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

                                   FORM 10-KSB

|X|      Annual report under Section 13 or 15(d) of the Securities  Exchange Act
         of 1934 for the fiscal year ended December 31, 1999

| |      Transition report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934 for the transition period from      to      .

Commission file number: 0-28540

                               VERSANT CORPORATION

                 (Name of small business 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)

                    Issuer's telephone number: (510) 789-1500

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

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                           Common Stock, no par value
                                (Title of Class)

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days.

                                   Yes X No__
                                      ---

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best  of  our  knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

     The  issuer's   revenues  for  the  year  ended   December  31,  1999  were
$25,900,000.

     As of February 29, 2000,  there were outstanding  10,990,869  shares of the
issuer's  common stock,  no par value per share.  As of that date, the aggregate
market value of the shares of common stock held by  non-affiliates of the issuer
(based on the closing  price of $13.687  for the  issuer's  common  stock on the
Nasdaq  National  Market on February 29, 2000) was  approximately  $126,385,156.
This excludes  1,756,913 shares of common stock held by directors,  officers and
certain  stockholders  of the  issuer.  Exclusion  of shares  held by any person
should not be construed to indicate that such person possesses power,  direct or
indirect,  to direct or cause the direction of the management or policies of the
issuer, or that such person is controlled by or is under common control with the
issuer.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the issuer's  definitive  proxy statement for the issuer's 2000
annual  meeting of  shareholders  to be filed with the  Securities  and Exchange
Commission by April 30, 2000 are  incorporated  by reference in Part III of this
Form 10-KSB.

     Transitional Small Business Disclosure Format (check one): Yes __ No X
                                                                         --


<PAGE>


                               VERSANT CORPORATION
                                ANNUAL REPORT ON
                                   FORM 10-KSB
                      For the Year Ended December 31, 1999

                                TABLE OF CONTENTS

    Form 10-KSB

      Item No.   Name of Item                                              Page

   PART I

Item 1      Description of Business                                            1
Item 2      Description of Property                                           13
Item 3      Legal Proceedings                                                 13
Item 4      Submission of Matters to a Vote of Security Holders               14

  PART II

Item 5      Market for Common Equity and Related Stockholder Matters          15
Item 6      Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         17
Item 7A     Quantitative and Qualitative Disclosures About Market Risk        30
Item 8      Financial Statements                                              30
Item 9      Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                              30

  PART III

Item 10     Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16(a) of the Exchange Act                 31

Item 11     Executive Compensation                                            31
Item 12     Security Ownership of Certain Beneficial Owners and Management    31
Item 13     Certain Relationships and Related Transactions                    31
Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K   31
Signatures                                                                    32
Index to Consolidated Financial Statements and Financial Statement Schedule  F-1


         Versant(R) is a registered  trademark of our company.  This Form 10-KSB
also includes trade names and trademarks of other companies.


<PAGE>


PART I

Item 1.  Description of Business

     This Form 10-KSB contains forward-looking  statements within the meaning of
Section  21E of the  Securities  Exchange  Act of 1934  and  Section  27A of the
Securities Act of 1933.  These  forward-looking  statements  involve a number of
risks  and  uncertainties  which are  described  throughout  this  Form  10-KSB,
including under "Revenues" and "Risk Factors" in Item 6 of this Form 10-KSB. The
actual results that we achieve may differ  materially  from any  forward-looking
statements  due to such risks and  uncertainties.  We have  identified,  using a
preceding asterisk, various sentences within this Form 10-KSB which contain such
forward-looking   statements,  and  words  such  as  "believes,"  "anticipates,"
"expects,"   "intends"  and  similar   expressions   are  intended  to  identify
forward-looking statements, but these are not the exclusive means of identifying
such  statements.  In addition,  the section labeled "Risk Factors" in Item 6 of
this Form 10-KSB,  which does not include  asterisks  for improved  readability,
consists  primarily of  forward-looking  statements  and  associated  risks.  We
undertake no  obligation  to revise any  forward-looking  statements in order to
reflect  events or  circumstances  that may arise after the date of this report.
Readers are urged to carefully review and consider the various  disclosures made
by us in this  report and in our other  reports  filed with the  Securities  and
Exchange  Commission that attempt to advise interested  parties of the risks and
factors that may affect our business.

Overview

    Our company  designs,  develops,  markets  and  supports  object  management
systems including database management systems,  data replication and middle tier
persistence  for  distributed  computing  environments,  including  the  growing
e-business marketplace.

    Our core product is the Versant Object Database Management System (ODBMS), a
highly  scaleable  database  management  system that combines native support for
object-oriented  languages with high performance  database  functionality  and a
client-server architecture. The Versant ODBMS enables users to store, manage and
distribute  information that we believe often cannot be supported effectively by
traditional database technologies, including:

  (1) abstract data, such as graphics,  images,  video,  audio and  unstructured
      text;
  (2) dynamic,  highly  interrelated  data,  such as  network  management  data,
      advanced financial instruments; and
  (3) distributed, rapidly changing content in Internet-based applications.

    The core  ODBMS  technology  is also part of  Versant's  application  server
integration product suite called,  Versant Enterprise  Container (VEC). We offer
Enterprise Java Bean (EJB) compliant application server integration for both IBM
WebSphere  and  BEA/WebLogic.  We also provide  peripheral  products,  including
object-oriented   programming   language   interfaces,   database  query  tools,
application  development  tools,  legacy database  access tools,  Internet-based
integration  tools and  multimedia  management  tools.  We are in the process of
bundling these  technology  components  and products into the Versant  Developer
Suite and the Versant enJin. Versant Developer Suite is the next generation core
ODBMS  product  and  Versant  enJin is the next  generation  application  server
integration  product.  Both  product  suites are  expected  to be  available  as
packaged bundles by the second quarter of 2000.

    In addition, we offer a variety of services, including training,  consulting
and technical support, to assist users in developing and deploying  applications
based on the Versant ODBMS.

    Our customers  include AT&T,  Alcatel Network  Systems,  Banque Nationale de
Paris, British Airways,  British  Telecommunications  plc, Chase Manhattan Bank,
The Chicago Stock  Exchange,  Dresdner  Kleinwort  Benson,  EDS,  Ericsson Radio
Systems, France Telecom, GE Harris, HNC Software,  Lucent, MCI WorldCom,  Sabre,
Northern  Telecom,  Siemens,  Sprint,  Qantas,  Texaco and TRW. We are a leading
provider of object management systems to the telecommunications  industry, where
our  products  are used in strategic  distributed  applications  such as network
modeling and management,  fault diagnosis,  service activation and assurance and
customer billing. We have also experienced customer acceptance in other vertical
markets, including the financial services, transportation,  defense, health care
and energy markets. These markets are similar to the  telecommunications  market
in  their  increasing  need  for  high   performance   support  for  distributed
applications  involving  abstract  data types and dynamic,  highly  interrelated
information.

<PAGE>

     We were  incorporated  in  California  in August  1988 as  Object  Sciences
Corporation.  Our  principal  executive  offices are  located at 6539  Dumbarton
Circle, Fremont, California 94555, and our telephone number is (510) 789-1500.

Background

    Organizations  are under  increasing  pressure  to  manage  and adapt to the
forces of accelerating  change and growing  complexity.  The combined demands of
global competition,  deregulation and organizational  restructuring,  as well as
rapid changes in products and markets and a proliferation  of new  technologies,
increasingly  complicate  business  operations.  The  rise of the  Internet  and
related  technologies has enabled companies to greatly expand their geographical
reach,  streamline  business  processes cost effectively across its supply chain
and provided new sources of revenue  streams.  The benefits of the Internet have
also created additional requirements for information infrastructures to scale to
a level not seen  before.  Management  systems  must  accommodate  thousands  of
concurrent users, millions of transactions per day and an architecture made even
more  distributed  and  complex.  These  pressures  fall  heavily on  enterprise
information   systems  and   emerging   service   providers   such  as  portals,
infomediaries and mobile commerce  providers,  which must model this complexity,
support increasingly  distributed operations and manage new types of information
that are more diverse, interrelated and dynamic.

    In  attempting  to  respond  to  these  pressures,  traditional  information
technologies  are being  stretched  to  deliver  solutions  for which  they were
neither  designed  nor  intended.  This is  particularly  true in the  areas  of
software  programming,  Internet middleware and database management,  where many
existing technology paradigms date back to the 1970s or earlier. The "structured
programming" approach, which still dominates most software development, requires
reduction  of a business  problem to a series of segmented  procedures  that are
implemented  line by line to build large,  monolithic  software  programs.  This
approach can be slow and error-prone,  and often produces software programs that
are costly to maintain and difficult to change.

    A newer  approach  to  software  development,  object-oriented  programming,
responds to many of these limitations.  Object-oriented  programming  languages,
such as C++ and Java,  enable  software  developers to  realistically  model the
complexities  of large  scale,  dynamic  systems,  and to develop,  maintain and
evolve  complex  programs  more quickly and at a higher level of quality than is
often possible using structured  programming.  In addition, Java allows software
developers to create  applications once that will run on any computing platform,
unlike most other programming  languages,  which require developers to modify an
application  every time it is ported to a  different  computing  platform.  As a
result, we believe that object-oriented programming languages,  especially Java,
are increasingly being used by software developers.

     While  object-oriented  technology  can address many  software  development
problems, it places new demands on existing database management systems, most of
which were designed to operate with traditional  programming  methodologies  and
simpler  types  of  data  in  centralized  environments.  The  hierarchical  and
relational  database  management  systems now prevalent were developed at a time
when  data  processing  operations  were  highly  structured  and  performed  on
centralized   mainframe  platforms  or,  in  the  case  of  relational  database
management systems, two-tier client/server  applications.  These systems perform
well  with  simple  types  of  data  (such  as  text  and  numbers)  and  static
relationships.  However, businesses are increasingly required to deploy database
management  systems that can  effectively  manage the  problems  and  conditions
listed below:

o   Abstract Data Types.  Graphics,  images, video, audio and unstructured text,
    often  combined  in one  application,  are  proliferating  in  business  and
    Internet-based applications.

o   Complex  Data  Relationships.  Telecommunications  networks,  Internet-based
    applications,  financial instruments,  health care systems, customer support
    systems,  airline reservation systems and logistics management often involve
    complex relationships among thousands of rapidly changing items.

o   Constant  Change.   Business  rules,  data  relationships,   technology  and
    information  are  constantly  changing,  requiring  information  systems and
    applications  that can be quickly  deployed and flexibly evolved to adapt to
    changes while  maintaining  overall  system  quality and data  integrity and
    while keeping the system in service.

                                       2

<PAGE>

o   Highly Distributed Data. Complex, interrelated, constantly changing data may
    be created in or distributed  to dozens or hundreds of locations  around the
    world, and must be carefully managed to maintain  integrity yet be available
    on demand to many users on different platforms.

    The growth of the  Internet and the World Wide Web as  mainstream  computing
and   communication   platforms   compounds  these   challenges.   The  Internet
incorporates new types and combinations of dynamic,  abstract data, and involves
a complex array of  relationships  among users,  service and content  providers,
data  sources  and  information   repackagers  and  resellers.   This  computing
environment  is  inherently  distributed  and dynamic and is evolving at a rapid
pace. The use of the Internet for transactional e-business applications, and the
proliferation   of   corporate   Intranets,   business-to-business   (B2B)   and
business-to-consumer (B2C) companies, are accelerating this complexity,  further
increasing demand for new software and database technologies.  Companies need to
integrate Internet and e-business applications with corporate databases, but the
abstract  multimedia  information  and  complex,   changing  data  relationships
prevalent in these  applications are not easily  accommodated by hierarchical or
relational databases.

    Information   Systems  (IS)   architectures  have  evolved  to  support  the
development  of e-business  applications  through the  deployment of application
servers.  Leading  application  server  vendors  include  BEA/WebLogic  and  IBM
WebSphere.  These and many other  vendors  provide a  "middle-tier"  solution to
manage  distributed  e-business  applications  over the Internet  while allowing
enterprises  to maintain and leverage  their  line-of-business  databases on the
"back-end". The growing popularity of the application server is supported by the
industry analyst firm,  IDC's,  1999 Worldwide  Market for Application  Servers:
Setting the Course for 2000 (published  December  1999),  which predicts that by
the year 2003,  worldwide sales of application servers will reach $2.36 billion.
The  line-of-business   database  is  typically  based  on  relational  database
management systems (RDBMSs).

    RDBMSs  were  developed  in  the  1970s  to  address  the  inflexibility  of
hierarchical  databases.  They were used initially to perform ad hoc queries and
later for online transaction  processing and decision support systems.  An RDBMS
stores  data in a series of  two-dimensional  tables and  defines  relationships
between  data by  connecting  rows and  columns  and  linking  multiple  tables.
Indexing  multiple  tables and then "joining" them to create a different view of
the data involves complex queries.  RDBMSs are adept at handling simple types of
information, such as alphanumeric data, and managing static relationships,  such
as that  between  a part  number  and an  invoice.  They are less  effective  in
managing more abstract data types, such as graphics,  video and audio,  which is
stored in RDBMSs as isolated binary large objects that do not support  analysis,
manipulation or relationships to other data. In addition,  RDBMSs are relatively
inefficient  when used to manage complex  relationships  because of the inherent
burden of indexing and joining multiple two-dimensional tables. This performance
burden can  significantly  lengthen  response times and is compounded when users
seek to  maintain  data on more  than one  server in a  distributed  environment
because data must be  transmitted  to a central  server where these joins can be
performed.  The burden is  increased  as  applications  become more  complex and
information more interrelated.

    Relational   database   vendors  have  attempted  to  address  some  of  the
shortcomings of RDBMSs by "extending" their support for abstract data types with
object-relational  and pure  object-oriented  approaches,  and the use of robust
middleware  applications  that enable  organizations to connect  object-oriented
applications to RDBMSs. The use of object-relational  and middleware  approaches
can improve relational performance for many enterprise customers, but we believe
that the  performance  of  object-relational  systems  or  RDBMSs  augmented  by
middleware is limited by the two-dimensional kernel architecture of RDBMSs.

    For the foregoing reasons, we believe today's business organizations need to
manage abstract data types as well as complex dynamic  relationships in a vastly
more  distributed  environment  and  that  this  need is often  not  effectively
addressed by hierarchical,  relational and object-relational database management
systems.

