for multiple data access productsconnecting applications to both object and relational databases. Thisarrangement also included a one-year consulting contract with the JDO Geniedevelopment team, which included objective-based bonus payments totaling$250,000. These amounts were expensed as incurred and not included as part ofthe purchase price. The original purchase price recorded by the Company was$525,000, and consisted of the following: a) a cash payment of $ 200,000 madein July of 2004; and b) a contingent deferred cash payment of $325,000.Under the terms of the agreement, the deferred portion of the purchase pricepayable to JDO Genie (PTY) Ltd was to be either:

 

a.               230,150 restrictedshares of Versant common stock (then valued at $400,000), if JDO Genie (PTY)Ltd received formal written approval to receive such shares from the SouthAfrican Reserve Bank; or

 

73

----

 

b.              Had the SouthAfrican Reserve Bank not provided such formal approval within a defined timeperiod after the closing of the transaction (which time period was subsequentlyextended by the mutual agreement of the parties) then in lieu of the shares,Versant would have had to pay JDO Genie (PTY) Ltd $325,000 in cash on June 30,2005.

 

On January 14, 2005, the South African Reserve Bank approved theissuance of the Versant common shares to JDO Genie. Consequently, Versantissued the 230,150 common shares to JDO Genie in March 2005. As a result,an adjustment of the purchase price for the JDO Genie asset purchase wasrecorded during the quarter ending January 31, 2005, which resulted in anincrease in purchase price of $75,000 ($50,000 of which was recorded asgoodwill and the remaining $25,000 was allocated to intangible assets).

 

As a result of the above, the total adjusted purchase price was$600,000, and consisted of the following: a) a cash payment of $200,000 made inJuly of 2004; and b) 230,150 common shares of Versant that were issued in March 2005.The results of operations of the JDO Genie product business are included inVersant’s statement of operations from June 30, 2004 onwards.

 

Pro forma results of operations

 

The pro forma condensed consolidated statements of operations arepresented below as if the merger with Poet and the acquisition of FastObjects, Inc.had occurred on November 1, 2003. These pro forma figures do not includeamounts related to the JDO Genie acquisition, as they are unavailable (inthousands except per share data):

 
| ** **         | ** ** | **Fiscal year Ended October 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Revenues           |       | $                                      | 20,509     |   | $ | 25,935 |   |
| Net loss           |       | $                                      | (14,554    | ) | $ | (8,587 | ) |
| Net loss per share |       | $                                      | (4.11      | ) | $ | (2.75 | ) |

 

### **NOTE 4.**      DISCONTINUEDOPERATIONS

###  

In September 2004, the Company completed its sale of all the stockof Poet GmbH, an indirect Versant subsidiary that owned the assets and employedthe personnel of Versant’s Catalog Solutions Business (the “Catalog Business”)to ems ePublishing AG, a privately held German company based in Karlsruhe,Germany (“EMS”). The sale was consummated pursuant to a Share Purchase andTransfer Agreement dated September 13, 2004 (the “Sale Agreement”) betweenEMS and Poet Software GmbH, another subsidiary of Versant (“Poet Software”)that owned all the shares of Poet GmbH. Pursuant to the Sale Agreement, EMSagreed to assume the operations of the Catalog Business.

 

The Catalog Business was originated by Poet and acquired by Versant inconnection with its March 2004 merger with Poet. This business involvedthe development and sale of software product lines that enable companies tocreate, manage, customize and distribute electronic sales catalogs to conductbusiness-to-business e-commerce transactions. The principal assets disposed ofin the sale of the Catalog Business to EMS include the X-Solutions andeSupplier Solutions product lines, including the Poet X-Buy, Poet X-Market,Poet X-Sell, Poet eSupplier Port, Poet eSupplier Web and Poet eSupplier Linkproducts, related rights to those products and customer agreements of the CatalogBusiness as well as the transfer of Catalog Business personnel. Pursuant to theSale Agreement, it was also agreed that Poet GmbH (now owned by EMS) may usethe “Poet” trade name and mark in connection with data processing and softwarebusinesses and that Versant, its subsidiary Poet Holdings, Inc. and theiraffiliates would cease their use of the “Poet” trade name or mark effective asof January 1, 2005. In addition, pursuant to the Sale Agreement PoetSoftware granted Poet GmbH certain non-exclusive rights to certain Poetdatabase software for use with certain existing Poet GmbH customer contracts.

 

74

----

 

In exchange for the shares of Poet GmbH, EMS paid Poet Software aclosing cash payment of 1,000,000 euros and paid a further 172,000 euros for atotal of 1,172,000 euros cash consideration (or approximately $1.4 millionUSD). In addition EMS has agreed to pay a royalty on future revenues of PoetGmbH’s Catalog Business over the ten-month period following the signing of theSale Agreement in an amount equal to 30% of all Poet GmbH’s Catalog SolutionsBusiness revenues which: (a) exceed 800,000 euros (or approximately $1.0million) during the period from September 1, 2004 to December 31,2004; (b) exceed 600,000 euros (or approximately $786,000) during theperiod from January 1, 2005 to March 31, 2005; and (c) exceed600,000 euros (or approximately $786,000) during the period from April 1,2005 to June 30, 2005. Versant had not received any royalties from EMS pursuantto the Sale Agreement referred to above as of October 31, 2005.

 

### **NOTE 5.       RESTRUCTURING**

###  

Versant has undergone several restructuring programs since fiscal 2004with the intent of reducing ongoing operating costs.

 

##### *Fiscal 2004*

 

In October 2004, Versant executed a restructuring plan tostreamline the Company’s expenditures subsequent to its acquisition of PoetHoldings, Inc., FastObjects, Inc. and the technologies of JDO Genie(PTY) Ltd in 2004. The objective was to better align the Company’s cost structurein an effort to improve its operating results. This restructuring plan resultedin expenses of approximately $2.9 million for the three months ended October 31,2004. Restructuring expenses primarily represented estimated future costsrelated to either closing or reducing utilized space at the Company’sCalifornia headquarters and certain European offices, staff reductions andemployee terminations.

 

In the second quarter of fiscal 2005, the Company entered into asub-lease agreement for its U.K. facility for which future rental expenses hadbeen previously accrued based on management’s then assessment of the Company’sfuture ability to sub-lease such space. As a result of the U.K. sublease, Versant reduced its restructuringaccrual by approximately $122,000 based on its estimate of such future subleaseincome for the second quarter of fiscal 2005. At October 31, 2004, thetime of original restructuring accrual, the Company did not anticipate that itwould be able to sublease this facility.

 

Versant expects to make future facility rent payments, net of estimatedsublease income of $217,000, on its contractual lease obligations for itsCalifornia and European facilities through the end of each obligation. Thesenet payments will be recorded as a reduction to our restructuring accrual. Asof October 31, 2005, the restructuring accrual balance represents anestimate of the Company’s lease obligations net of the estimated subleaseincome.

 

##### *Fiscal 2005*

 

In July 2005, Versant committed to and began implementing arestructuring program to realign resources to focus on its Versant ObjectDatabase product. Versant assessed its product portfolio and associatedresearch and development efforts and expenditures, and then streamlined therest of its operations to support those reassessments. Versant planned to spinoff and eliminate marginally profitable or non-strategic products lines,consolidated development activities, eliminated four management positions andcertain duplicate positions in marketing functions and programs, andcentralized its sales support functions.