The Versant Solution

    Versant's core product,  ODBMS and the Versant  Enterprise  Container  (VEC)
combine  native  support for  object-oriented  languages  with high  performance
database  functionality and a client-server  architecture that supports two-tier
to n-tier applications.  As a standalone database, the Versant ODBMS is designed
to meet  commercial  users'  requirements  for  high  performance,  scalability,
reliability and compatibility with heterogeneous  computing platforms and legacy
information systems.  Incorporated into Versant's application server integration
product (now VEC,  soon to be bundled and  renamed,  Versant  enJin),  the ODBMS
provides several  value-added  functions to the application server  environment.

                                       3
<PAGE>


For those  customers  needing to store and maintain the integrity of data in the
middle-tier,  Versant's core technology serves as a persistent cache. This means
that  customers  developing new  e-business  applications  can take advantage of
native  object-based  models,  the  integrity  of a robust and  highly  reliable
"persistent  cache" and the  streamlining  of access to and from the  relational
database on the back-end.  This last feature alone can increase  performance  by
more than 10 times. In addition Versant benefits include:

o Management of Abstract Data Types.  Versant allows users to store and manage a
wide  range  of  abstract   information,   such  as  images,  video,  audio  and
unstructured text, as well as traditional types of alphanumeric data. Nearly any
kind of  information  that can be  digitized  can be  stored as an object in the
Versant  ODBMS,   while   maintaining  the   application-defined   behavior  and
relationships of the objects.

o  Language-Independent  Support for  Object-Oriented  Programming.  The Versant
solution  provides  native  support  for the  leading  object-oriented  software
development languages--C++ and Java. This support facilitates rapid and flexible
development,  maintenance and evolution of complex,  dynamic  applications  that
closely  model  real-world  systems and  processes.  Objects  developed in these
languages  are directly  stored in the Versant  ODBMS.  In addition,  Versant is
language-independent,  allowing objects written in one object-oriented  language
to  interoperate  with  objects  written  in another  object-oriented  language.
Moreover,  the Versant solution supports Java, an object-oriented  language that
allows the development of applications  that will run on any computing  platform
without modification.

o High Performance. The Versant object-based architecture provides direct access
(navigation) to stored objects. Its balanced client-server architecture enhances
performance by efficiently  distributing  processing  burdens between the client
and the server to leverage the  processing  power of networked  computers.  As a
result,   certain  customers  running  complex  applications   involving  highly
interrelated data on Versant have reported a ten-to-hundred-fold  improvement in
performance compared to RDBMSs running similar applications.

o Highly Scaleable Support for Distributed  Computing.  The Versant object-based
architecture is designed to support the transparent  integration of up to 65,000
separate  databases  in one  network,  distributed  over a range of hardware and
software platforms.  Through  object-level  operations,  Web browser support and
other design features,  Versant can be scaled from small workgroup operations to
thousands of users over wide area networks or the Internet.

o  Reliability,  Availability  and  Serviceability.  The Versant  ODBMS offers a
number of features designed to permit continuous  operation,  including features
providing  online  backup and recovery and online  modification  of the database
system,  as well as  system  utilities  that can  operate  while  the  system is
running.  These features,  together with replication and disk mirroring provided
by our Fault Tolerant Server,  support operations 24 hours per day, 365 days per
year in environments such as telecommunications  network, commercial banking and
airline  reservation  systems,  where  it  is  critical  that  the  database  be
continuously available.

o Support for Three-Tier  Architectures.  Traditional two-tier architectures are
adequate for closely coupled  client-server  environments but become unwieldy in
large,   distributed   systems.   The  Versant  solution   supports   three-tier
architectures,  in which  application  logic  resides as a middle layer  between
clients and data stores. This architecture  insulates data from constant change,
allows an end-user or application to locate data across  multiple  databases and
improves  the   productivity   and  quality  of  application   development   and
maintenance.

o Support for Component  Architectures.  The Versant Enterprise  Container (VEC)
integrates with leading Java application  servers including BEA WebLogic and IBM
WebSphere application servers. The application servers enable users to build and
deploy  Enterprise  Java Bean  (EJB)-  based  applications  to the VEC,  thereby
gaining the inherent  productivity  and  performance  advantages  of the Versant
ODBMS.

o Integration  with Users' Existing  Information  Systems.  The Versant solution
operates on a wide range of server platforms,  including  industry-leading  UNIX
platforms  from  Sun  Microsystems,   Hewlett-Packard,  IBM,  Digital  Equipment
Corporation and Silicon Graphics, Linux platforms from industry leader, Red Hat,
as well as Microsoft's Windows 95, Windows 98, and Windows NT platforms. Objects
can be readily  accessed and stored by any  combination of these  platforms in a
heterogeneous network. In addition,  Versant-based applications can interoperate
with information stored in relational database management systems, enabling such
applications  to complement  RDBMS

                                       4
<PAGE>


strengths  in  structured  applications.  These  compatibilities  allow users to
protect their existing  investments in databases and  information  systems while
migrating newer systems to object-oriented platforms.

o  Persistence.  Traditionally,  persistence  for  object-oriented  applications
required  explicit  application code in some object  programming  language.  The
emergence of EJB-based  application  servers  offers an  alternative to explicit
programming,  where  application  components  execute in containers that provide
object persistence  services.  The Versant  Enterprise  Container supports EJB's
that  interface to the Versant  ODBMS via a Java  database  interface,  enabling
customers to utilize the Versant ODBMS as a persistence solution.

Company Strategy

    Versant's objective is to be the leading provider of Internet middleware for
object  management of e-business  applications.  Key elements of our strategy to
achieve this objective include the following:

o Extend Technology  Leadership.  A significant  component of our strategy is to
leverage our knowledge and expertise in object database  management  systems for
e-business  applications.  We believe that our product  architecture  includes a
number  of  important   technological   advances  and  that  this  technological
leadership  is essential to our  continued  ability to compete  effectively.  In
1999, we released products that enable organizations to:

     (1) utilize the Versant ODBMS in conjunction with the IBM WebSphere and BEA
WebLogic  application  server  family  (2)  extended  asynchronous   replication
solution that allows data to be replicated from one Versant  database to another
(3) improved Java Versant Interface to enable Java objects to persist in Versant
ODBMS (4) made  available  an early  developer's  release  for the  Versant  XML
Toolkit  providing import and export of Extended Markup Language (XML) data into
and out of the Versant ODBMS.

     *We intend to extend our  leadership  position by  continuing  to invest in
internal research and development,  establishing  strategic  relationships  with
leading  providers of complementary  technologies and by integrating the Versant
ODBMS with products  offered by third  parties.  We note that our  technological
development  efforts are  subject to the risks  typically  associated  with such
efforts,  including  development  delays  and the  technological  challenges  of
creating new functionality and integrating  third-party  products into Versant's
products.  See "Management's  Discussion and Analysis of Financial Condition and
Results  of  Operations--Risk   Factors--We  depend  on  successful   technology
development."

o Leverage Strength in  Telecommunications  to Other Vertical Markets.  We are a
leading   provider   of   object   database   management    solutions   to   the
telecommunications  market,  where  our  products  are  used in such  strategic,
distributed  applications as network  modeling and management,  fault diagnosis,
fraud  prevention,  service  activation and assurance and customer  billing.  We
believe that our experience and success in this demanding market positions us to
address  other  vertical  markets  such as financial  services,  transportation,
defense,   health   care  and   energy.   These   markets  are  similar  to  the
telecommunications  market in their  increasing  reliance on large  networks and
need for high  performance  support for abstract data types and for distributed,
complex  applications  involving dynamic,  highly interrelated  information.  In
1999,  we increased  our focus on the  financial  services  market and conducted
several  seminars  worldwide to expand  awareness of us and our products in this
market.  *We intend to continue to derive revenues from  telecommunications  and
financial services in 2000, though we will seek additional opportunities outside
these markets as well. Our success in the telecommunications, financial services
and other  markets  is  dependent,  in part,  on our  ability  to  compete  with
alternative  technology  providers  and the  extent to which our  customers  and
potential customers believe we have the expertise necessary to provide effective
solutions  in  these  markets.  If  these  conditions,  among  others,  are  not
satisfied,  we may not be successful in generating  additional  opportunities in
these markets. See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations  --Risk  Factors--We  rely on  telecommunications  and
financial services markets."

o  Capitalize  on the  e-business  Market  Opportunity.  *We  believe  that  the
increasing  development  of new  e-business  applications  for both  large-scale
enterprises  and for Internet  startups such as portals,  infomediaries  and b2b
vendors  will  significantly  expand  the  market  opportunity  for  our  object
technologies.  Internet-based computing environments and applications are highly
distributed  and  are  increasingly  becoming  more  complex,  requiring  highly
scaleable,  high  performance  database  systems  as  their  infrastructure.  In
addition,  e-business applications  increasingly

                                       5
<PAGE>

incorporate  abstract  data  types  and  are  increasingly  being  addressed  by
object-oriented programming languages such as Java. As a result, we believe that
our  object-based  component  architecture  position us to  capitalize  upon the
Internet-based  market. Certain of our customers,  including iVendor,  StellarX,
Covia (formerly Glyphica), CyberRoad (formerly Calvex), Future State Technology,
France  Telecom  spin-off  NetCentrex,   Factiva,   AVT  Technologies,   Syncom,
Platform7,   Software.com,   Whiplash  and  France   Telecom's  New  Development
Laboratory,   are  using  Versant  technology  to  enhance  the  performance  of
Internet-based infrastructures and applications. *We intend to continue focusing
on the  Internet-based  market  opportunity and working with partners to improve
the performance of Internet-based infrastructures.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Risk  Factors--We
rely on telecommunications and financial services markets."

o Integrate with Component Middle-tier Servers. Today, Versant partners with the
two leading  application  server  vendors,  IBM WebSphere and  BEA/WebLogic.  We
intend to  continue to  integrate  with  leading  providers  of  component-based
servers offering persistence services.  Existing standards for EJB solutions and
emerging  standards  for common  object  request  broker  architecture  (CORBA),
solutions  provide an  important  opportunity  for  Versant  to expand  into new
markets.

o Expand Distribution  Channels.  *We intend to expand our indirect distribution
channels by recruiting additional value-added resellers,  distributors and other
resellers. *As familiarity with object-oriented  technology and awareness of our
products  increase,  we  believe  that we will  be able to  increase  our use of
indirect  sales  channels  to  address a broader  market  and to  capitalize  on
resellers' integration capabilities.  In addition, we believe that international
markets present attractive opportunities, particularly as telecommunications and
other industries face increasing change and competitive pressures worldwide. *We
intend  to  continue  to  expand  our  international   distribution  network  to
capitalize on these  opportunities,  particularly  through Versant  Europe,  our
European  subsidiary.  See  "Management's  Discussion  and Analysis of Financial
Condition   and   Results  of   Operations--Risk   Factors--We   depend  on  our
international operations."

o Enable  Customers  to  Implement  a Complete  Solution.  Versant is working to
bundle its technologies and products into complete  solutions for our customers.
By second quarter 2000,  Versant expects to have available the Versant Developer
Suite and the Versant enJin suite of products. These product suites are intended
to enable  customers  to more  quickly  and easily  develop  and  implement  new
applications.  Versant  also  continues  to work  with  its  application  server
partners,  IBM and BEA to further product  integration  between the two vendors.
*We  intend to expand the  breadth of our  product  offerings  through  internal
development  efforts and through  marketing,  licensing and other  relationships
with providers of complementary technologies and other market participants.  *We
believe that by providing our customers  with a more complete  solution,  we can
facilitate  their  adoption  of  object-oriented   technology,   accelerate  the
development of  applications  in a component  framework,  and expand the use and
value  of  our  products.   However,   Versant  product  offerings  may  not  be
commercially  accepted by our customers and are subject to potential development
delays due to the  technological  challenges of creating new product  offerings,
and competing  solutions may limit the market  opportunity  for Versant  product
offerings.  See "Management's Discussion and Analysis of Financial Condition and
Results  of  Operations--Risk   Factors--We  depend  on  successful   technology
development."

o  Increase   Penetration  of  Current   Customer  Base.  We  seek  to  generate
incremental, recurring revenue from our installed base of customers. In 1999, we
significantly  increased our  development  licenses sold compared to 1998.  This
action could  generate  significant  follow-on  sales of deployment  licenses in
2000. A customer's successful  development of an application under a development
license can lead to additional revenue from deployment licenses. The scalability
of the Versant solution enables customers to add end-users, providing additional
license  revenue  to us as  customers  expand  their  use  of the  product.  The
adaptability of the Versant  technology to a wide range of  applications  allows
customers  to develop  applications  for other  functions.  We also  license our
products on a project basis, with development and deployment licenses bundled at
a lower price to the customer than if the customer had  purchased  such licenses
separately.  *Although  we seek to increase our number of  customers,  typically
through relatively  smaller licenses,  we believe that our practice of licensing
our products on a project basis will increase.  *This increase in projects could
result in our realizing  larger amounts of revenue at the beginning of a project
than  it  otherwise  would,   with   potentially   reduced   recurring   revenue
opportunities from such project in the future. See "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations--Risk  Factors--Our
revenue levels are unpredictable."

                                       6

<PAGE>


Products and Services

    Our key products are the Versant ODBMS, a high  performance  object database
management  system,  and Versant  Enterprise  Container (VEC). *In addition,  we
offer  object-oriented  programming language  interfaces,  database query tools,
application  development tools and  integration's  with system management tools.
Customers  licensing  the Versant  ODBMS  receive the  database  engine with one
object-oriented  programming language interface and a set of integrated database
utilities.  For additional  fees,  customers may obtain  additional  programming
language    interfaces,    and   users   requiring   continuous   operation   in
mission-critical  environments can license the Versant Fault Tolerant Server. We
offer a variety of services to assist  customers in the design,  development and
management of their database  applications,  including training,  consulting and
custom development services.

Products

Core Database Products

o Versant ODBMS. The Versant ODBMS is designed to support multi-user, commercial
applications   in   distributed   environments.   Its   balanced   client-server
architecture enables the system to process a wide variety of abstract data types
and complex  applications in a highly concurrent,  high performance  manner. The
product is designed to integrate  over 65,000  databases  connected  over a like
number of  locations  on a variety of  hardware  and  software  platforms.  Each
database has a theoretical storage capacity of 4.6 million terabytes,  an amount
far beyond the actual capacity of most existing operating  systems.  The Versant
ODBMS implements a variety of database features, including two-phase commits for
distributed  transaction  integrity  and database  triggers to monitor  changing
events  and data and to notify  users and  applications  when  specified  events
occur. In addition,  on-line management  utilities enable routine maintenance to
be performed while the database is running.  These include  utilities to perform
backup operations,  manage log files,  dynamically evolve database schema,  add,
delete  and  compact  volumes  on disk  storage  and  related  functions.  These
utilities  provide  multiple  levels of  administrative  access and  application
security.  With the  version  5.2 of the  Versant  ODBMS,  we  provide  external
transaction coordination from third-party transaction monitors, parallel queries
to multiple Versant  databases,  distributed  on-line backup of multiple Versant
databases,   persistent   database  event,   and  enhanced   system   management
capabilities.  We believe  these new  features  extend  our role as the  premier
object database provider for enterprise computing.

o Versant Fault Tolerant  Server.  For continuous  operation in mission critical
environments,  we offer the Versant Fault Tolerant Server.  This product ensures
transparent  failure  recovery by connecting  database  clients to  synchronized
copies of the database stored on physically  separate  computers.  If one of the
databases  fails due to operating  system failure,  hardware  breakdown or other
interruption,   the  other  database  continues  operation  without  application
interruption.   When  the  failed  database  is  restored,   the  two  databases
automatically   resynchronize   and  resume   operations   without   application
interruption.

Language Solutions

     The  Versant  ODBMS  implements  an object  model that is a superset of the
capabilities of C++ and Java. The interface to these  object-oriented  languages
make the  database  appear  to be a natural  and  transparent  extension  of the
language.  Programs written in any of these languages can use objects written in
another, allowing integration of corporate data stores regardless of application
development  language.   Versant's  Java  Direct  Interface,   enables  seamless
persistence  for  Java  applications  that  will run on any  computing  platform
without modification. In addition, we provide a C language interface.

Internet-based Products

    Versant  Enterprise  Container  (VEC).  The  VEC  enables  users  to  deploy
Java-based applications using Java 2 Enterprise Edition (J2EE) technologies such
as Enterprise Java Beans that take advantage of the  capabilities of the Versant
ODBMS  without  customizing  the  applications  for the Versant  ODBMS.  The VEC
supports the BEA WebLogic  application server and the IBM WebSphere  Application
Server.  See  "Management's  Discussion and Analysis of Financial  Condition and
Results  of  Operations--Risk   Factors--We  depend  on  successful   technology
development."

                                       7
<PAGE>

Data Access and Integration Tools

    The Versant  ODBMS allows users a choice of access  methods for querying and
manipulating  data in the  Versant  ODBMS  and to obtain  data  from  relational
databases.  With the  Versant  SQL Suite,  we offer open  database  connectivity
capability  and structured  query  language  access to data stored in relational
databases using industry-standard off-the-shelf query and reporting tools. These
tools permit  customers  to retain their  investments  in legacy  systems  while
addressing new applications with the  productivity,  flexibility and performance
characteristics available through object technology.

Licensing and Pricing of Products

    We license our products directly to end-users principally through four types
of licenses--development licenses, deployment server licenses, deployment client
licenses  and  project  licenses  (which  include   development  and  deployment
licenses).  Development  licenses are sold on a per seat basis and authorize the
customer to develop an application program that uses the Versant ODBMS. Before a
customer may deploy an  application,  it must  purchase at least one  deployment
server license and one deployment client license for each computer  connected to
the server that will run the  application  using the  database.  If the customer
wishes  to  install  several  copies  of the  application,  separate  deployment
licenses are required for each server computer and each client that will run the
particular  application.  We also license our products on a project basis, where
the customer simultaneously purchases development and deployment licenses for an
entire project.

    Prices  for our  development  and  deployment  contracts  range from the low
thousands  to the high  millions  depending  on a variety  of  variables.  These
variables  include,  but are not  limited  to the  following:  number  of  users
(specific number or unlimited), number of deployments, timeframe of deployments,
prepaid or as needed deployments, type of operating system(s), type of server(s)
and are the servers single or multiprocessor  machines.  We provide  alternative
pricing for non-interactive environments where the product is deeply embedded in
a  component,  such as a telephone  switch,  and does not have end users.  Sales
through  distributors  generally  involve a  significant  discounts.  Prices for
project licenses will vary with the scope and nature of the underlying project.

    A typical  value-added  reseller  develops an application  incorporating the
Versant ODBMS and then  licenses the  application  to our customer.  Value-added
resellers  purchase  development  licenses  from us on a per seat basis on terms
similar to those of development licenses sold directly to end-users. Value-added
resellers are authorized by us to sub-license  deployment  copies of the Versant
ODBMS,  together with the  value-added  resellers'  applications,  to end-users.
Deployment license pricing for sales through value-added  resellers generally is
based  either on a  percentage  of the total  price  charged by the  value-added
reseller to our  end-user  customers  or are based on a  percentage  of our list
prices. We also enter into project licenses with certain value-added resellers.

Services

    We  offer  a  variety  of  services  to  assist  customers  in  the  design,
development and management of their database  applications.  Training is offered
in a variety of Versant-specific and object-related technologies and ranges from
beginning to advanced levels. Consulting services are available for analysis and
design assistance,  mentoring and technical transfer, application coding, design
reviews and performance  analysis.  In addition,  we provide custom  development
services to customers  that request unique or  proprietary  product  extensions.
These services may be performed by third-party integrators,  consultants, or us,
depending on the nature and complexity of the request. Maintenance and technical
support  services are  available  at an annual fee that varies  depending on the
type of support that the customer  requires.  Maintenance and support contracts,
which  typically have  twelve-month  terms,  are offered  concurrently  with the
initial  license of a Versant  product  and entitle  the  customer to  telephone
support and to product and documentation updates. For additional fees, customers
may purchase a special support package  providing a dedicated  support engineer,
and may obtain  telephone  support  available 24 hours per day. All  maintenance
contracts are renewable annually.

Customers and Applications

    The  Versant  ODBMS  and  Versant  Enterprise  Container  are  licensed  for
development  and/or  deployment  in a wide  range of  applications.  Many of our
customers have licensed multiple copies for use in different applications. Sales
to
                                       8
<PAGE>

Ericsson  Radio  Systems,   Siemens  Medical  and  CDC  of  Canada  together
represented  12.8% of our total  revenue in 1999;  however,  no single  customer
accounts for 10% or more of our 1999 total revenue.

    In any  given  quarter,  it is  typical  for a  relatively  small  number of
customers to constitute a significant  percentage of our total revenue. In 1997,
1998 and 1999, 39%, 42% and 30% of our total revenue were  attributable to sales
of products and services to telecommunications  companies. In addition, in 1999,
7.1% and 4.6% of our total  revenue were  attributable  to sales of products and
services  in  the  financial   services  and  technology   markets  *Our  future
performance  will depend in significant  part on the continued growth of the use
of  ODBMSs in  telecommunications  and  financial  market  applications  and the
acceptance of our products within the  telecommunications and financial services
industries.  *In addition,  we expect to become increasingly  dependent upon the
Internet-based  and financial  services markets.  The failure of our products to
perform  favorably in and become an accepted  component  of  telecommunications,
Internet-based  or financial  services  applications,  or a slower than expected
increase or a decrease in the volume of sales of our  products  and  services to
telecommunications, Internet-based or financial services companies, could have a
material adverse effect on us.

    The following  examples  illustrate some of the new applications for Versant
in  our  core  markets  (telecommunications,  financial  services,  defense  and
transportation) and in our strategic e-business market.

Core Market Customers

    3Com/Bull alliance selected Versant for its Intelligent  Networking Solution
("IN"). Their IN solution allows network service providers (NSPs) with access to
Signaling  System 7 (SS7) to  connect  their 3Com  Total  Control  multi-service
access platform to the telephone trunk network.  This, in turn, permits carriers
and NSPs to roll out scalable Internet-based services, including data, voice and
fax services,  over their existing data  infrastructure.  The 3Com Total control
solution  is a modular  technology  capable of  accommodating  dial-in  Internet
access,  Internet  Protocol (IP)  telephony,  managed  remote  access,  dial-out
services and cellular access.

    Check Point Software Technologies selected Versant Asynchronous  Replication
(VAR) for its call center application and is scheduled for production deployment
next month. Check Point Software uses VAR in conjunction with Primus software in
order to more efficiently share data between our world wide support centers. VAR
was  deployed  to  help  Check  Point  meet  key  design  goals,  which  include
accelerating  the workflow  process and enhancing  data sharing  between  global
sites in order to improve customer response and decrease operational costs.

    Banque Nationale de Paris selected Versant as the Object Database Management
System (ODBMS) of choice for its Equities Group,  the world leader in OTC equity
options  and the second  largest in overall  equities  products.  Versant  ODBMS
technologies  are being used in a key BNP  online  trading  application,  called
Market Data Server (MDS).  In real-time MDS  consolidates  market data including
stock volatility, dividend and interest rates from around the world. BNP traders
now have the most up-to-date data needed to price their derivatives instruments.
The  level of  complexity  in the  application,  collecting  market  data from a
variety of sources, coupled with BNP's availability  requirements,  mandated the
selection of an ODBMS and VAR. More traditional RDBMS were not able to scale and
deliver fast performance. Additionally, VAR provided real-time update capability
without impacting that performance.

     Versant  technologies are the foundation for the eXpanded  Straight Through
Processing  (X-STP)  system,  called  FARAO CSD,  the first fully  event  driven
real-time Central Securities Depositories (CSDs) solution.  Developed by Axioma,
a leading  software  provider of  enterprise  Internet  solutions,  and based on
Versant's  Object  Database  Management  System  (ODBMS),  X-STP  is  the  first
application  to facilitate  both domestic and cross border  settlement and other
financial services,  e.g. custody services,  securities lending and borrowing or
collateral  management  without human  intervention.  The first CSD to implement
Axioma's  state of the art  solution  is the  Oesterreichische  Kontrollbank  AG
(OeKB),  Austria's main financial and information  service  provider for exports
and the capital market. OeKB is Clearing House and Central Securities Depository
for the Austrian capital market and is partnering with other European CSDs. OeKB
services include safekeeping and administration,  book entry transfers, clearing
and  settlement  of stock  exchange  and OTC  transactions,  and issue of global
instruments of certificates for foreign  registered  shares.  In addition to the
Austrian  Central  Bank and Vienna  Stock  Exchange,  OeKB  partners  include 97
national commercial banks and brokers, and 28 international business partners.

                                       9
<PAGE>

e-business Customers

    NetCentrex,  a France  Telecom  spin-off,  conducted an evaluation  and also
selected   Versant  as  the   foundation  for  its  Personal  Call  Agent  (PCA)
application.  PCA allows  service  providers  the  ability to offer  traditional
Centrex  services to both telephony and Voice over IP (VoIP) users. The services
include  a  network-based  corporate  directory,  personal  contact  and  groups
management, call filtering and network-based universal messaging. The Java-based
user interface  allows web-based  provisioning,  simplifying the addition of new
services.

    iVendor Inc, a newly launched  e-merchandising network, has chosen Versant's
Object-based technologies to provide a highly flexible and scalable platform for
presenting  millions  of  products  from  multiple  vendors,  through  virtually
thousands of online store operators. With the Versant ODBMS as one key component
of its architecture, iVendor's e-merchandising network is now able to handle the
tremendous demands of high traffic content sites, allowing reliable,  consistent
performance  even at peak load periods.  The iVendor  network,  the first of its
kind, brings together products from independent suppliers into a central Versant
database for presentation to iVendor online retailers,  who then select products
to create their own  customized  e-commerce  sites.  It has been  architected to
handle literally thousands of online storefronts  offering millions of products,
each product containing changing price points and presentations.

    France Telecom , one of the world's leading telecommunications carriers with
1998 revenues of $24 billion, initiated a study in 1998 to evaluate key software
technologies for it's middle-tier information technology (IT) infrastructure,  a
program internally dubbed  "@rchimede".  Technologies  evaluated included object
modeling tools, application servers, EJBs and XML. Over a two year period France
Telecom  conducted  performance and usability  benchmarks to test the technology
components against real-world application scenarios.  The results indicated that
traditional  RDBMS  environments  could not  deliver the  performance  required.
France Telecom selected EJB technology,  combined with Versant's object-oriented
technologies, to provide middle-tier persistence, to increase performance and to
enable an easy-to-use  development  environment.  France Telecom standardized on
Versant technologies for development of all object-based applications, including
Voice over IP (VoIP), micro-payments, network management, directory services for
Internet portals, customer service, real-time management of leased lines and the
design of their mobile network.

    Covia's  (formerly  Glyphica)  "customer  portal" uses Versant  object-based
technologies  as the foundation to help manage their customers over the Internet
and provide their sales teams with customer data, documents and dialogue through
a similar Web interface. Glyphica's PortalWare allows organizations with complex
sales cycles and products to use the Internet to  accelerate  their sales cycles
and create one-to-one relationships with their customers and partners. Marketing
and sales  professionals  can create  personalized  extranets  at the touch of a
button,  creating a window for  exchanging  business  information  with each and
every customer.

    The above four companies  exemplify  Versant's thrust into e-business.  This
new  segment of our  business is the fastest  growing  portion of the  company's
portfolio,  and as  demonstrated,  shows  applications  ranging  from portals to
Application  Service  Provisioning  (ASP) to  internet  infrastructure.  Further
customer  examples  representative  of this  shift  in 1999  include;  CyberRoad
(formerly Calvex),  Orange County California,  Ericsson-USA,  Factiva,  Firemans
Fund,  Intel,   MCI-WorldCom,   Nth  Degree,  Platform7,   Quadrian,   StellarX,
Software.com and Whiplash.

Marketing and Sales

    We  market  and sell the  Versant  ODBMS in the  United  States  principally
through our direct sales force and  value-added  resellers  and  internationally
through our distributors, direct sales force and value-added resellers.