 

The total quarterly cost savings attributable to previously announcedelements of Versant’s restructuring plan, excluding the effect of the VOA.NETspin-off (see below), was approximately $400,000 for the quarter ended October 31,2005, and is expected to increase to approximately $550,000 by the quarterended July 31, 2006. These cost savings are related to completed headcountreduction and reduced discretionary spending.

 

In July 2005, Versant, through its subsidiary Versant GmbH,entered into certain agreements to effect a spin-off of tangible assets,technology rights and contracts related to its Versant Open Access .NET

 

75

----

 

(“VOA.NET”) business to Vanatec GmbH (“Vanatec”) (a newly formedprivately held German based company). In connection with that spin-off, sevenformer Versant employees departed Versant to join Vanatec, and a partnershipformed by those individuals, which received an 80.4% equity interest inVanatec, with Versant retaining the remaining 19.6% equity interest in Vanatec.In connection with the spin-off, on July 29, 2005 Versant committed toprovide funding to Vanatec in a total amount not to exceed 425,000 euros (or$520,000) in two equal installments of 212,500 euros (or $260,000) each on August 3,2004 and November 3, 2005.  Inaddition, during the three months ended July 31, 2005, Versant contributed25,000 euros (or $30,000) to Vanatec, for a total cash capital contributed andcommitted by Versant to Vanatec of 450,000 euros (or $550,000).

 

VOA.NET was one of the aforementioned non-strategic product lines,which Versant decided to spin off. Versant believes that the dissolution of theVOA.NET business would have caused Versant to incur cash outlays and expensesfor severance and other contractual obligations in amounts comparable to therestructuring charge from the Vanatec spin-off. Versant has committed no additional funding beyond the $550,000 referredto above and has no further obligations to Vanatec. The spin-off of the VOA.NETbusiness will allow Versant focus on its core database business and progresstowards its long-term profitability goal. The spin-off of Vanatec allowsVersant to participate in any future success of the VOA.NET business while atthe same time limiting its cash exposure to the aforementioned $550,000investment.

 

Versant determined that equity at risk in Vanatec is not sufficient topermit it to finance its activities without additional subordinated financialsupport; therefore, Versant has determined that Vanatec is a variable interestentity in accordance with FIN 46(R), *Consolidation of VariableInterest Entities* (As Amended). Vanatec results have been included in Versant’s consolidated financialstatements for the three months ended July 31, 2005 and October 31,2005, and for any additional periods in which the criteria of FIN 46(R) forconsolidation are met.  Accordingly, avariable interest entity liability in the amount of $137,000 is recorded in Versant’saccompanying condensed consolidated balance sheet as of October 31, 2005,respectively, reflecting the 80.4% equity interest in Vanatec held by theformer Versant employees. The recording of the aforementioned variable interestentity liability resulted in a corresponding restructuring charge of $480,000during fiscal 2005.

 

In fiscal 2005, Versant recorded total restructuring charges ofapproximately $638,000, which included approximately $280,000 of severancepayments for headcount reductions; $480,000 related to the aforementionedVanatec spin off of which $24,000 related to legal fees incurred due to theVOA.Net spin-off; offset by a $122,000 adjustment as result of the sublease ofthe Company’s UK facilities.

 

As of October 31, 2005, there remains $1.2 million ofrestructuring accrual and $137,000 of variable interest entity liability inVersant’s consolidated balance sheet. The following table summarizes theCompany’s restructuring activities from October 31, 2003 through October 31,2005 (in thousands):

 
| ** **                                                               | ** ** | **Facility** | ** ** | **Employee**     | ** ** | ** **         | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|--------------------|------------|------------|------------|
| ** **                                                               | ** ** | **Leases**   | ** ** | **Terminations** | ** ** | **Others/Vanatec** | ** ** | **Total**  | ** ** |
| **Opening balance at October 31,  2003**                            | ** ** | **$**        | **—** | ** **       | **$**      | **—**         | ** ** | **$**      | **—** |   | — |   |
| ** **                                                               | ** ** | ** **   | ** ** | ** **       | ** ** | ** **         | ** ** | ** ** | ** ** |
| Non-cash adjustment during  the fiscal year 2004                         |       | 2,107        |       | 1,164            |       | —             |       | 3,271      |       |
| Net cash payments during  the fiscal year 2004                           |       | —       |       | (660             | )          | —             |       | (660       | )          |
| **Accrual balance as of October 31,  2004**                         | ** ** | **$**        | **2,107**  | ** **       | **$**      | **504**            | ** ** | **$**      | **—** | ** ** | **$** | **2,611** | ** ** |
| ** **                                                               | ** ** | ** **   | ** ** | ** **       | ** ** | ** **         | ** ** | ** ** | ** ** |
| Non-cash adjustment during  the fiscal year 2005                         |       | (122         | )          | 280              |       | 480                |       | 638        |       |
| Net cash payments during  the fiscal year 2005                           |       | (804         | )          | (784             | )          | (343               | )          | (1,931     | )          |
| **Accrual and variable interest  liability as of October 31, 2005** | ** ** | **$**        | **1,181**  | ** **       | **$**      | **—**         | ** ** | **$**      | **137**    | ** ** | **$** | **1,318** | ** ** |

 

### **NOTE 6.      LEASEOBLIGATION AND OTHER COMMITMENTS**

 

Versant’s principal commitments as of October 31, 2005 consistedof obligations under operating leases for facilities, equipment, and contractcommitments.

 

76

----

 

In November 1996, Versant entered into a ten-year operating leaseagreement for the Company’s corporate headquarters in Fremont, California thatcommenced on June 1, 1997 and expires on May 31, 2007. The terms ofthe lease provide for certain increases in rental payments during the leaseterm. Rental expense under this agreement, including contractual rent increases,is recognized on a straight-line basis. Versant also leases field office spacein Europe and India, generally under multi-year operating lease agreements.Consolidated rent expenses for the fiscal years ended October 31, 2005, October 31,2004 and October 31, 2003, were approximately $1.0 million, $1.7 million,and $1.4 million, respectively.

 

The Company has recorded approximately $1.6 million its commitments atits October 31, 2005, Balance Sheet. TheCompany’s future annual minimum commitments as of October 31, 2005 undernon-cancelable operating leases are listed in the table below. :

 
| ** **                          | ** ** | **Rental** | ** ** | **Equipments** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                          | ** ** | **Lease**  | ** ** | **Lease**      | ** ** | **Total**  | ** ** |
| Fiscal year ending October 31, |       |       |       |           |       |       |       |
| 2006                                |       | $          | 1,621      |           | $          | 101        |       | $ | 1,722 |   |
| 2007                                |       | 875        |       | 63             |       | 938        |       |
| 2008                                |       | —     |       | 28             |       | 28         |       |
| 2009                                |       | —     |       | 24             |       | 24         |       |
| 2010                                |       | —     |       | 9              |       | 9          |       |
| Thereafter                          |       | —     |       | 8              |       | 8          |       |
| Total                               |       | $          | 2,496      |           | $          | 233        |       | $ | 2,729 |   |

 

**NOTE 7.      LINE OF CREDIT**

 

On June 21, 2005, Versant and afinancial institution entered into a Loan and Security Agreement, a StreamlineFacility Agreement and an Intellectual Property Security Agreement(collectively, the “Loan Agreements”). Under the terms of these LoanAgreements, Versant may borrow up to a maximum of $3.0 million from thefinancial institution at****any one timeunder a revolving secured accounts receivable-based line of credit.  This line of credit permits Versant to obtainshort-term loan advances from the financial institution equal to 80% of theface amount of specific eligible accounts receivable of Versant. The interestrate on each advance will be either 4.0% or 4.5% above the bank’s prime rate.As of October 31, 2005, there was $39,000 outstanding debt under thiscredit line.  The Company has been incompliance with all the covenants of the line of credit.