Direct Sales

    As of December  31,  1999,  our direct  sales  organization  consisted of 25
employees based at our corporate headquarters in Fremont,  California and at our
other regional offices around the world. The direct sales organization  includes
a telesales  force that  supports  our field  sales  personnel  and  maintenance
renewals and handles smaller orders. The direct sales organization also includes
systems engineers who answer technical questions and assist customers in running
benchmarks against competitive products and developing  prototype  applications.
In 1997,  1998 and 1999,  sales by our direct  sales force  (including  sales to
value-added resellers) accounted for over 99%, 99% and 78%, respectively, of our
total revenue.

                                       10
<PAGE>

Indirect Sales

    An  important  part  of our  sales  strategy,  going  forward,  will  be the
continued  development of indirect  distribution  channels,  such as value-added
resellers,  systems  integrators and foreign  distributors.  With the continuing
growth in the internet business arena, our focus towards indirect sales channels
is expected to be more important as we penetrate the e-business market.  Typical
value-added   resellers  build  application  programs  in  which  they  embed  a
deployment  copy of the  Versant  ODBMS.  Systems  integrators  may  include our
products with those of others to provide a complete solution to their customers.
Foreign  distributors  include  distributors  based in Japan,  Italy and Israel.
Value-added  resellers  are  typically  not subject to any  minimum  purchase or
resale  requirements  and can cease marketing our products at any time.  Certain
value-added resellers, distributors and systems integrators also offer competing
products that they produce or that are produced by third parties. During 1999 we
had 14 value-added resellers and 3 distributors contribute,  collectively,  $5.7
million  dollars  of  indirect  revenue  (consisting  of product  royalties  and
deployment licenses).

Marketing

    As part of our restructuring  effort in 1999, we reduced marketing headcount
and budget to focus the company's efforts on rebuilding the product line for our
strategic  e-business  segment.  In fourth  quarter  1999,  a Vice  President of
Marketing was hired to develop and implement  programs  geared to  communicating
Versant's new e-business position to external and internal  audiences.  Programs
include:  Media  and  Analyst  Relations,  Investor  Communications,   Speaker's
Program, Online Marketing, Partner Marketing Programs and Conference/Tradeshows.

Sales Process

    The sales cycle for our core  products to new  customers  often  exceeds six
months and may extend to a year or more.  The sales cycle to  Internet  startups
are shorter in length, typically 3 to 6 months, due to the increasing market and
competitive  pressures on them to bring new services or products to market.  For
existing customers with successful deployed  applications,  sales cycles for new
applications  of the Versant ODBMS are generally much shorter.  During the sales
cycle,  meetings  involving both  technical and management  staff are frequently
conducted at the customer's site and at our headquarters.  Prospective customers
typically  perform a detailed  technical  evaluation or benchmark of the Versant
object-based  technologies and, often,  competitive  products,  as a part of the
selection process. Upon completion of the evaluation,  the customer may purchase
one or more development licenses for the team of programmers that will build the
application.  Additionally, the customer may order maintenance, training courses
and  assistance  from our  consultants.  A customer  can  purchase a  deployment
license at the same time as it purchases a development  license, or can purchase
a project license that covers  development and deployment for an entire project.
However, many customers defer their purchase of a deployment license and related
maintenance  until  they  complete  application   development  (a  process  that
typically  takes at least six months and can exceed one year) and then decide to
deploy the application.

    For deployed  applications,  a customer may purchase  additional  deployment
licenses as additional users are added to a system,  without further  deliveries
from us,  providing  additional  revenue over an extended period at a relatively
low incremental  cost to us.  Depending on the application type and the customer
size,  it is  possible  for the price of a  customer's  deployment  licenses  to
substantially exceed the price of earlier development licenses.

Shipping and Backlog

    Our software is typically  shipped to customers  shortly after the execution
of a license  agreement  and upon our  receipt  of the  order.  As a result,  we
typically do not have a material backlog of unfilled license orders at any given
time,  and we do not  consider  backlog to be a  meaningful  indicator of future
performance.

                                       11
<PAGE>


Research and Development

    *We have committed, and expect to continue to commit,  substantial resources
to our research and development  efforts.  Our current  development  efforts are
focused on:

     (1)  continuing to leverage Java for e-business applications
     (2)  improving   the   integration   of  Versant   products   with  leading
          application-servers and middleware technologies
     (3)  improving performance and scalability of the Versant ODBMS
     (4)  improving   integration  between  the  Versant  ODBMS  and  relational
          databases
     (5)  leveraging   XML  and  Versant   products   for   business-to-business
          applications and portals

    Research and  development  expenses were  approximately  $5.2 million,  $7.7
million  and $7.0  million in 1997,  1998 and 1999  respectively.  To date,  all
research and development expenditures have been expensed as incurred.

    The  Versant  ODBMS has,  to date,  been almost  entirely  developed  by our
research  and  development  personnel.  Our  development  team  consisted  of 46
full-time employees as of December 31, 1999, most of whom are software engineers
with significant experience and expertise in such technologies as:

     (1) object-oriented software development, including Java
     (2) relational database technology
     (3) platform engineering
     (4) design and integration and
     (5) large-scale run-time environments
     (6) middleware technologies

    We selectively supplement our internal staff with outside consultants having
expertise in specific areas.

    In 1997, we began  performing  certain porting and  enhancement  engineering
work in Pune, India, by subcontracting  work through Netcon Systems,  a Software
Technology Park (STP) company. A STP company is a software  development  company
shielded  from  import  and  export  duties,  so  that  India  can  promote  its
specialized software labor pool. In December 1998, we, with two Indian citizens,
sponsored the creation of a STP company named Versant  India.  In March 1999, we
purchased the common stock of Versant India from its founders.  Versant India is
our wholly  owned  subsidiary  and will  continue to do porting and  development
projects for us.  Versant India has 16 employees and occupies a rented  facility
of 7,500 square feet in Pune, India.

    In 1998, we also added 14 engineers  with our  acquisition of Soft Mountain.
As of December 31, 1999, the headcount at Soft Mountain is four. The development
effort originally conducted by the Soft Mountain subsidiary has been transferred
to our  Versant  India  research  and  development  facility  in order to better
utilize our worldwide development resources.  *Our future success will depend on
our ability to attract, train and retain highly skilled research and development
personnel. Competition for such personnel is intense, especially the competition
for personnel  familiar with  object-oriented  technology.  *We expect that such
competition will continue for the foreseeable future and may intensify.

    *We believe  that our future  results  will depend on our ability to improve
our current technologies and to develop new products and product enhancements on
a timely  basis.  The market for our products and services is  characterized  by
changing customer demands, rapid technological change and frequent introductions
of new products and product enhancements. Customer requirements for products can
change  rapidly  as a result of  innovations  or  changes  within  the  computer
hardware  and  software  industries,   the  introduction  of  new  products  and
technologies  (including new hardware  platforms and programming  languages) and
the  emergence,  evolution or  widespread  adoption of industry  standards.  The
actual or anticipated  introduction of new products,  technologies  and industry
standards can render  existing  products  obsolete or  unmarketable or result in
delays in the  purchase of such  products.  As a result,  the life cycles of our
products are difficult to estimate.  *We have in the past experienced  delays in
the introduction of new products and features, and may experience such delays in
the future. If we are unable, for technological or other reasons, to develop new
products or enhancements of existing  products in a timely manner in response to
changing market  conditions or customer  requirements,  our business,  operating
results and financial condition will be materially adversely affected.

                                       12
<PAGE>

    New  products or new versions of existing  products  may,  despite  testing,
contain   undetected  or  unresolved  errors  or  bugs  that  will  delay  their
introduction or adversely affect their commercial acceptance, which could have a
material  adverse  effect  on our  business,  operating  results  and  financial
condition.

Intellectual Property and Other Proprietary Rights

    We rely  primarily on a combination of copyright and trademark  laws,  trade
secrets,  confidentiality  procedures and contractual  provisions to protect our
proprietary technology.  For example, we license our software pursuant to signed
license agreements and, to a lesser extent,  "shrink-wrap" licenses displayed in
product packaging,  which impose certain  restrictions on the licensee's ability
to utilize the software.  In addition,  we seek to avoid disclosure of our trade
secrets,  including  requiring  those  persons  with  access to our  proprietary
information  to execute  confidentiality  agreements  with us,  and we  restrict
access to our source code.  We seek to protect our software,  documentation  and
other written materials under trade secret and copyright laws, which afford only
limited  protection.  On October 13, 1998 we were awarded a United States patent
(No.  5,822,759) for our proprietary  Cache System used within our Versant ODBMS
product.

     For  a  discussion  of  the  intellectual   property  risks  we  face,  see
"Management's  Discussion  and  Analysis of financial  Condition  and Results of
Operations--Risk Factors--We must protect our intellectual property."

Competition

For a discussion of the competition we face in our business,  see  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations--Risk
Factors--We face intense competition."

Employees

    As of  December  31,  1999,  we and  our  subsidiaries  had a  total  of 108
employees,  60 of whom were based in the United States, 32 of whom were based in
Europe,  and 16 of whom were based in India.  Of the total,  46 were  engaged in
engineering and technical services,  27 were engaged in sales and marketing,  19
were engaged in the services  organization and 16 were engaged in administration
and finance.  None of our employees is represented by a labor union with respect
to his or her  employment by us. We have  experienced no organized work stoppage
to date and believe that our relationship with our employees is good.

    *Our  future  performance  depends in  significant  part upon the  continued
service of our key technical, sales and senior management personnel. The loss of
the services of one or more of our key employees  could have a material  adverse
effect on our business,  operating results and financial condition.  *Our future
success also depends on our  continuing  ability to attract,  train and motivate
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense,  especially in Silicon Valley where our  headquarters  are
located, and we may not be able to attract, train and motivate such personnel.

Item 2.  Description of Property

    In August 1997, we moved our principal administrative,  sales, marketing and
research and development  operations to a new headquarters  facility in Fremont,
California, where we occupy 54,000 square feet under a 10 year lease. We believe
that the Fremont  facility  will be adequate for our  requirements  for the next
several  years.  We and our  subsidiaries  also lease  space for sales  offices,
generally  under  multi-year   operating  lease  agreements,   in  Pune,  India;
Frankfurt, Germany; Munich, Germany; Paris, France; and Hampshire, England.

Item 3.  Legal Proceedings

     Our company and certain of our present and former  officers  and  directors
were named as  defendants  in four  class  action  lawsuits  filed in the United
States District Court for the Northern District of California,  filed on January
26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively.  On
June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended  complaint  alleges
violations  of Sections  10(b) and 20(a) of the  Securities  Exchange  Act,  and
Securities and Exchange  Commission Rule 10b-5  promulgated under the Securities
Exchange Act, in connection with public statements about the Company's

                                       13
<PAGE>


expected  financial  performance.  The complaint seeks an unspecified  amount of
damages. We vigorously deny the plaintiffs' claims and have moved to dismiss the
allegations.  The Plaintiff has filed a response to our motion to dismiss and we
have filed an  opposition  to  Plaintiff's  response.  The motion to dismiss was
submitted to the court for  consideration on November 13, 1998 and the court has
not yet issued a decision.  Securities  litigation  can be  expensive to defend,
consume  significant  amounts of management time and result in adverse judgments
or  settlements  that  could have a material  adverse  effect on our  results of
operations and financial condition.

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

     Not applicable.

                                       14

<PAGE>


PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

Price Range of Common Stock

     Our common stock is quoted on the Nasdaq  National  Market under the symbol
"VSNT." Our common stock commenced trading on the Nasdaq National Market on July
18, 1996. From July 19, 1999 until March 7, 2000, our common stock was quoted on
the Nasdaq SmallCap Market.) Prior to July 18, 1996, there was no public trading
market for our common stock.  The following table lists the high and low closing
prices during for the last three full years (based on closing prices as reported
by Nasdaq).

                                                    High                Low
                                                  --------           ---------
     1997:

                First Quarter                     $ 22 3/4           $   8 1/2
                Second Quarter                    $  9 3/8           $   4 1/8
                Third Quarter                     $ 16 1/4           $   6
                Fourth Quarter                    $ 18 5/8           $  11 1/8
     1998:

                First Quarter                     $ 14 9/16          $   5 1/8
                Second Quarter                    $  7 5/16          $   3 3/4
                Third Quarter                     $  5 1/2           $   2 1/8
                Fourth Quarter                    $  4 1/4           $ 1 13/16

   1999:

                First Quarter                     $   2 15/32        $   1
                Second Quarter                    $   2 31/32        $   1 1/8
                Third Quarter                     $   3  5/32        $   2
                Fourth Quarter                    $  11 13/16        $   2 3/8


     There were  approximately  118 holders of record of our common  stock as of
February 29, 1999. We believe that a significant  number of beneficial owners of
our  common  stock  hold  their  shares in  street  name.  Based on  information
available to us, we believe we have at least 400 beneficial  shareholders of our
common stock.

Dividend Policy

     We have neither declared nor paid cash dividends 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 not anticipate that we will declare or
pay cash dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

     On July 12, 1999, we issued shares of a newly designated Series A Preferred
Stock  ("Series A Stock").  A total of  1,489,799  shares of Series A Stock were
issued, with each share of Series A Stock intitially convertible into two shares
of the Company's  common stock at the market price of the Company's common stock
effective  July 12, 1999.  Nine hundred and two thousand  nine hundred and forty
six  (902,946)  of the shares of Series A Stock were issued in  exchange  for an
outstanding  convertible secured promissory note with outstanding  principal and
interest of $3,846,550.82 held by Vertex Technology Fund, Ltd.  ("Vertex"),  and
586,853 of the shares were issued in consideration  of an additional  $2,499,994
in new  financing.  One million  dollars of the new  financing was provided by a
Vertex affiliate,  with the remainder provided by other investors. Each share of
Series A Stock was sold at a price of $4.26 per share.  We also issued  warrants
to purchase a total of 1,489,799 shares of our common stock at an exercise price
of $2.13 per share as part of the transaction.

     The Series A Stock has a liquidation  preference  equal to 150% of the full
amount  paid for the  Series  A Stock,  with  the  preference  increasing  by an
additional 50% per year over each of the next two years, so long as the Series A
Stock is

                                       15
<PAGE>


outstanding.  The Series A Stock automatically converts into common stock if our
common stock price exceeds  $12.00 per share for 45  consecutive  business days.
The  holders of Series A Stock will  generally  vote with the  holders of common
stock  provided  that the Series A Stock is only  entitled  to a number of votes
equal to 50% of the  number of shares of common  stock  into  which the Series A
Stock is  convertible.  The  holders of Series A Stock were also  provided  with
certain voting protective provisions.

     Neither the Series A Stock nor the warrants have been registered  under the
Securities  Act of 1933,  and may not be offered  or sold in the  United  States
absent registration or an exemption from applicable  registration  requirements.
Investors  in the  financing  were  provided  with certain  registration  rights
relating to the shares of Series A Stock and warrants  purchased  by them.  Each
investor also agreed not to purchase more than 100,000  additional shares in the
Company  without our approval so long as such investor holds more than 5% of our
outstanding securities.

     On November 1, 1999, we signed an agreement with a public  relations firm ,
whereby the firm provided certain public relations services for our company.  We
agreed to compensate the firm for services  rendered at a monthly rate of $5,000
per month and as further  compensation  we issued  warrants  to  purchase  up to
125,000  shares  of  our  common  stock.   Warrants  for  25,000  shares  vested
immediately  and have an  exercise  price  of $3.00  per  share.  The  remaining
warrants for up to 100,000  shares were  scheduled to vest in November 2003 with
an exercise  price of $10.00 per share unless  certain  target stock prices were
achieved.  If target  stock  prices were  achieved,  the  exercise  price of the
warrants would be adjusted and vesting  accelerated.  The public  relations firm
achieved a majority of its  performance  criteria  during the fourth  quarter of
1999. As a result,  the warrants were valued using the  Black-Scholes  valuation
model at the dates when the performance  criteria were met. We recorded $337,000
to general and  administrative  expense in 1999 related to the  warrants.  As of
December 31, 1999,  warrants for 75,000 of the 100,000 shares had vested and the
exercise  prices were reduced to a weighted  average of $4.50 per vested  share.
These warrants expire in November 2002.

                                       16
<PAGE>
Item 6.  Management's Discussion and Analysis of Financial Condition and Result
         of Operations

     As  indicated  in the first  paragraph  of Item 1, above,  this Form 10-KSB
contains certain forward looking statements within the meaning of the Securities
Exchange Act the Securities Act. We have identified,  with a preceding asterisk,
various  sentences  within this Form 10-KSB which  contain such  forward-looking
statements  and words such as "believe,"  "anticipate,"  "expect,"  "intend" and
similar  expressions are also intended to identify  forward looking  statements,
but  these are not the  exclusive  means of  identifying  such  statements.  The
forward looking  statements  included in this Form 10-KSB involve numerous risks
and  uncertainties  which are described  throughout this Form 10-KSB,  including
under  "Revenues" and "Risk Factors" within this Item 6. The actual results that
we achieve may differ materially from any forward looking statements due to such
risks and uncertainties.

     The following  table  presents  statements of operations  data for the five
years ended December 31, 1999.
<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                           (in thousands, except per share data)
                                                ------------------------------------------------------------
          STATEMENTS OF OPERATIONS DATA:           1999        1998        1997         1996        1995
                                                -----------  ----------  ----------  ----------- -----------
<S>                                              <C>         <C>         <C>            <C>        <C>
     Revenue:
         License                                  $ 17,074    $ 14,463    $ 21,363      $12,202     $ 7,810
         Services                                    8,794       8,770       7,827        6,191       4,067
                                                -----------  ----------  ----------  ----------- -----------
             Total revenue                          25,868      23,233      29,190       18,393      11,877

     Cost of revenue:
         License                                       745       2,846       1,445        1,144       1,062
         Services                                    4,180       6,893       5,010        2,987       2,258
                                                -----------  ----------  ----------  ----------- -----------
               Total cost of revenue                 4,925       9,739       6,455        4,131       3,320
                                                -----------  ----------  ----------  ----------- -----------
         Gross profit                               20,943      13,494      22,735       14,262       8,557
                                                -----------  ----------  ----------  ----------- -----------
     Operating expenses:
         Marketing and sales                         9,883      18,511      17,265        8,327       6,319
         Research and development                    7,011       7,722       5,225        3,323       2,048
         General and administrative                  3,658       3,857       2,880        1,501       1,419
         Amortization of goodwill                      463         546         370            -           -
         Write down of assets                            -       1,555           -            -           -
         Acquired in-process R&D cost                    -         528           -            -           -
         Non Cash Compensation Expense                 337           -           -            -           -
                                                -----------  ----------  ----------  ----------- -----------
                Total operating expenses            21,352      32,719      25,740       13,151       9,786
                                                -----------  ----------  ----------  ----------- -----------

     Income (loss) from operations                    (409)    (19,225)      (3,005)      1,111      (1,229)
         Interest income (expense) and
         other, net                                 (1,273)       (692)         705         429          70
                                                -----------  ----------  ----------  ----------- -----------
     Income (loss) before taxes                     (1,682)    (19,917)     (2,300)       1,540      (1,159)
         Provision for income taxes                     54          18          40          129          73
                                                -----------  ----------  ----------  ----------- -----------
     Net income (loss)                            $ (1,736)   $(19,935)   $ (2,340)     $ 1,411     $(1,232)
                                                ===========  ==========  ==========  =========== ===========

     Basic net income (loss) per share              ($0.17)     ($2.16)     ($0.26)       $0.24      ($0.41)
                                                ===========  ==========  ==========  =========== ===========
     Shares used in calculating basic net
      income (loss) per share                       10,178       9,209       8,931        5,916       2,987
                                                ===========  ==========  ==========  =========== ===========

     Diluted net income (loss) per share           ($0.17)     ($2.16)      ($0.26)       $0.18      ($0.41)
                                                ===========  ==========  ==========  =========== ===========
     Shares used in calculating diluted net
      income (loss) per share                       10,178       9,209       8,931        7,690       2,987
                                                ===========  ==========  ==========  =========== ===========
</TABLE>
Overview

     We were incorporated in August 1988 and commenced  commercial  shipments of
our  principal   product,   the  Versant  ODBMS,  in  1991.   Since  that  time,
substantially all of our revenue has been derived from:

     Primarily

    (1) sales of development,  deployment  licenses and project licenses for the
        Versant ODBMS
    (2) related maintenance and support,  training,  consulting and nonrecurring
        engineering   fees  received  in  connection  with  providing   services
        associated with the Versant ODBMS and
    (3) sales of the peripheral products for the Versant ODBMS

                                       17
<PAGE>

     Secondarily

     (1)the  resale  of  licenses,  maintenance,  training  and  consulting  for
        third-party products that complement the Versant ODBMS

    We released Version 5.2 of the Versant ODBMS in December 1998. *We currently
expect that  licenses of the Versant  ODBMS,  Versant  Enterprise  Container and
peripheral  products  and sales of  associated  services  will be our  principal
sources of revenue for the foreseeable  future.  In 1997,  1998 and 1999,  three
customers,  combined,  accounted for approximately 36%, 17% and 13% of our total
revenue,  and the  telecommunications  industry accounted for 39%, 42% and 30%of
our total  revenue.  In  addition,  in 1999,  12.8%,  7.1% and 4.6% of our total
revenue were  attributable  to sales of products and services in the e-business,
financial  services and high technology  markets.  *Our future  performance will
depend in significant part on the continued growth of the e-business  market and
its  dependence  on  highly  scalable,  performance  and  reliable  object-based
technologies  such as ours. *The failure of our products to perform favorably in
and become an accepted  component of these  markets,  or a slower than  expected
increase or a decrease in the volume of sales of our  products  and  services to
these same markets, could have a material adverse effect on us.

    We license our products directly to end-users principally through four types
of licenses-development  licenses, deployment server licenses, deployment client
licenses and project licenses. Development licenses are sold on a per seat basis
and  authorize  the  customer to develop an  application  program  that uses the
Versant  ODBMS or VEC.  Before a  customer  may  deploy  an  application  it has
developed under a development  license, it must purchase at least one deployment
server license and one deployment client license for each computer  connected to
the server that will run the application using the database  management  system.
If the customer  wishes to install several copies of the  application,  separate
deployment  licenses are required for each server  computer and each client that
will run the particular application. Pricing of the Versant ODBMS and VEC varies
according  to several  factors,  including  the  computer  platform on which the
application  will run and the  number of users  that will be able to access  the
server at any one time. For certain  applications,  we offer deployment licenses
priced on a per user basis.  We also  license our  products on a project  basis,
where the customer simultaneously  purchases development and deployment licenses
for an entire project.

    Value-added  resellers purchase  development  licenses from us on a per seat
basis,  on terms similar to those of  development  licenses sold directly to end
users.  Value-added  resellers are  authorized by us to  sub-license  deployment
copies of the Versant  ODBMS or VEC,  together with the  value-added  reseller's
application,  to  end-users.   Deployment  license  pricing  for  sales  through
value-added  resellers  generally  represents  either a percentage  of the total
price  charged  by the  value-added  reseller  to our  end-user  customers  or a
percentage  of our  list  prices.  We  also  license  our  products  to  certain
value-added resellers on a project basis.

    Our  development,  deployment and project license  agreements and agreements
with  value-added  resellers  typically  require the payment of a nonrefundable,
one-time license fee for a license of perpetual term,  although certain licenses
to value-added resellers are for a limited term and/or are limited to particular
applications. Revenue from license agreements is recognized upon shipment of the
software if there is no significant  modification of the software,  payments are
due within our normal payment terms and  collection of the resulting  receivable
is deemed probable.  If an acceptance period is required,  revenue is recognized
upon the earlier of customer  acceptance  or the  expiration  of the  acceptance
period.  Maintenance  revenue  is  recognized  ratably  over  the  term  of  the
maintenance contract,  which is typically twelve months. Training and consulting
revenue is recognized when a customer's order has been received and the services
have  been  performed.  We have  entered  into  contracts  with  certain  of our
customers that require us to perform development work in return for nonrecurring
engineering  fees.  Revenue  related  to  such  nonrecurring   engineering  fees
generally is recognized using the percentage-of-completion method of accounting.
Amounts  received  from  customers  under  certain   license,   maintenance  and
nonrecurring engineering agreements involving significant continuing obligations
to be performed by us are included on our balance sheet as deferred revenue.

    We license the Versant ODBMS,  Versant  Enterprise  Container and peripheral
products and sell associated  services  primarily through our direct sales force
to end-user customers and value-added  resellers.  Through late 1993, we focused
our sales efforts on developing  indirect  sales  channels and  contracting  for
nonrecurring  engineering  fees from our  marketing  partners.  In late 1993, we
changed our sales strategy to a direct sales model and began increasing the size
of our direct sales force.

                                       18
<PAGE>

    During 1995, we entered into an agreement with  ISAR-Vermogensverwaltung Gbr
mbH, an entity formed by a group of European  investors,  pursuant to which ISAR
organized  and funded  Versant  Europe.  Versant  provided  Versant  Europe with
exclusive European  distribution rights for our products,  subject to the rights
of existing  distributors,  and with management  responsibilities  for Versant's
existing  distributors  in Europe.  In March 1997,  we  exercised  our option to
acquire Versant Europe.  This acquisition,  in which Versant paid  approximately
$3.6 million in cash and stock,  has been accounted for as a purchase.  See note
10 of notes to our consolidated  financial statements.  As of December 31, 1999,
Versant Europe had 32 employees.

    Since inception,  we have invested  significant  resources in developing the
Versant  ODBMS and related  technologies  and in building our sales,  marketing,
consulting and administrative  organizations.  *Due to our financial performance
in 1998, we restructured our worldwide  organization by  significantly  reducing
headcount  in order to bring  expenses in line with  anticipated  1999  revenue.
*Because of this action and other expense controls implemented,  we were able to
reduce in 1999  overall  operating  expenses by 35% to $21.4  million from $32.7
million in 1998. We expect to hire  additional  personnel and expect an increase
in our promotion and selling  expenditures during 2000 if we believe that market
conditions  support such expenses The labor market in which we operate is highly
competitive,  and we may be unable to retain key employees  without  substantial
increases in our operating expenses.

Recent Events

     Vertex Financing

     On July 12, 1999, we issued shares of a newly designated Series A Preferred
Stock  ("Series A Stock").  A total of  1,489,799  shares of Series A Stock were
issued, with each share of Series A Stock initially  convertible into two shares
of the Company's  common  stock.  Nine hundred and two thousand nine hundred and
forty six  (902,946) of the shares of Series A Stock were issued in exchange for
an outstanding  convertible  secured promissory note with outstanding  principal
and interest of $3,846,550.82  held by Vertex Technology Fund, Ltd.  ("Vertex"),
and  586,853  of the  shares  were  issued  in  consideration  of an  additional
$2,499,994 in new financing.  A Vertex affiliate  provided $1 million of the new
financing with the remainder provided by other investors. Each share of Series A
Stock  was  sold at a price of $4.26  per  share.  We also  issued  warrants  to
purchase a total of 1,489,799 shares of our common stock at an exercise price of
$2.13 per share as part of the transaction.

     The  Series A Stock has a  participating  liquidation  preference  over our
common  stock  initially  equal to 150% of the full amount paid for the Series A
Stock, which preference increases by an additional 50% per year over each of the
next two years, so long as the Series A Stock is outstanding. The Series A Stock
automatically  converts  into common  stock if our common  stock  price  exceeds
$12.00 per share for 45 consecutive business days. The holders of Series A Stock
will  generally vote with the holders of common stock provided that the Series A
Stock is only entitled to a number of votes equal to 50% of the number of shares
of common  stock into which the Series A Stock is  convertible.  The  holders of
Series A Stock were also provided with certain voting protective provisions.

     The  shares  eligible  for  resale  upon  execution  of  the  warrants  and
conversion of the preferred stock have been registered  under the Securities Act
of 1933, under two separate  registration  statements on Form S-3. Each investor
also agreed not to purchase more than 100,000  additional  shares in the Company
without  our  approval  so long  as  such  investor  holds  more  than 5% of our
outstanding securities.