 

### **NOTE 8.      SHAREHOLDERS’EQUITY AND EARNINGS PER SHARE**

 

Basic and diluted net loss per common share has been computed using theweighted average number of shares of common stock outstanding during theperiod, less shares subject to repurchase. The following table presents thecalculation of basic and diluted net loss per share (in thousands, except pershare amounts):

 
| ** **                                    | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Calculation of basic net loss per share:      |       |                                   |       |   |   |   |   |
| Net loss                                      |       | $                                      | (14,554    | ) | $ | (11,997 | ) | $ | (2,389 | ) |
| Basic and  diluted :                          |       |                                   |       |   |   |   |   |
| Weighted  average common shares outstanding   |       | 3,539                                  |       | 3,117 |   | 1,368 |   |
| Net loss per share, basic &  diluted |       | $                                      | (4.11      | ) | $ | (3.85 | ) | $ | (1.75 | ) |

 

77

----

 

The Company excludes potentially dilutive securities from its dilutednet loss per share computation when their effects are anti-dilutive to net lossper share amounts. The following common stock equivalents were excluded fromthe net loss per share computation (in thousands):

 
| ** **                                                                                                      | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                            |       |                                   |       |   |   |   |   |
| Anti-dilutive common stock  options and non-vested common stock not included in net loss per share  calculation |       | 341                                    |       | 460 |   | 392 |   |
| Shares issuable pursuant  to warants to purchase common stock                                                   |       | —                                 |       | 131 |   | 133 |   |
| Shares issuable upon  conversion of preferred stock                                                             |       | —                                 |       | — |   | 263 |   |
| Total anti-dilutive common  shares excluded from basic & diluted net loss per share                    |       | 341                                    |       | 591 |   | 788 |   |

 

### **NOTE 9.      INCOMETAXES**

 

TheCompany accounts for income taxes pursuant to the provisions of SFAS No. 109,*Accounting for Income Taxes*, whichrequires an asset and liability approach to accounting for income taxes.Deferred tax liabilities and assets are determined based on the differencebetween the financial statement carrying amounts and the tax basis of assetsand liabilities and are measured using the enacted statutory tax rates ineffect at the balance sheet date. The Company records a valuation allowance toreduce its deferred tax assets when uncertainty regarding that realizabilityexists.

 

Lossbefore provision for income taxes consisted of the following (in thousands):

 
| ** **    | ** ** | **Fiscal year ended October 31,** | ** ** |
|---------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States |       | $                                      | (16,653    | ) | $ | (10,282 | ) | $ | (3,800 | ) |
| International |       | 2,123                                  |       | (1,627 | ) | 1,485 |   |
|          |       | $                                      | (14,530    | ) | $ | (11,909 | ) | $ | (2,315 | ) |

 

Theprovision for income taxes consisted of the following (in thousands):

 
| ** **                       | ** ** | **Fiscal year ended October 31,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:                         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                          |       | $                                      | —     |   | $ | — |   | $ | — |   |
| State                            |       | 13                                     |       | — |   | — |   |
| Foreign  withholding             |       | 24                                     |       | 88 |   | 74 |   |
| Total  current                   |       | $                                      | 37         |   | $ | 88 |   | $ | 74 |   |
| Deferred:                        |       |                                   |       |   |   |   |   |
| Federal                          |       | —                                 |       | — |   | — |   |
| State                            |       | —                                 |       | — |   | — |   |
| Total  deferred                  |       | $                                      | —     |   | $ | — |   | $ | — |   |
| Total provision for income taxes |       | $                                      | 37         |   | $ | 88 |   | $ | 74 |   |

 

Theprovision for income taxes differs from the amount estimated by applying thestatutory federal income tax rate to loss before taxes as follows (inthousands):

 

78

----

 
| ** **                                                     | ** ** | **Fiscal year ended October 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal tax (benefit) at statutory rate                        |       | $                                      | (5,086     | ) | $ | (4,168 | ) | $ | (810 | ) |
| State tax (benefit) at statutory rate, net  of federal benefit |       | (64                                    | )          | (101 | ) | (142 | ) |
| Change in valuation allowance                                  |       | 2,212                                  |       | 1,761 |   | 790 |   |
| Foreign tax differential                                       |       | (743                                   | )          | 488 |   | 17 |   |
| Impairment of intangible asets                                 |       | 3,605                                  |       | — |   | — |   |
| Book intangible assets amortization not  deductible for tax    |       | —                                 |       | 1,073 |   | — |   |
| Deemed divident not deductible for tax                         |       | —                                 |       | 848 |   | — |   |
| Other                                                          |       | 113                                    |       | 187 |   | 219 |   |
| Provision for income taxes                                     |       | $                                      | 37         |   | $ | 88 |   | $ | 74 |   |

 

Thecomponents of the net deferred tax asset were as follows (in thousands):

 
| ** **                        | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Deferred tax asset:               | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  operating loss carryforwards |       | $                                      | 30,358     |   | $ | 17,755 |   | $ | 16,582 |   |
| Tax credit  carryforwards         |       | 3,502                                  |       | 3,292 |   | 3,302 |   |
| Other                             |       | 242                                    |       | 1,215 |   | 617 |   |
|                              |       | $                                      | 34,102     |   | $ | 22,262 |   | $ | 20,501 |   |
| Valuation  allowance              |       | (34,102                                | )          | (22,262 | ) | (20,501 | ) |
| Net deferred tax asset            |       | $                                      | —     |   | $ | — |   | $ | — |   |

 

The net change in the valuation allowance forthe year ended October 31, 2005 was an increase of approximately $11.8million due to current year losses net of the effect of the expiration of taxcarry forwards, acquired deferred tax assets and other assets. Managementbelieves that sufficient uncertainty exists as to whether the deferred taxassets will be realized, and accordingly, a valuation allowance is required.

 

A portion of deferred tax assets relate toacquired net deferred tax assets of approximately $9.4 million.  When recognized, the tax benefit of theseacquired deferred tax assets will be accounted for as a credit to reducegoodwill or acquired intangibles, if remaining, rather than a reduction ofincome tax expense.

 

At October 31, 2005, the Company had federal and state netoperating loss carry forwards of approximately $82.7 million and $24.6 million,respectively and federal and state tax credit carry forwards of approximately$2.2 million and 1.3 million, respectively. The federal and state tax credit carry forwards and federal tax creditcarry forwards expire on various dares through 2024, if not utilized. The statetax credit can be carried forward indefinitely. Due to the Company’s history of operating losses, the Company believesthat there is sufficient uncertainty regarding the realizability of these carryforwards and, therefore, a valuation allowance of approximately $34.0 millionhas been recorded against the Company’s net deferred tax assets ofapproximately $34.0 million.  The Companywill continue to assess the realizability of the tax benefit available based onactual and forecasted operating results.