Results of Operations

Revenue

<TABLE>
<CAPTION>
                                           1997        % Change       1998         % Change       1999
                                        -----------  -----------  -------------  -----------  -----------
<S>                                     <C>              <C>        <C>             <C>       <C>
License revenue                         $21,363,000      (32%)      $14,463,000      18%      $17,074,000
As a percentage of total revenue            73%                        62%                        66%
Services revenue                          7,827,000       12%         8,770,000     0.3%       8,794,000
As a percentage of total revenue            27%                        38%                        34%
Total revenue                            29,190,000      (20%)       23,233,000      11%      25,868,000
</TABLE>


                                       19
<PAGE>

    Total revenue  declined 20% from 1997 to 1998 but increased 11% from 1998 to
1999. We continue to experience significant annual and quarterly fluctuations in
total revenue.  *We have experienced,  in prior years, a seasonal pattern in our
operating results, with the fourth quarter typically having higher total revenue
and income from operations than the first quarter of the following year, however
we do not believe this trend will continue in 2000 compared to 1999.  Also,  see
the section below labeled "Risk Factors."

    The decrease in license  revenue in 1998  compared to 1997 was due primarily
to the timing and  complexity  of sales and our inability to close large project
opportunities.

    The  increase  in  license   revenue   during  1999  compared  to  1998  was
attributable to:

     Primarily

     (1)  increased sales in the defense and e-business market
     (2) increased customer deployments of applications  previously subject only
         to development licenses, particularly in the telecommunications and the
         internet market

     Secondarily

     (1) restructuring and refocusing efforts within the Company sales personnel

    *We expect  license  revenue to increase in 2000 in  absolute  dollar  terms
compared to 1999,  due to increased  license  purchases  by core and  e-business
customers and increased sales by our Versant Europe subsidiary, each as a result
of our 1999  customer  development  activities.  *We also  believe  that license
revenue as a percentage of total revenue will increase in 2000 compared to 1999.
However, due to risks highlighted in the section, "Risk Factors," below, license
revenue may  decrease  in  absolute  dollar  terms or as a  percentage  of total
revenue in 2000 when compared to 1999.

    The  increase  in  services   revenue  during  1998  compared  to  1997  was
attributable  principally to increased  maintenance revenue from a significantly
larger installed  customer base, while training and consulting  revenue declined
due to the reduction in overall license revenues. The marginal increase in total
services  revenue  in  1999  compared  to  1998  was  due to a 31%  increase  in
maintenance  revenues but was offset by a  corresponding  decrease in consulting
revenues.  The restructuring  efforts within the services group did not allow us
to take advantage of the consulting  projects that became  available  during the
year. *We expect that services revenue will increase in absolute dollar terms in
2000 as we increase our focus on consulting opportunities,  but will decrease as
a percentage of total  revenue.  However,  due to the risks  highlighted  in the
section,  "Risk Factors,"  below,  services revenue may not increase in absolute
dollar terms in 2000 compared to 1999.

     We had no sales to customers representing more than 10% of total revenue in
1999 and 1998. In 1997 two customers accounted for $5.8 million and $3.1 million
in revenue, respectively.

    International  revenue  increased  22% from  $8.6  million  in 1997 to $10.5
million in 1998.  The  increase in  international  revenue from 1997 to 1998 was
driven  principally  by  higher  sales by  Versant  Europe,  Australia  and Asia
Pacific, resulting from our increased marketing and sales investment,  partially
offset by decreased sales in Japan.  International  revenues grew 21% from $10.5
million in 1998 to $12.7  million in 1999.  This  increase  was again due to the
increases  in  Versant  Europe's  revenues  partially  offset  by  decreases  in
Australia  and Asia  Pacific.  In addition,  as a result of the  acquisition  of
Versant Europe in March 1997, we began  recognizing  license and service revenue
from  Versant  Europe  that  would  have been  recognized  only at 40 % and 25 %
royalty rates had Versant Europe not been  acquired.  *We intend to maintain our
sales and marketing  activities  outside the United  States,  including  Europe,
Japan  and  other  Asia/Pacific   countries,   which  will  require  significant
management attention and financial  resources,  and which may increase costs and
impact  margins  unless  and  until  corresponding  revenue  is  achieved.   Our
international  sales are currently  denominated  predominantly  in United States
dollars.  An  increase  in the value of the United  States  dollar  relative  to
foreign currencies could make our products more expensive and,  therefore,  less
competitive in foreign markets. We believe that the increase in the value of the
United  States  dollar  relative  to foreign  currencies  in 1999 did not have a
material  effect on our operating  results.  *To the extent that we increase our
international  sales,  our total revenue may be affected to a greater  extent by
seasonal  fluctuations  resulting from lower sales levels that  typically  occur
during the summer  months in Europe and other parts of the world.  International
revenue as a percentage  of total revenue  increased  from 29% in 1997 to 45% in
1998 and  then  increased  to 49% in 1999.  *Due to our  increased  emphasis  on
international sales,  especially through Versant Europe, we expect international
revenue to increase in absolute  dollar

                                       20
<PAGE>

terms but  decrease as a percentage  of total  revenue;  however,  international
revenue  may not  grow at all.  Our  international  operations  are  subject  to
corresponding   risks;  see  "Risk  Factors--We   depend  on  our  international
operations."

Cost of Revenue and Gross Profit

<TABLE>
<CAPTION>
                                                      1997        % Change         1998         % Change         1999
                                                    -------      ----------      --------      ----------      --------
<S>                                                <C>              <C>         <C>               <C>         <C>
   Cost of license revenue                         $1,445,000        97%        $2,846,000        (74%)        $745,000
   As a percentage of license revenue                  7%                           20%                           4%
   Cost of services revenue                         5,010,000        38%         6,893,000        (39%)        4,180,000
   As a percentage of services revenue                 64%                          79%                           48%
   Gross profit                                    22,735,000       (41%)       13,494,000         55%        20,943,000
   As a percentage of total revenue                    78%                          58%                           81%
</TABLE>

    Cost of license  revenue  consists  primarily of reserves for  estimated bad
debts,  product  royalty  obligations  incurred by us when we sub-license  tools
provided by third parties,  royalty  obligations  incurred by us under a porting
services agreement, user manuals/product media, production labor costs, freight,
and packaging.  Cost of license  revenue during 1998 increased  compared to 1997
due to  increased  reserves  for bad debts,  amortization  of  certain  deferred
license costs and increased  royalty costs.  Cost of license revenue during 1999
decreased compared to 1998,  primarily due to the elimination of amortization of
certain deferred license costs, and secondarily due to reduced bad debt reserves
and decreases in royalty costs. As part of the acquisition of Versant Europe, we
allocated $1.4 million of the purchase price to deferred  license costs. In 1998
we recognized the remaining  $1.0 million of these  deferred  license costs as a
cost of license revenue. *Although our cost of license revenue decreased in 1999
compared  to 1998,  both in  absolute  dollars  and as a  percentage  of license
revenue,  we expect 2000 cost of license  revenue to decline as well compared to
1999 due to the reductions in our production  costs,  royalty costs and freight.
*For these reasons,  we expect cost of license  revenue to decrease  slightly in
absolute  dollar terms, as well as decline as a percentage of license revenue in
2000, if expected revenue growth materializes.  However, revenue growth in 2000,
and  therefore  license  revenue  margin  improvement,  are subject to the risks
highlighted in the section, "Risk Factors", below.

    Cost of services revenue consists  principally of personnel costs associated
with  providing  consulting,   technical  support,   training  and  nonrecurring
engineering work paid for by customers. The increase in cost of services revenue
during  1998  compared to 1997 was  primarily  attributable  to the  significant
increase  in our  service  organization,  due to a lack of third  party  support
services,  the  increased  costs of providing  maintenance  support to a growing
customer base and secondarily to costs associated with employee  turnover.  Cost
of services  revenue as a  percentage  of  services  revenue  increased  in 1998
compared to 1997.  This increase was primarily  due to reduced  service  support
productivity  caused by reduced license revenues and higher consulting  expenses
associated  with  the  use  of  external  consultants  on  specialized  customer
projects, without an immediate increase in consulting and training revenue.

    The decrease in cost of services  revenue  during 1999  compared to 1998 was
primarily  attributable to the restructuring efforts worldwide in decreasing the
size of our  service  organization  while  refocusing  our vision and efforts to
better  serve  our  customer  base  worldwide.  In so  doing  we  were  able  to
significantly  reduce  services  cost of revenues  while  supporting  the higher
maintenance  revenue levels compared to 1998. *We expect to increase our cost of
service revenue in 2000 compared to 1999, both in absolute  dollars as well as a
percentage of revenues,  through  headcount and supporting  expenses  increases,
coupled with increases in productivity. These increases are necessary to support
our  projected  increases  in services  revenues  and to support our  increasing
efforts  in the  consulting  business,  which we intend  to expand in 2000.  The
increases  in  our  e-business  applications  have  given  rise  to  substantial
increased  opportunities  to  support  our  customer  base more  effectively  by
offering  additional  consulting  services,  thereby  reducing  the need for our
customers  to find and train  addition  personnel to  implement  new  e-business
applications.

Marketing and Sales Expenses

<TABLE>
<CAPTION>
                                            1997         % Change        1998        % Change        1999
                                          -------       ----------     --------     -----------    ---------
<S>                                      <C>                <C>       <C>              <C>        <C>
Marketing and sales expenses             $17,265,000        7%        $18,511,000      (47%)      $9,883,000
As a percentage of total revenue             59%                          80%                         38%
</TABLE>

                                       21
<PAGE>

     Marketing  and sales  expenses  consist  primarily of  marketing  and sales
personnel costs, including sales commissions,  recruiting,  travel, advertising,
public relations,  seminars,  trade shows, lead generation,  product descriptive
literature,   product  management,  sales  offices,  mailings  and  depreciation
expense.  The increase in 1998  compared to 1997 was due to increased  marketing
program costs to generate leads,  partially offset by lower commission  expenses
on reduced revenues.  In addition,  in 1998 we increased  marketing  spending to
expand  worldwide  awareness of our products and services,  particularly  in the
Internet-based and financial services markets.  The substantial decrease in 1999
marketing  expenses  compared to 1998 was  primarily the result of our worldwide
restructuring  efforts and our decision to utilize the marketing  program monies
more efficiently by reducing duplicate efforts and programs worldwide. The focus
is on worldwide programs versus regional programs,  hence promoting a consistent
message to our  current  and  potential  customer  base.  Better  utilizing  the
internet to deliver our message will the goal in 2000. *We expect  marketing and
sales expenses to increase in absolute dollar terms, due to increased efforts to
market our  products  to new  (e-business)  and  existing  (telco and  financial
services) business markets.  However,  we intend to counterbalance this increase
with our restructured operations and our efforts to control commission costs and
costs  associated with less focused  marketing  programs and accordingly  expect
marketing and sales  expenses to decrease as a percentage of revenue.  *However,
if we  increase  our  marketing  and sales  expenditures  without  corresponding
increases in revenue, our results of operations would be adversely affected.

Research and Development Expenses

<TABLE>
<CAPTION>
                                              1997        % Change        1998       % Change        1999
                                           ----------  ------------  -------------  ----------  -------------
<S>                                        <C>              <C>        <C>             <C>        <C>
Research and development expenses          $5,225,000       48%        $7,722,000      (9%)       $7,011,000
As a percentage of total revenue              18%                         33%                        27%
</TABLE>

     Research and development expenses consist primarily of salaries, recruiting
and other personnel-related  expenses, the costs of an ISO 9001 quality program,
depreciation  or expensing of development  equipment,  supplies and travel.  The
increase during 1998 compared to 1997 resulted from:

     (1) higher  compensation  and other  personnel  expenses  due to  increased
         headcount
     (2) increased  operating  expenses  due to new  opportunities  and expanded
         projects
     (3) costs of funding ongoing engineering activities in India
     (4) additional   operating   expenses   associated   with  Soft  Mountain's
         engineering activity

     The decrease during 1999 compared to 1998 primarily  resulted from, reduced
compensation  and other  personnel  expenses due to  decreases in headcount  and
secondarily due to reduced  operating  expenses  associated with Soft Mountain's
engineering activity.

     We  believe  that  a   significant   level  of  research  and   development
expenditures  is required to remain  competitive  and  complete  products  under
development.  *Accordingly,  we  anticipate  that we  will  continue  to  devote
substantial  resources  to  research  and  development  to design,  produce  and
increase the quality, competitiveness and acceptance of our products. Due to our
restructuring  activities,  we  reduced  research  and  development  expense  in
absolute  dollar  terms and as a  percentage  of revenues  in 1999.  *Due to our
e-business  efforts as well as ongoing  improvements  in our ODBMS  products  we
expect  research  and  development  expenses  to  increase  slightly  in 2000 in
absolute dollars,  but decline as a percentage of revenues.  Our objective is to
improve our R&D to revenue  dollar  productivity  and better  match R&D spending
with revenue  increases.  *However,  if we continue our research and development
efforts without  corresponding  increases in revenue,  our results of operations
would be adversely affected. To date, all research and development  expenditures
have been expensed as incurred.

General and Administrative Expenses

<TABLE>
<CAPTION>
                                               1997        % Change        1998        % Change        1999
                                            ----------   ------------  ------------  ------------ -------------
<S>                                         <C>               <C>       <C>              <C>        <C>
General and administrative expenses         $2,880,000        34%       $3,857,000       (5%)       $3,658,000
As a percentage of total revenue                10%                        17%                         14%
</TABLE>

     General  and   administrative   expenses  consist  primarily  of  salaries,
recruiting  and  other  personnel-related  expenses  for our  accounting,  human
resources,   management   information  systems,  legal  and  general  management
functions.  In addition,  general and  administrative  expenses  include outside
legal,  audit and public reporting  costs. The significant  increase during 1998
compared to 1997 resulted from:

                                       22
<PAGE>

     (1) increased  severance  costs incurred in connection  with changes to our
         management team
     (2) increased legal and accounting services
     (3) expanded travel expense  associated with funding projects
     (4) increased facility costs

     The  decrease in general and  administrative  expenses in 1999  compared to
1998  were  primarily  due  to the  restructuring  efforts  taken  in  1999  and
secondarily  due to the  continuing  expense  controls  that are  being  used to
properly match expense trends with revenue  trends.  *We anticipate that general
and administrative  expenses will increase in absolute dollar terms but decrease
as a percentage  of revenues in 2000 compared to 1999 levels.  This  anticipated
increase  is due to the need to rebuild  part of the  administrative  staff that
were reduced in 1999, coupled with management's awareness to continue to improve
productivity by aligning expenses with revenue trends.  *However, if we increase
our existing  administration  infrastructure without corresponding  increases in
revenue, our results of operations would be adversely affected.

Amortization of Goodwill

     The  acquisition  of Versant Europe in March 1997 resulted in our recording
an  intangible  asset  representing  the cost in excess of fair value of the net
assets  acquired in the amount of $3.3 million,  which is being amortized over a
seven-year  period.  During 1998 and 1999,  we amortized  $485,000 and $187,000,
respectively,  of this  amount.  Additionally  in 1998 we wrote down the Versant
Europe  goodwill by $1.6 million due to our revised  estimated  discounted  cash
flow over the next five years.  *We will  amortize  $187,000  of this  remaining
goodwill  amount  in 2000.  See note 9 of  notes to our  consolidated  financial
statements.

     The  acquisition of Soft Mountain in September 1998 resulted in our writing
off $528,000 of in-process research and development expenses associated with the
purchased  software and recording an intangible  asset  representing the cost in
excess of fair value of the net assets  acquired in the amount of $1.2  million,
which is being  amortized  over a five-year  period.  During 1999,  we amortized
$245,000 of this amount.  *We will amortize $245,000 of this amount in 2000. See
note 10 of notes to our consolidated financial statements.

Interest Income (Expense) and Other, Net

<TABLE>
<CAPTION>
                                                    1997       % Change        1998        % Change        1999
                                                  --------    ----------  -------------  -----------  -------------
<S>                                               <C>           <C>         <C>              <C>       <C>
Interest income (expense) and other, net          $705,000      (198 %)     ($692,000)       84 %      ($1,273,00)
As a percentage of total revenue                     2%                        (3%)                        (5%)
</TABLE>

     Interest income  (expense) and other,  net represents  income earned on our
cash,  cash   equivalents  and  short-term   investments  and  interest  expense
associated  with our  financing  activities.  The  decrease in  interest  income
(expense) and other, net from 1997 to 1998 was primarily due to:

     (1) decreased interest income from lower cash balances
     (2) increased interest expense on bank debt and capital equipment leases
     (3) increased  interest  expense on our  convertible  secured  subordinated
         promissory note

     The sharp increase in interest income (expense) and other, net from 1998 to
1999 was due to the conversion of the Vertex  convertible note to equity and the
subsequent write off of the remaining capitalized note discount of $787,000 as a
non-cash  interest  expense and $158,000 of accrued  interest  expense which was
converted to equity in association  with the Vertex  convertible  note. See note
11 of notes to our consolidated financial statements.

Provision for Income Taxes

<TABLE>
<CAPTION>
                                                             1997      % Change       1998       % Change      1999
                                                           -------     --------     --------     --------    --------
<S>                                                        <C>           <C>         <C>           <C>        <C>
Provision  for income taxes                                $40,000       (55%)       $18,000       200%       $54,000
As a percentage of income (loss) before income taxes         (2%)                     (0%)                     (3%)
</TABLE>

    We account  for income  taxes in  accordance  with  Statement  of  Financial
Accounting  Standards No. 109,  "Accounting  for Income  Taxes." We incurred net
operating  losses  in 1997 and  1998,  resulting  in no  federal  or  state  tax

                                       23
<PAGE>

liability based on income.  However,  we did incur foreign  withholding taxes of
$18,000 and $54,000 during 1998 and 1999,  which are included  within the income
tax provision.

     At  December  31,  1999,  we had  federal  and  state  net  operating  loss
carryforwards of $33.6 million and $8.4 million and tax credit  carryforwards of
$2.4 million  expiring on various  dates  through  2019.  *Due to our history of
operating  losses through 1995 and in 1997, 1998 and 1999 and other factors,  we
believe that there is  sufficient  uncertainty  regarding the  realizability  of
these carryforwards,  and therefore a valuation allowance of approximately $15.4
million has been recorded  against our net deferred tax assets of  approximately
$15.4 million.  We will continue to assess the  realizability of the tax benefit
available to us based on actual and forecasted operating results.

     Due to the "change in ownership" provisions of the Internal Revenue Code of
1986, the  availability  of net operating loss and tax credit  carryforwards  to
offset  federal  taxable  income  in  future  periods  is  subject  to an annual
limitation  due to changes in ownership  for income tax  purposes.  Usage of net
operating loss  carryforwards is limited to approximately  $4.0 million per year
because of past ownership changes.

Liquidity and Capital Resources

<TABLE>
<CAPTION>
                                         1997       % Change         1998        % Change        1999
                                     -----------  -----------   --------------  ------------  -----------
Net cash used in
<S>                                  <C>               <C>      <C>                <C>        <C>
   operating activities              ($5,655,000)      88%      ($10,628,000)      (94%)      ($669,000)
Year end cash, cash equivalents
    And short-term investments        $9,831,000      (64%)       $3,564,000         3%       $3,663,000

Year end working capital (deficit)   $12,228,000       n/a       ($3,303,000)       n/a       $1,584,000
</TABLE>

     In 1999,  net cash of $520,000 was used in operating  activities  primarily
due to the cash  component  of our net  loss for  1999,  increases  in  accounts
receivable,  decreases  in accounts  payable,  accrued  liabilities  and reduced
deferred  revenue,  which were offset by non-cash  depreciation and amortization
expenses,  non-cash compensation  expense,  non-cash accrued Vertex interest and
discount,  decreases  in  prepaid  expenses  and  other  current  assets,  and a
decreased  provision  for doubtful  accounts  compared to 1998.  The increase in
accounts receivable was due to reduced collection  activity,  and lower revenues
in the fourth  quarter of 1999 compared to the fourth  quarter of 1998.  Through
February  29,  2000,  we had  collected  $3.9  million of our  December 31, 1999
accounts  receivable  balance,  leaving an accounts  receivable  balance of $3.4
million related to the December 31, 1999 balance.

     In 1998,  net  cash of  $10.6  million  was  used in  operating  activities
primarily  due to the cash  component  of our net loss for  1998,  decreases  in
deferred revenue,  accrued  liabilities and taxes and a decreased  provision for
doubtful  accounts,  which were  offset by a  significant  decrease  in accounts
receivable,  decreases  in  prepaid  expenses  and  other  current  assets,  and
increases  in  accounts  payable  compared  to 1997.  The  decrease  in accounts
receivable was due to improved  collection  activity,  and lower revenues in the
fourth quarter of 1998 compared to the fourth quarter of 1997.  Through February
28, 1999,  we had  collected  $3.2  million of our  December  31, 1998  accounts
receivable  balance,  leaving an  accounts  receivable  balance of $3.0  million
related to the December 31, 1998 balance.

     In 1999, our net cash used in investing  activities was $115,000 due to our
$80,000  increased  investment  in Versant India and our $35,000 net purchase of
property and  equipment,  primarily for the  acquisition of network and computer
equipment,  associated with Y2k improvements. *We have and will continue to make
certain  investments  in  software  applications  and systems to ensure that our
products  continue to be Year 2000 compliant.  We  successfully  crossed the Y2k
threshold  with minor  corrective  actions,  none of which had any impact on our
daily operating  activities.  See "Risk  Factors--Our  business may be harmed by
Year 2000 problems."

     In 1998 we purchased $2.0 million of property and equipment,  primarily for
the  acquisition  of network and  computer  equipment,  leasehold  improvements,
furnishings and fixtures for our headquarters.  In addition,  in September 1998,
we acquired Soft Mountain and paid the shareholders of Soft Mountain $136,000 in
cash in addition to issuing them 245,586 shares of our common stock.  These uses
of  cash  for  investing  activities  were  entirely  offset  by net  sales  and
maturities of short-term investments.

                                       24
<PAGE>

     In  1999,  financing  activities  provided  a  net  increase  of  $727,000,
primarily  due to proceeds  from the sale of  preferred  stock to certain of our
largest  shareholders,  exercising of common stock warrants for common stock and
secondarily to the sale of common stock to our employees under employee  benefit
plans.  These increases were offset by the paydown of our short term receivables
line of credit and long term bank note, plus the normal principal  payments made
under capital lease obligations.

     In 1998,  financing  activities  provided  $6.5  million,  primarily due to
proceeds from the sale of a convertible  secured  subordinated  promissory note,
the sale of common  stock to certain of our  largest  shareholders,  the sale of
common stock to our employees under employee  benefit plans and borrowings under
a short-term  accounts receivable loan. These increases were partially offset by
principal  payments made under capital lease  obligations and our long term bank
note.

     At December 31, 1999, we had $3.7 million in cash and cash  equivalents and
positive working capital of approximately $1.6 million.  We maintain a revolving
credit line with a bank that expires on September 30, 2000.  The maximum  amount
that can be borrowed  under the  revolving  credit line is $5.0  million.  As of
December 31,  1999,  $900,000  was  allocated  to a standby  letter of credit to
support  our  European   banking  line  and  $1.4  million  of  borrowings  were
outstanding.  Borrowings  and the standby  letter of credit under the  revolving
credit line are limited to 80% of eligible  accounts  receivable and are secured
by a lien on substantially all of our assets.  These borrowings bear interest at
the bank's base lending rate (8.50% at December 31, 1999,  plus 2.0%).  The loan
agreement  contains  financial  covenants,  commencing  with this quarter ending
December  31,  1999,   and  also   prohibits  cash  dividends  and  mergers  and
acquisitions without the bank's prior approval.  Certain of these new covenants,
which the Company was not in compliance  with as of December 31, 1999, have been
waived  through March 31, 2000.  In March 2000, we negotiated  new covenants for
the  year  ending  December  31,  2000,   based  on  the  Company's   forecasted
performance.

     On March 19, 1998, we converted an interest  only,  variable rate note to a
variable rate, term loan with principal and interest payable over 36 months. The
term loan covenants and interest rate were amended in  conjunction  with the new
line of credit agreement. Borrowings under the loan are secured by a lien on all
assets  acquired  using the  proceeds of the loan,  which have been used for the
acquisition of equipment and leasehold improvements.  The loan bears interest at
the bank's base lending rate (8.50% at December 31, 1999,  plus 2.5%).  The loan
contains  certain  financial  covenants and also  prohibits  cash  dividends and
mergers and  acquisitions  without the bank's prior  approval.  Certain of these
covenants,  which we were not in compliance  with as of December 31, 1999,  have
been waived  through March 31, 2000. In March 2000, we negotiated  new covenants
for the  year  ending  December  31,  2000,  based on the  Company's  forecasted
performance.

     *We believe that our current cash, cash  equivalents,  our lines of credit,
and  the  net  cash  provided  by  operations  will be  sufficient  to meet  our
anticipated cash needs for working capital and capital expenditures for 2000. At
December 31, 1999, our commitments for capital  expenditures  were not material.
*If cash  provided  by  operations  is  insufficient  to satisfy  our  liquidity
requirements,  we will seek additional debt or equity financing.  Such financing
may  not be  available  on  terms  acceptable  to us,  if at  all.  The  sale of
additional equity or convertible debt securities could result in dilution to our
shareholders.  *A  portion  of our  cash may be used to  acquire  or  invest  in
complementary businesses or products or to obtain the right to use complementary
technologies.  From time to time,  we evaluate  potential  acquisitions  of such
businesses, products and technologies.

     To  date,  we have not  achieved  business  volume  sufficient  to  restore
profitability  and a  positive  cash  flow.  We  operated  at a net loss of $1.7
million and $19.9 million in 1999 and 1998.  We believe our  available  cash and
credit facilities should be sufficient to fund our operations, however there can
be no assurance of this and we are dependent upon future  events,  including our
ability to obtain additional debt or equity financing, if financial results fall
short of our goals.  Additional debt or equity financing,  may be required,  and
may not be available to us on commercially  reasonable terms, or at all. Even if
we were able to obtain  additional debt or equity  financing,  the terms of this
financing may significantly restrict our business activities.

     The actual cash resources  required to successfully  implement our business
plan in year 2000 will depend upon numerous  factors,  including but not limited
to those described in the following Risk Factors.

                                       25
<PAGE>

Risk Factors

     This Annual Report on Form 10-KSB contains forward-looking  statements that
involve risks and uncertainties,  including, but not limited to, those set forth
below,  that could cause actual results to differ  materially  from those in the
forward-looking  statements.  The matters set forth  below  should be  carefully
considered when evaluating our business and prospects.

Risks Related To Our Business

     We have limited  working  capital.  At December 31, 1999,  we had only $1.6
million  of  working  capital.  To date we have not  achieved  profitability  or
positive cash flow on a sustained basis. As our revenue is unpredictable,  and a
significant portion of our expenses are fixed, a revenue shortfall could deplete
our  limited  financial  resources  and  require  us  to  substantially   reduce
operations  or to raise  additional  funds  through  debt or equity  financings.
Additionally, as of December 31, 1999, we had approximately $1.2 million of bank
term debt financing outstanding, of which $71,000 a month is due and payable and
another $1.4 million of bank  revolving line debt that is due as we collect from
our customers.  From time to time we have been in violation of covenants of such
bank debt. We will need to generate  sufficient earnings to repay such debt when
due, or raise additional funds through debt or equity  financings.  There can be
no assurance  any equity or debt  funding  would be available to us on favorable
terms, if at all. The sale of additional  equity or convertible  debt securities
would result in dilution to our shareholders.

     Our  revenue   levels  are   unpredictable.   Our  revenue  has  fluctuated
dramatically  on a  quarterly  and  annual  basis,  and we expect  this trend to
continue.   These  dramatic  fluctuations  result  from  a  number  of  factors,
including:

     (1) the lengthy and highly  consultative  sales cycle  associated  with our
         products
     (2) uncertainty  regarding  the  timing  and scope of  customer  deployment
         schedules of applications based on the Versant ODBMS
     (3) fluctuations  in  domestic  and  foreign  demand for our  products  and
         services, particularly in the telecommunications and
         financial services markets
     (4) the impact of new product  introductions  by us and our competitors
     (5) our  unwillingness to significantly  lower prices to meet prices set by
         our competitors
     (6) the effect of publications of opinions about us and our competitors and
         their respective products
     (7) customer order deferrals in anticipation of product enhancements or new
         product offerings by us or our competitors
     (8) potential  customers  unwillingness to invest in our products given our
         financial instability

     A number of other  factors  make it  impossible  to predict  our  operating
results for any period prior to the end of that period.  We ship our software to
a customer at receipt of the customer's order, and consequently,  we have little
order  backlog.  As a result,  license  revenue in any quarter is  substantially
dependent on orders booked and shipped in that quarter.  Historically, we record
most of our  revenue  and book most of our  orders  in the  third  month of each
quarter, with a concentration of such revenue and orders in the last few days of
the quarter. We expect this trend to continue.  Many of these factors are beyond
our control.