 

A portion of deferred tax assets relating tonet operating losses, pertains to net operating loss carry forwards resultingfrom tax deductions upon the exercise of employee stock options ofapproximately $1.6 million. When recognized, the tax benefit of these losscarry forwards will be accounted for as a credit to additional paid-in capitalrather than a reduction of income tax expense.

 

Due to “change in ownership” provisions of the Internal Revenue Code of1986, the availability of net operating loss and tax carry forwards to offsetfederal taxable income in future periods may be subject to an annuallimitation.

 

**NOTE 10.      EMPLOYEEAND DIRECTOR BENEFIT PLANS**

 

Versant has, or had during fiscal 2005, thefollowing option plans in place:

 

•              2005Equity Incentive Plan

 

79

----

 

At the Company’s Annual Meeting ofShareholders on August 22, 2005, the Company’s shareholders approved theadoption of the 2005 Equity Incentive Plan. On that date, the Companyimmediately terminated use of the 1996 Equity Incentive Plan and ceased togrant stock options or other stock awards under the 1996 Equity Incentive Plan,instead granting them under the 2005 Equity Incentive Plan.

 

Under Versant’s 2005 Equity Incentive Plan, options are generallygranted to its employees with a three-year vesting schedule in which 25%of the option vests and becomes exercisable nine months from grant date and theremaining 75% vests ratably, on a monthly-basis thereafter over the remaining27 months of the vesting schedule. All options granted to employees underthe Company’s 2005 Equity Incentive Plan expire ten years after the grantdate.  Grant holders have three months after leaving the Company toexercise their vested options.

 

The purpose of adopting the 2005 EquityIncentive Plan was to continue to reserve and make available under that planthe same number of common shares that would be reserved and available forfuture option grants and stock awards under the 1996 Equity Incentive Plan ifit were not expiring. Accordingly, the number of common shares reserved forissuance under the 2005 Equity Incentive Plan is equal to the number of sharesthat are reserved and available for issuance under the 1996 Equity IncentivePlan on the date the 2005 Equity Incentive Plan was approved by the Company’sshareholders, plus any shares that in the future would have become availablefor issuance under the 1996 Equity Incentive Plan due to the expiration ofunexercised options or other forfeitures of equity awards granted under thatplan. Thus, adoption and approval of the 2005 Equity Incentive Plan did notresult in any increase in the number of shares of Common Stock available forequity awards beyond the number of shares that would otherwise have beenavailable for issuance under the 1996 Equity Incentive Plan if it did notexpire.

 

•              1996Equity Incentive Plan

 

Under Versant’s 1996 Equity Incentive Plan, options are generallygranted to its employees with a three-year vesting schedule in which 25%of the option vests and becomes exercisable nine months from grant date and theremaining 75% vests ratably, on a monthly-basis thereafter over the remaining27 months of the vesting schedule.  Versant’s Compensation Committee hasfrom time to time approved non-standard stock option vesting schedules for thepurposes of employee retention or bonus grants, such as a three-year grant,with 25% vesting in three months and the remaining vesting ratably on amonthly-basis thereafter or an option grant with 100% of the option grantvesting three months after the grant date.  All options granted toemployees under the Company’s 1996 Equity Incentive Plan expire ten years afterthe grant date.  Grant holders have three months after leaving the Companyto exercise their vested options.

 

•              2005Directors Stock Option Plan

 

On August 22, 2005, the Company’sshareholders approved the 2005 Director Stock Option Plan at the AnnualMeeting; the Company immediately terminated use of the 1996 Director StockOption Plan and ceases to grant stock options or other stock awards under the1996 Director Stock Option Plan, and instead granted them under the 2005Director Stock Option Plan.

 

Under Versant’s 2005 Directors Stock Option Plan, Versant grants 40,000options as an initial grant to new directors of the Board and 20,000 as anannual succeeding grant thereafter.  Both grants vest 50% on the first andsecond anniversaries of the option grant.  The options granted under the2005 Directors Stock Option Plan expire ten years after the grant date. Directors have seven months after leaving their directorships to exercise theirvested options.

 

The purpose of adopting the 2005 DirectorsPlan was to continue to reserve and make available under that plan the samenumber of common shares that would be reserved and available for future optiongrants under the 1996 Directors Plan if it were not expiring. Accordingly, thenumber of common shares reserved for issuance under the 2005 Directors Planwill be equal to the number of shares that are reserved and available forissuance under the 1996 Directors Plan on the date the 2005 Directors Plan isapproved by the Company’s shareholders (the “Directors Plan Effective Date”),which was August 22, 2005, plus any shares that in the future would havebecome available for issuance under the 1996 Directors Plan due to the

 

80

----

 

expiration of unexercised options grantedunder that plan or the Company’s repurchase of shares issued under that plan attheir original issue price. Thus, adoption and approval of the 2005 DirectorsPlan will not result in any increase in the number of shares of Common Stockavailable for options beyond the number of shares that would otherwise havebeen available for issuance under the Prior Directors Plan if it did notexpire.

 

The purpose of the 2005 Directors Plan wasalso to enhance the Company’s ability to attract and retain highly qualifieddirectors who are not employees of the Company or any of parent, subsidiary oraffiliate of the Company (an “Outside Director”) through the use of equityincentives. The Board believed that the 1996 Directors Plan played an importantrole in the Company’s efforts to attract and retain Outside Directors andexpected the 2005 Directors Plan to play a similar role. The Board believesthat adoption of the new 2005 Directors Plan is in the best interests of theCompany because it believes that the 2005 Directors Plan will help enable theCompany to provide equity participation to attract and retain Outside Directorsof outstanding ability. In this regard the Company noted that recentlegislation, stock exchange requirements and case law have increased theimportance to the Company of having qualified independent directors. However,these changes had also increased the obligations, risks and time commitment ofdirectors of public companies such as the Company, making it even moreimportant for the Company to be able to offer equity incentives to attract andretain qualified Outside Directors.

 

•              1996Directors Stock Option Plan

 

Under Versant’s 1996 Directors Stock Option Plan, Versant grants 40,000options as an initial grant to new directors of the Board and 20,000 as anannual succeeding grant thereafter.  Both grants vest 50% on the first andsecond anniversaries of the option grant.  The options granted under the1996 Directors Stock Option Plan expire ten years after the grant date. Directors have seven months after leaving their directorships to exercise theirvested options.

 

Versant acquired all of Poet’s stock option plans in connection withour March 2004 acquisition of Poet.  Prior to the acquisition Poethad the following plans in place:

 

•              1995Stock Option Plan

 

Under Poet’s 1995 Stock Option Plan, options were generally grantedwith a four-year vesting schedule of which 25% are vested twelve monthsafter the date of grant with the remaining options vesting ratably on amonthly-basis over the remaining 36-month vesting period. Poet has approvednon-standard stock option vesting schedules for the purposes of employeeretention or bonus grants, including an option grant with 100% of the optiongrant vested at 6 months.

 

•              2001Non-statutory Plan.

 

Standard vesting under this plan is a three-year vesting schedule with33% of the options vesting one year after the date of grant, and the remainingoptions vesting ratably on a monthly-basis over the remaining 24-month vestingperiod.

 

•              DirectorPlan

 

Under Poet’s 1999 Director’s Plan, options were generally granted toits directors with a three-year vesting schedule, with 33% vesting twelvemonths from the option grant date with remaining vesting ratably on amonthly-basis over the remaining 24-month vesting period. Poet has granted options,as approved by their Board of Directors, with non-standard option vesting,including an option grant vesting 100% on the fourth anniversary of the grantdate; and a four-year grant with 25% vesting on each subsequent anniversary ofthe grant date.

 

No further options will be granted under any of Poet’s option plans.

 

81

----

 

## ***Shares Reserved for Future Issuance***

 

As of October 31, 2005, the Company had reserved shares of commonstock for the following purposes:

 
| Employee  stock purchase plan     |   | 45,032  |   |
|-----------------------------------|--------|---------|--------|
| Stock options available for grant |   | 266,937 |   |
| Warrants outstanding              |   | 145     |   |
| Unexercised stock options         |   | 301,487 |   |
|                              |   | 613,601 |   |

 

## ***Stock Options Activities***

 

The stock option activities in fiscal years 2003, 2004 and 2005 were asfollows:

 
| ** **                           | ** ** | **Options**       | ** ** | **Number of**   | ** ** | **Weighted** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                           | ** ** | **available for** | ** ** | **options**     | ** ** | **average**  | ** ** |
| ** **                           | ** ** | **grant**         | ** ** | **outstanding** | ** ** | **price**    | ** ** |
| **Balance at October 31, 2002** | ** ** | **147,210**       | ** ** | **375,927**     | ** ** | **33.50**    | ** ** |
| Authorized                           |       | 25,000            |       | —          |       | —       |       |
| Granted                              |       | (142,970          | )          | 142,970         |       | 9.10         |       |
| Exercised                            |       | —            |       | (11,323         | )          | 9.30         |       |
| Canceled                             |       | 134,498           |       | (134,498        | )          | 28.70        |       |
| **Balance at October 31, 2003** | ** ** | **163,739**       | ** ** | **373,076**     | ** ** | **$**        | **26.60**  | ** ** |
| Authorized                           |       | 178,478           |       | —          |       | —       |       |
| Granted                              |       | (192,693          | )          | 13,020          |       | 15.40        |       |
| Assumed                              |       | —            |       | 178,478         |       | 34.90        |       |
| Exercised                            |       | (12,771           | )          | (28,394         | )          | 9.50         |       |
| Canceled                             |       | 77,316            |       | (76,287         | )          | 23.30        |       |
| **Balance at October 31, 2004** | ** ** | **214,068**       | ** ** | **459,893**     | ** ** | **$**        | **31.20**  | ** ** |
| Authorized                           |       | —            |       | —          |       | —       |       |
| Granted                              |       | (88,950           | )          | 88,950          |       | 7.34         |       |
| Exercised                            |       | (53,199           | )          | (52,338         | )          | 5.13         |       |
| Canceled                             |       | 195,018           |       | (195,018        | )          | 37.03        |       |
| **Balance at October 31, 2005** | ** ** | **266,937**       | ** ** | **301,487**     | ** ** | **$**        | **24.90**  | ** ** |

 

The following table summarizes information concerning outstanding andexercisable options at October 31, 2005:

 
| ** **                | ** ** | **Options Outstanding**   | ** ** | **Options Exercisable** | ** ** |
|---------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Number**                | ** ** | **Weighted**            | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** |
| ** **                | ** ** | **outstanding at**        | ** ** | **average remaining**   | ** ** | **average** | ** ** | **exercisable at** | ** ** | **average remaining** | ** ** | **average** | ** ** |
| **Exercise Prices**       | ** ** | **October 31, 2005** | ** ** | **contractual life**    | ** ** | **price** | ** ** | **October 31, 2005** | ** ** | **contractual life** | ** ** | **price** | ** ** |
| From $3.00 to $6.00       |       | 54,391                    |       | 7.85                    |       | $ | 4.38 |   | 38,745 |   | 7.41 |   | $ | 4.61 |   |
| From $6.10 to $9.90       |       | 85,255                    |       | 8.31                    |       | 8.29 |   | 37,595 |   | 7.13 |   | 8.66 |   |
| From $10.20 to $16.00     |       | 44,531                    |       | 6.36                    |       | 14.04 |   | 42,234 |   | 6.24 |   | 14.22 |   |
| From $16.60 to $20.70     |       | 12,400                    |       | 4.91                    |       | 18.93 |   | 11,947 |   | 4.78 |   | 18.87 |   |
| From $21.40 to $25.00     |       | 14,574                    |       | 5.17                    |       | 23.77 |   | 14,447 |   | 5.15 |   | 23.79 |   |
| From $26.563 to $42.00    |       | 33,289                    |       | 4.88                    |       | 29.56 |   | 33,289 |   | 4.88 |   | 29.56 |   |
| From $44.375 to $122.00   |       | 55,857                    |       | 3.58                    |       | 68.90 |   | 55,857 |   | 3.58 |   | 68.90 |   |
| From $180.00 to $1,287.00 |       | 1,190                     |       | 3.33                    |       | 444.59 |   | 1,190 |   | 3.33 |   | 444.59 |   |
|                      |       | 301,487                   |       | 6.37                    |       | $ | 24.90 |   | 235,304 |   | 5.60 |   | $ | 29.90 |   |

 

82

----

 

## ***Non Cash Stock Expense***

##  

The following table summarizes the non-cash stock expenses in fiscal2005, 2004 and 2003:

 
| ** **                                          | ** ** | **Fiscal Year ended October 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                   |       |   |   |   |   |
| Unvested Poet Options                               |       | $                                      | 96         |   | $ | 86 |   | $ | — |   |
| Stock Option grants to non employees                |       | —                                 |       | — |   | 88 |   |
| Accelerated vesting in the Mokume merger  agreement |       | —                                 |       | — |   | 1,121 |   |
| Total non cash stock expense                        |       | $                                      | 96         |   | $ | 86 |   | $ | 1,209 |   |

 

In both fiscal 2005 and fiscal 2004, stock based compensation expensesrepresent the amortization of the deferred compensation related to optionsassumed in the Poet merger.

 

### **NOTE 11.      RELATEDPARTY TRANSACTIONS**

###  

The Company paid one of its directors, Bernhard Woebker, $60,000 infiscal 2005 for consulting services, in addition to the amounts paid to Mr. Woebkeras part of the Company’s standard director compensation.

 

**NOTE 12.      VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES**

 

Versant evaluates and revises its bad debt allowance as part of itsquarter end process at each subsidiary and corporate level. The Company’smanagement assigns a risk factor and percentage of risk to each accountreceivable, the collection of which is considered non-routine. The Company alsoassigns a general reserve to all its overdue accounts, excluding thenon-routine items.

 

The following table summarizes the activities in the Company’sallowance for doubtful accounts (in thousands):

 
| ** **                                    | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Allowance for doubtful accounts**           |       |                                   |       |   |   |   |   |
| Beginning balance                             |       | $                                      | 368        |   | $ | 258 |   | $ | 687 |   |
| Provision in allowance for doubtful  accounts |       | 29                                     |       | 111 |   | 139 |   |
| Recovery in allowance for doubtful accounts   |       | (283                                   | )          | (1 | ) | (568 | ) |
| Ending balance                                |       | $                                      | 114        |   | $ | 368 |   | $ | 258 |   |

 

**NOTE 13.      QUARTERLYINFORMATION (unaudited)**

 

Summarized quarterly supplemental consolidated financial informationfor fiscal 2005 and 2004, net of discontinued operations (in thousands):

 
| ** **                                                                   | ** ** | **Fiscal 2005 Quarters Ended** | ** ** | **Fiscal 2004 Quarters Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **October 31,**           | ** ** | **July 31,**              | ** ** | **April 30,** | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **July 31,** | ** ** | **April 30,** | ** ** | **January 31,** | ** ** |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                                 |       | $                              | 5,096      |                           | $          | 4,457 |   | $ | 4,346 |   | $ | 6,609 |   | $ | 6,229 |   | $ | 5,253 |   | $ | 5,027 |   | $ | 6,366 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cost of revenues**                                                         |       | $                              | 1,847      |                           | $          | 1,754 |   | $ | 1,787 |   | $ | 2,170 |   | $ | 2,061 |   | $ | 2,452 |   | $ | 2,129 |   | $ | 1,886 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross profit**                                                             |       | $                              | 3,249      |                           | $          | 2,703 |   | $ | 2,559 |   | $ | 4,439 |   | $ | 4,168 |   | $ | 2,801 |   | $ | 2,898 |   | $ | 4,480 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating expenses**                                                       |       | $                              | 3,123      |                           | $          | 17,013 |   | $ | 3,718 |   | $ | 4,130 |   | $ | 7,715 |   | $ | 5,974 |   | $ | 4,376 |   | $ | 3,932 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loss from operations**                                                     |       | $                              | 126        |                           | $          | (14,310 | ) | $ | (1,159 | ) | $ | 309 |   | $ | (3,547 | ) | $ | (3,173 | ) | $ | (1,478 | ) | $ | 548 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net loss from continuing operations attributable  to common shareholders** |       | $                              | 512        |                           | $          | (14,352 | ) | $ | (1,059 | ) | $ | 345 |   | $ | (3,726 | ) | $ | (3,058 | ) | $ | (3,862 | ) | $ | 605 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loss from discontinued operations, net of income  tax**                    |       | $                              | —     |                           | $          | — |   | $ | — |   | $ | — |   | $ | 14 |   | $ | (752 | ) | $ | (908 | ) | $ | — |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loss from sale of discontinued operations, net  of income tax**            |       | $                              | —     |                           | $          | — |   | $ | — |   | $ | — |   | $ | (309 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net income (loss)**                                                        |       | $                              | 512        |                           | $          | (14,352 | ) | $ | (1,059 | ) | $ | 345 |   | $ | (4,021 | ) | $ | (3,810 | ) | $ | (4,770 | ) | $ | 605 |   |
|                                                                         |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net loss per share**                                                       |       |                           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                        |       | $                              | 0.14       |                           | $          | (4.04 | ) | $ | (0.30 | ) | $ | 0.10 |   | $ | (1.16 | ) | $ | (1.10 | ) | $ | (1.97 | ) | $ | 0.41 |   |
| Diluted                                                                      |       | $                              | 0.14       |                           | $          | (4.04 | ) | $ | (0.30 | ) | $ | 0.10 |   | $ | (1.16 | ) | $ | (1.10 | ) | $ | (1.97 | ) | $ | 0.34 |   |

 

83

----

 

 

----

*The acquisition of FastObjects, Inc. increased the Company’sownership stake in this company to 100% compared with the approximate 19%ownership position the Company enjoyed prior to the transaction. As a result ofthis increased ownership position Versant’s investment in this subsidiary wasconverted from the cost method of accounting to the equity method ofaccounting, resulting in a $35,020 increase to investment income withapproximately $17,000 recorded in the three months ended April 30,2004 andthe balance recorded in the three months ended July 31, 2004. Previously the Company had reported the entire $35,020 as a cumulative effectof accounting changing in the three months ended July 31, 2004.

 

### **ITEM 8. Changes In and Disagreements With Accountants on Accounting andFinancial Disclosure**

 

Not applicable.

 

### **ITEM 8A. CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures.*

 

Our management (with the participation of our Chief Executive Officerand Chief Financial Officer) evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)), as ofOctober 31, 2005, the end of the fiscal period covered by this report on Form10-KSB. Securities and Exchange Commission, or SEC, rules define the term“disclosure controls and procedures” to mean a company’s controls and otherprocedures that are designed to ensure that information required to bedisclosed in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time period specifiedin the SEC’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by a company inits reports filed under the Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

As previously discussed in our reports on Form 10-K for the fiscal yearended October 31, 2004, as amended by our report on Form 10-K/A, and ourreports on Form 10-QSB for the quarters ended January 31, April 30 andJuly 31, 2005, in the course of conducting its audit of our financialstatements for the fiscal year ended October 31, 2004, in late November 2004our registered independent public accounting firm, Grant Thornton LLP,identified certain material weaknesses and significant deficiencies in ourinternal controls. As previously reported in our report on Form 10-QSB for thequarter ended July 31, 2005, we believe that we have remedied all the materialweaknesses previously noted by our auditors. There are, however, three areas ofsignificant deficiencies  we haveidentified which remain to be remedied:

 

•         Monitoring controls over the recordingand analysis of revenue transactions (particularly multiple elementtransactions) are in need of improvement.

 

To address theaforementioned significant deficiency, we developed a revenue recognitionpolicy, formalized our VSOE analysis and developed a contract review andapproval procedure. Further, we are developing enhanced procedures with respectto the review of the Company’s revenue contracts (in particular, multipleelement transactions). We expect to have the enhanced procedures and controlsin place during the first quarter of fiscal 2006.

 

•         Inadequate segregation of duties wasnoted with respect to the revenue, expenditure and payroll processes asnumerous incompatible tasks are performed by the same accounting personnel.

 

To address this deficiency, we implementedprocedures to segregate certain critical and incompatible tasks, in particularin the areas of disbursement and collection for payroll, accounts payable andaccounts receivable. For example, we established a purchase order system forour accounts payable, segregated the bank reconciliation function from payrolland accounts payable processing and put additional review process in place forour disbursements. We are, however, in the process of implementing additionalreview processes and controls to mitigate the risks associated with theincompatible duties that cannot be segregated due to the limitation in ourstaffing resources. There are some deficiencies, however, that are inherent inan organization that has a limited number of employees, and as a result, wecannot fully implement optimal segregation of duties. We continue to evaluateand revise and develop policies and procedures to refine and enhance ourinternal controls.

 

84

----

 

•         Inadequate access controls were notedwith respect to our financial reporting systems.  Our independent auditors noted exceptionswhere users may have access to some business application systems, includingthose programs and data files outside their assigned responsibility.  Thisaccess situation could potentially create an exposure to unauthorized access tosystem programs or data files and may result in errors, intentional damage orin the distribution of confidential information.

 

We, however, have other detective controls in place that we believe canreduce the risk of material misstatements around the business applications. Forexample, we implemented a new chart of accounts and trend reporting system thatwe will use in the first quarter of fiscal 2006.

 

We are also currently evaluating the potential replacement of ourglobal enterprise reporting and accounting systems to provide us withadditional controls to enhance our system controls over our financialreporting.

 

Based on the evaluation of the effectiveness of our disclosure controlsand procedures by our management with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, our Chief Executive Officer and ChiefFinancial Officer has concluded that, as of the end of the period covered bythis report, our disclosure controls and procedures were effective to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Commission’s rules and forms.

 

A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, have been or will be detected.These inherent limitations include the fact that there are resourceconstraints, and that the benefits of controls must be considered relative totheir costs.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

The certification of Versant’s Chief Executive Officer and ChiefFinancial Officer attached as Exhibit 31.01 to this Annual Report onForm 10-KSB include, in paragraph 4 of such certifications, informationconcerning Versant’s disclosure controls and procedures and internal controlover financial reporting.  Such certifications should be read inconjunction with the information contained in this Item 8A for a more completeunderstanding of the matters covered by such certifications.  Thecertifying officers have worked to design, or caused to be designed, disclosurecontrols and procedures, for the purpose of ensuring that material informationrelating to Versant, including its consolidated subsidiaries, is made known tothem by other personnel of Versant on a timely basis.  These disclosure controlsand procedures were designed and adopted in good faith for this purpose, but itis recognized that these procedures must be continually evaluated and canalways merit further improvement.  Versant believes that the significantdeficiencies in our internal controls described above do not materially affectthe fairness or accuracy of the presentation of our financial condition andresults of operation in our historical financial statements as set forth inthis report.

 

*Changes in Internal Control over Financial Reporting*.

 

During the quarter ended October 31, 2005, the Company took thefollowing actions that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act:

 

•      Wedeveloped control procedures to conform our global revenue processing andrevenue recognition procedures to our revenue recognition policy.

 

•      Weformalized our monthly and quarter end close and sign off processes.

 

85

----

 

•      Weimplemented a new chart of accounts and trend reporting system to be used infiscal 2006.

 

•      We further documented additional detailedpolicies and procedures related to revenue processing, disbursements, chart ofaccounts description, stock options processing and expensing in our U.S.operation as well as international subsidiaries.

 

**Item 8B.  Other Information.**

 

None

 

**PART III**

 

**Item 9. Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act**

 

The Board has adopted a Code of Conduct andEthics that applies to Versant’s principal executive officer, principalfinancial officer, principal accounting officer and all other employees of theCompany.  This Code of Conduct and Ethics is posted on our website athttp://www.versant.com.  We intend to satisfy the disclosure requirementunder Item 10 of Form 8-K regarding any amendment to, or waiver from,a provision of this Code of Conduct and Ethics by posting such information onour website at http://www.versant.com on the investors’ relations page.

 

The remainder of the information required forthis Item is incorporated by reference from our Proxy Statement to be filed inconnection with our 2006 Annual Meeting of Shareholders.

 

**Item 10.  Executive Compensation**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed in connectionwith our 2006 Annual Meeting of Shareholders.

 

**Item 11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed in connectionwith our 2006 Annual Meeting of Shareholders.

 

**Item 12.  Certain Relationships andRelated Transactions**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed in connectionwith our 2006 Annual Meeting of Shareholders.

 

86

----

 

**Item 13.  Principal Accountant Fees andServices**

 

The information required for this Item isincorporated by reference from our Proxy Statement to be filed in connectionwith our 2006 Annual Meeting of Shareholders.

 

**Item 14.  Exhibits**

 

The exhibit list in the “Exhibit Index”is incorporated herein by reference as the list of exhibits required as part ofthis report.

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the Registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|   | VERSANT CORPORATION             |
|--------|---------------------------------|
|   |                            |
|   |                            |
|   | By:                             | /s/ Jochen Witte |   |
|   | Jochen Witte                    |
|   | Vice President, Chief Executive |
|   | Officer,                        |
|   | and Chief Financial Officer     |
|   | Date: January 27, 2006     |

 

**POWER OFATTORNEY**

 

By signing this Form 10-KSB below, Ihereby appoint Jochen Witte as my attorney-in-fact to sign all amendments tothis Form 10-KSB on my behalf, and to file this Form 10-KSB(including all exhibits and other documents related to the Form 10-KSB)with the Securities and Exchange Commission.  I authorize each of myattorney-in-fact to (1) appoint a substitute attorney-in-fact for himselfand (2) perform any actions that he believes are necessary or appropriateto carry out the intention and purpose of this Power of Attorney.  Iratify and confirm all lawful actions taken, directly or indirectly, by myattorneys-in-fact and by any properly appointed substitute attorneys-in-fact.

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 

 
| **Name**                                                                                    | ** ** | **Title**  | ** ** | **Date**   | ** **            |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|-----------------------|
|                                                                                        |       |       |       |       |                  |
| PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL  FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: |       |       |       |       |                  |
|                                                                                        |       |       |       |       |                  |
| ADDITIONAL DIRECTORS:                                                                       |       |       |       |       |                  |
|                                                                                        |       |       |       |       |                  |
| /s/ Uday Bellary                                                                            |       |       | Director   |       | January 27, 2006 |   |
| Uday Bellary                                                                                |       |       |       |       |                  |
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** **            |
| /s/ William Henry Delevati                                                                  |       |       | Director   |       | January 27, 2006 |   |
| William Henry Delevati                                                                      |       |       |       |       |                  |
|                                                                                        |       |       |       |       |                  |
| /s/ Herbert May                                                                             |       |       | Director   |       | January 27, 2006 |   |
| Herbert May                                                                                 |       |       |       |       |                  |
|                                                                                        |       |       |       |       |                  |
| /s/ Bernhard Woebker                                                                        |       |       | Director   |       | January 27, 2006 |   |
| Bernhard Woebker                                                                            |       |       |       |       |                  |

 

87

----

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                        | ** ** | **Incorporated by Reference** | ** ** | **Filed** | ** ** |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------|------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                      | ** ** | **Form**                      | ** ** | **Date**  | ** ** | **Number** | ** ** | **Herewith** | ** ** |
| 2.01        |       | Agreement and Plan of Reorganization dated  as of November 19, 2002 by and among the Registrant, VM Merger Corp.,  Mokume Software, Inc. and the stockholders of Mokume Software, Inc.  †                     |       | 8-K                           |       | 11/27/02  |       | 2.01 |   |   |   |
|        |       |                                                                                                                                                                                                                              |       |                          |       |      |       |   |   |   |   |
| 2.02        |       | Amendment Agreement dated September 26,  2003 by and among the Registrant and former stockholders of Mokume Software, Inc.                                                                                              |       | 8-K                           |       | 10/03/03  |       | 99.01 |   |   |   |
|        |       |                                                                                                                                                                                                                              |       |                          |       |      |       |   |   |   |   |
| 2.03        |       | Agreement and Plan of Merger with Poet  Holdings, Inc. dated September 27, 2003 by and among the  Registrant, Puma Acquisition Inc. and Poet Holdings Inc. †                                                       |       | 8-K                           |       | 09/29/03  |       | 99.01 |   |   |   |
|        |       |                                                                                                                                                                                                                              |       |                          |       |      |       |   |   |   |   |
| 2.04        |       | Amendment to Agreement and Plan of Merger,  dated as of January 20, 2004, by and among the Registrant, Poet Holdings, Inc.  and Puma Acquisition, Inc.                                                             |       | S-4/A                         |       | 2/2/04    |       | 2.2 |   |   |   |
|        |       |                                                                                                                                                                                                                              |       |                          |       |      |       |   |   |   |   |
| 2.05        |       | Share Purchase and Transfer Agreement dated  as of September 13, 2004 between Poet Software GmbH and ems ePublishing  AG and attached list of annexes thereto (translated to English from the  original German text). † |       | 8-K                           |       | 9/17/03   |       | 2.1 |   |   |   |

 

88

----

 
| 2.06   |   | Vanatec GmbH Asset Purchase Agreement                                                                                                                                |   |   |   |       |   |   |   | ý |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|--------|--------|--------|--------|
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 2.07   |   | Vanatec GmbH Agreement on the Purchase and  Assignment of a Share                                                                                                    |   |   |   |       |   |   |   | ý |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 3.01   |   | Amended and Restated Articles of Incorporation  of the Registrant, filed with the California Secretary of State on March 18,  2004                              |   | S-8    |   | 03/24/2004 |   | 4.01   |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 3.02   |   | Certificate of Amendment of Amended and  Restated Articles of Incorporation of the Registrant, filed with the  California Secretary of State on August 22, 2005 |   | 8-K    |   | 8/26/05    |   | 3.1    |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 3.03   |   | Registrant’s Amended and Restated Bylaws                                                                                                                        |   | 10-K   |   | 2/15/05    |   | 3.2    |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.01  |   | Registrant’s 2005 Equity Incentive Plan**                                                                                                                       |   | S-8    |   | 12/22/05   |   | 99.01  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.02  |   | Forms of Stock Option Agreements and Stock  Option Exercise Agreements under Registrant’s 2005 Equity Incentive Plan**                                          |   | S-8    |   | 12/22/05   |   | 99.02  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.03  |   | Registrant’s 2005 Directors Stock Option  Plan**                                                                                                                |   | S-8    |   | 12/22/05   |   | 99.03  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.04  |   | Forms of Stock Option Grants and Stock  Option Exercise Agreements under Registrant’s 2005 Directors Stock Option  Plan**                                       |   | S-8    |   | 12/22/05   |   | 99.04  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.05  |   | Registrant’s 2005 Employee Stock Purchase  Plan**                                                                                                               |   | S-8    |   | 12/22/05   |   | 99.05  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.06  |   | Forms of Enrollment Form and  Subscription Agreement under Registrant’s 2005 Employee Stock Purchase Plan**                                                |   | S-8    |   | 12/22/05   |   | 99.06  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.07  |   | Registrant’s 1996 Directors Stock Option  Plan, as amended as of July 30, 2003, and related documents**                                                    |   | S-8    |   | 08/14/03   |   | 4.06   |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.08  |   | Registrant’s 1996 Employee Stock Purchase  Plan, as amended as of August 17, 2004 and related documents**                                                  |   | 10-K   |   | 2/15/05    |   | 10.02  |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.09  |   | Registrant’s 1996 Equity Incentive Plan, as  amended as of April 18, 2002, and related documents**                                                         |   | S-8    |   | 05/09/02   |   | 4.05   |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.10  |   | Poet Holdings, Inc. Amended and  Restated 1995 Stock Plan and Forms of Stock Option Agreement and Exercise  Notice thereunder**                                 |   | S-8    |   | 3/24/04    |   | 4.5    |   |   |   |
|   |   |                                                                                                                                                                 |   |   |   |       |   |   |   |   |   |
| 10.11  |   | Poet Holdings, Inc. 1999 Director  Option Plan and Forms of Director Option Agreement and Director Option  Exercise Notice thereunder**                         |   | S-8    |   | 3/24/04    |   | 4.6    |   |   |   |

 

89

----

 
| 10.12  |   | Poet Holdings, Inc. 2001 Non Statutory  Stock Option Plan and Forms of Stock Option Agreement and Exercise Notice  thereunder**                                  |   | S-8    |   | 3/24/04       |   | 4.7         |   |   |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------|--------|-------------|--------|--------|--------|
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.13  |   | Form of Letter from Registrant to  option holders of Poet Holdings, Inc., regarding assumption of options  by Registrant**                                  |   | S-8    |   | 3/24/04       |   | 99.01       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.14  |   | Form of Indemnity Agreement entered  into by Registrant with each of its directors and executive officers                                                        |   | 10-K   |   | 2/15/05       |   | 10.9        |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.15  |   | Form of Amendment to Versant  Corporation Stock Option Agreement**                                                                                               |   | SB-2   |   | 7/16/96       |   |        |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.16  |   | Lease Agreement dated November 25,  1996 between John Arrillaga, Trustee et al. and Registrant                                                                   |   | 10-KSB |   | 4/03/98       |   | 10.15       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.17  |   | Separation Agreement dated June 14,  2005 between Versant Corporation and Nick Ordon**                                                                           |   | 8-K    |   | 6/16/05       |   | 10.01       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.18  |   | Separation Agreement dated June 14,  2005 between Registrant and Lee McGrath**                                                                                   |   | 8-K    |   | 6/16/05       |   | 10,02  |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.19  |   | Managing Director Service Contract between  Poet Software GmbH, a wholly owned subsidiary of Registrant, and Jochen  Witte**                                          |   | 10-K   |   |  2/15/05 |   | 10.14  |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.20  |   | Registration Rights Agreement dated October 16,  1998 between the Registrant and Vertex Technology Fund Pte. Ltd.                                                |   | 10-KSB |   | 03/31/99      |   | 10.31       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.21  |   | Registration Rights Agreement dated December 28,  1998 between the Registrant and the parties listed on the Schedule of  Investors attached thereto         |   | 10-KSB |   | 03/31/99      |   | 10.35       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.22  |   | Supplement dated June 28, 1999 to  Registration Rights Agreement among the Registrant and the parties listed on  the Schedule of Investors attached thereto |   | 8-K    |   | 07/13/99      |   | 10.02       |   |   |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.23  |   | Silicon Valley Bank Loan and Security  Agreement                                                                                                                      |   |   |   |          |   |        |   | ý |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.24  |   | Silicon Valley Bank and Versant Corporation  Streamline Facility Agreement                                                                                            |   |   |   |          |   |        |   | ý |   |
|   |   |                                                                                                                                                                  |   |   |   |          |   |        |   |   |   |
| 10.25  |   | Silicon Valley Bank and Versant Corporation  Intellectual Property Security Agreement                                                                                 |   |   |   |          |   |        |   | ý |   |

 

90

----

 
| 21.01  |   | Subsidiaries of the Registrant                                                                         |   |   |   |   |   |   |   | ý |   |
|--------|--------|--------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |
| 23.01  |   | Consent of Grant Thornton LLP                                                                          |   |   |   |   |   |   |   | ý |   |
|   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |
| 31.01  |   | Rule 13a-14(a) Certification of  Principal Executive Officer and Principal Financial Officer |   |   |   |   |   |   |   | ý |   |
|   |   |                                                                                                   |   |   |   |   |   |   |   |   |   |
| 32.01  |   | Section 1350 Certification of  Principal Executive Officer and Principal Financial Officer        |   |   |   |   |   |   |   | ý |   |

 

----

†              Pursuantto Item 601(b)(2) of Regulations of S-K, certain annexes, exhibits andschedules to this Exhibit have been omitted but will be furnishedsupplementally to the Commission upon request.

 

**           Managementcontract or compensatory plan.

 

91

----