     We may  not be able to  manage  costs  given  the  unpredictability  of our
revenue.  We  expended  significant  resources  in 1997 and  1998 to  build  our
infrastructure  and  hire  personnel,  before  reductions,  particularly  in the
services and sales and  marketing  sectors,  in  expectation  of higher  revenue
growth than actually  occurred.  Although we have restructured our operations to
reduce  operating  expenses in 1999,  we continue to plan for revenue  growth in
2000 compared to 1999. Consequently, we will continue to incur a relatively high
level of fixed expenses. Although, in January 1999, we reduced significantly our
worldwide  headcount  and  implemented  controls on spending in order to achieve
expense  reductions,  if expense  controls are not maintained or planned revenue
growth does not materialize,  our business,  financial  condition and results of
operations will be materially harmed.

     We  rely on our  core  markets,  specifically  the  telecommunications  and
financial services markets  characterized by complexity and intense competition.
Historically, we have been highly dependent upon the telecommunications industry
and are becoming increasingly  dependent upon the financial services market. Our
success in the telecommunications and financial service markets is dependent, in
part,  on our ability to compete with  alternative  technology  providers and on
whether our  customers  and  potential  customers  believe we have the expertise
necessary to provide effective  solutions in these markets. If these conditions,
among  others,  are  not  satisfied,  we may  not be

                                       26

<PAGE>
successful in generating additional opportunities in these markets. The need for
and type of applications and commercial products for the  telecommunications and
financial services markets is continuing to develop, is rapidly changing, and is
characterized by an increasing number of new entrants whose products may compete
with those of ours.  As a result,  we cannot  predict the future growth of these
markets,  and demand for  object-oriented  databases  in these  markets  may not
develop  or be  sustainable.  We  also  may not be  successful  in  attaining  a
significant share of these markets. In addition,  organizations in these markets
generally   develop   sophisticated   and  complex   applications  that  require
substantial  customization  of  our  products.  Although  we  seek  to  generate
consulting  revenue in  connection  with these  customization  efforts,  we have
offered, and may, under certain circumstances continue to offer, free or reduced
price consulting.  This practice has impacted,  and will continue to impact, our
service  margins  and will  require  that we maintain a highly  skilled  service
infrastructure with specific expertise in these markets.

     Our  products  have a lengthy  sales cycle.  Our sales cycle,  which varies
substantially  from  customer to  customer,  often  exceeds  nine months and can
sometimes  extend to a year or more. Due in part to the strategic  nature of our
products and associated expenditures, potential customers are typically cautious
in making product  acquisition  decisions.  The decision to license our products
generally requires us to provide a significant level of education to prospective
customers  regarding  the  uses  and  benefits  of our  products,  and  we  must
frequently  commit no-fee  pre-sales  support  resources,  such as assistance in
performing bench marking and application prototype  development.  Because of the
lengthy sales cycle and the  relatively  large average dollar size of individual
licenses,  a lost  or  delayed  sale  could  have a  significant  impact  on our
operating  results  for  a  particular  period.  Although  we  seek  to  develop
relationships with best-of-class value-added resellers in the telecommunications
and  financial  services  markets  in order to  strengthen  our  indirect  sales
activity,  we have  not  yet  entered  into  such  relationships  and may not be
successful  in  developing  such  relationships.  In addition,  our  value-added
resellers may be subject to a lengthy sales cycle for our products.

     Our  customer  concentration  increases  the  potential  volatility  of our
operating results.  Notwithstanding our recent efforts to develop new customers,
typically through the use of relatively small licenses, a significant portion of
our total revenue has been,  and we believe will continue to be,  derived from a
limited  number of  orders  placed by large  organizations.  The  timing of such
orders and their  fulfillment has caused,  and is likely to cause in the future,
material  fluctuations  in our operating  results,  particularly  on a quarterly
basis.  In addition,  our major  customers tend to change from year to year. The
loss of any one or more of our major  customers  or our  inability  to replace a
customer that has become less significant in a given year with a different major
customer could have a material adverse effect on our business.

     We depend on our  international  operations.  A significant  portion of our
revenue is derived  from  customers  located  outside  the United  States.  This
requires that we operate  internationally and maintain a significant presence in
international  markets.  However, our international  operations are subject to a
number of risks. These risks include:

     (1)  longer receivable collection periods
     (2)  changes in regulatory requirements
     (3)  dependence on independent resellers
     (4)  multiple and conflicting regulations and technology standards
     (5)  import and export restrictions and tariffs
     (6)  difficulties and costs of staffing and managing foreign operations
     (7)  potentially adverse tax consequences
     (8)  foreign exchange fluctuations
     (9)  the burdens of complying with a variety of foreign laws
     (10) the impact of business  cycles and  economic  instability  outside the
          United States

     We must defend against securities litigation. We and certain of our present
and former  officers and directors were named as defendants in four class action
lawsuits filed in the United States District Court for the Northern  District of
California,  filed on January 26,  1998,  February  5, 1998,  March 11, 1998 and
March 18, 1998, respectively. On June 19, 1998, a Consolidated Amended Complaint
was filed in the  above  mentioned  court,  by the lead  Plaintiff  named by the
court. The amended complaint  alleges  violations of Sections 10(b) and 20(a) of
the Securities  Exchange Act, and Securities and Exchange  Commission Rule 10b-5
promulgated  under the  Securities  Exchange  Act,  in  connection  with  public
statements about the Company's  expected  financial  performance.  The complaint
seeks an  unspecified  amount of damages.  We  vigorously  deny the  plaintiffs'
claims and has moved to  dismiss  the  allegations.  The  plaintiff  has filed a
response to our motion to dismiss and we have filed an opposition to plaintiff's
response.  The motion to dismiss was submitted to the court for consideration on
November  13,  1998 and the  court  has not yet  issued a  decision.  Securities

                                       27

<PAGE>

litigation can be expensive to defend, consume significant amounts of management
time and result in adverse  judgments or settlements  that could have a material
adverse effect on the Company's results of operations and financial condition.

     Our stock price is volatile. Our revenue, operating results and stock price
have been and may continue to be subject to significant volatility, particularly
on a quarterly basis. We have previously  experienced  significant shortfalls in
revenue and earnings from levels expected by securities  analysts and investors,
which has had an immediate and  significant  adverse effect on the trading price
of our common  stock.  This may occur  again in the future.  Additionally,  as a
significant  portion of our revenue often occurs late in the quarter, we may not
learn of revenue shortfalls until late in the quarter,  which could result in an
even more immediate and adverse effect on the trading price of our common stock.

     Stock ownership has become more concentrated and subject to dilution.  As a
result  of the  Vertex  note  conversion  and  equity  financing  in July  1999,
ownership of our equity has become more concentrated.  Based on Vertex's filings
with  the  SEC  and  assuming,  as  of  December  31,  1999,  15,030,330  shares
outstanding (assuming conversion of all outstanding preferred stock and exercise
of all warrants outstanding),  Vertex and its affiliates would own approximately
26.6% of our  common  stock  if it  converted  all of its  Preferred  Stock  and
exercised  all of its  warrants.  The Company has  registered  5,839,091  shares
issuable  upon  conversion/exercise  of  the  outstanding  preferred  stock  and
warrants.  The  issuance of such shares  could  result in the  dilution of other
shareholders,  and the sale of such shares could depress the market price of our
stock.

     Our business may be harmed by Year 2000 problems.  We and our customers and
suppliers  are aware and  concerned  about the risks  associated  with Year 2000
computer  issues.  Our systems  did  recognize  the  correct  date when the year
changed to 2000,  and our  customers,  as of the date of this  filing,  have not
reported any material Y2k related problems, with our ODBMS and related products,
to our  service  department.  There  were no  material  adverse  effects  on our
operations,  either  internally  or  externally.  We are also  not  aware of any
material Y2k problems with our vendors or third party developers.

     Despite the foregoing  measures,  there can be no assurance  that Year 2000
problems  will  not  occur  and the  consequences  of any such  problems  may be
material to the operation of the Company and its financial results or prospects.

Risks Related To Our Industry

    We face competition from different sectors.

    The  competition  includes  Fortune 500 firms such as Oracle and Sybase with
the resources to heavily  promote their products and assert account control over
their  largest  enterprise  accounts.  Competition  from the  traditional  ODBMS
vendors has started to shift and  shakeout.  Most have diverged into new markets
and new businesses, leaving Objectivity and eXcelon as our key competitors.

    A  more  comprehensive  list  includes   competitors   offering  object  and
object-relational  database  management  systems  such  as  Oracle  Corporation,
Computer Associates International, Inc., eXcelon (formerly Object Design, Inc.),
Informix   and  its  Illustra   Information   Technologies,   Inc.   subsidiary,
Objectivity,  Inc., Gemstone Systems,  Inc., Poet Software  Corporation,  ONTOS,
Inc. In addition,  our products  compete with  traditional  relational  database
management  systems,  many of which have been or are  expected to be modified to
incorporate  object-oriented interface and other functionality,  and to leverage
Java. The principal  competitors in the relational  database  market are Oracle,
Sybase,  Informix,  IBM and  Microsoft.  In 1997,  Oracle  released  its Oracle8
product,  which,  with its object option,  provides  object-relational  database
capabilities,  and Computer  Associates released their Jasmine ODBMS, which is a
pure  object-oriented  database.  We believe  that the  decision  of  relational
database  vendors  to pursue  object-relational  or  object-oriented  approaches
validates  our  belief  that   object-oriented   database   solutions   will  be
increasingly demanded by today's business organizations. During the last year we
have seen a major shift away from Smalltalk towards JAVA. In addition Versant is
used more and more as a middle tier persistence layer in multi-tier applications
This allows  Versant to complement  the product  offerings from some of the more
established  companies in these  markets.  These are companies like IBM, SUN and
BEA selling Java based tools and solutions.  In order for Versant products to be
well  accepted  in the  marketplace,  it is  important  for one or more of these
partnerships to become  strategic on both sides.  There is also some movement in
the market to buy as much  middleware  components as possible from one or just a
few  suppliers.  Due to the  introduction  by Oracle and Computer  Associates of
competing  products with lower prices than the Versant ODBMS, we

                                       28

<PAGE>

may not be able to maintain  prices for our  products at levels that will enable
us to market our products  profitably.  Any  decrease in per unit  prices,  as a
result of competition or otherwise,  could have a material adverse effect on our
business, operating results and financial condition.

     We are also  indirectly  facing  competition  from developers of middleware
products that allow users to connect  object-oriented  applications  to existing
legacy data and RDBMSs such as TopLink and Thought Inc.

     Many of our  competitors,  and especially  Oracle and Computer  Associates,
have longer operating  histories,  significantly  greater financial,  technical,
marketing, service and other resources,  significantly greater name recognition,
broader product offerings and a larger installed base of customers than ours. In
addition,  many of our  competitors  have  well-established  relationships  with
current and potential  customers of ours. As a result,  our  competitors  may be
able to devote greater resources to the development, promotion and sale of their
products,  may have more direct  access to  corporate  decision-makers  based on
previous  relationships  and may be  able  to  respond  more  quickly  to new or
emerging technologies and changes in customer  requirements.  We may not be able
to compete successfully  against current or future competitors,  and competitive
pressures  could  have a  material  adverse  effect on our  business,  operating
results and financial condition.

     We depend on successful technology development. We believe that significant
research and development  expenditures will be necessary to remain  competitive.
While we believe our  research  and  development  expenditures  will improve the
Versant product lines, due to the uncertainty of software development  projects,
these   expenditures   will  not  necessarily   result  in  successful   product
introductions.  Uncertainties  impacting  the  success of  software  development
project  introductions  include  technical   difficulties,   market  conditions,
competitive  products and  consumer  acceptance  of new  products and  operating
systems.

     We also face certain challenges in integrating  third-party technology with
our  products.   These  challenges  include  the  technological   challenges  of
integration,  which may result in development delays, and uncertainty  regarding
the economic terms of our relationship with the third-party technology provider,
which may result in delays of the commercial release of new products.

     We face  further  technology  development  challenges  associated  with our
acquisition of Soft Mountain.  The Soft Mountain R'Net product offering is still
under  development,  and there is  uncertainty in both the timing of the release
and the market acceptance of the product.

     We have worked with BEA and IBM to develop  technology  that will allow the
Versant  Enterprise  Container  to support the BEA  WebLogic  and IBM  WebSphere
application server family, undiscovered bugs or errors may exist that prevent us
from achieving the functionality we seek with the Versant Enterprise  Container.
In addition,  because  Java Bean  containers  are  specific to each  application
server vendor and no standards have been adopted for such containers, we may not
be  able  to  take  advantage  of our  development  work  with  the  BEA and IBM
application  server  family's when  developing  solutions for other  application
server  vendors.  We do not  currently  have  any  agreements  or  relationships
regarding  the  Versant  Enterprise  Container  with  other  application  server
vendors,  therefore  customers  will only be able to use it with BEA  and/or IBM
application servers.

     We must protect our intellectual  property.  Despite our efforts to protect
our proprietary rights,  unauthorized parties may attempt to copy aspects of our
products, obtain or use information that we regard as proprietary or use or make
copies of our products in violation of license agreements. Policing unauthorized
use of our products is difficult. In addition, the laws of many jurisdictions do
not protect our  proprietary  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 of  certain  jurisdictions,  and  copyright  and  trade  secret
protection  for software may be unavailable in certain  foreign  countries.  Our
means  of  protecting  our  proprietary  rights  may  not be  adequate,  and our
competitors may independently develop similar technology.

    To  date,  we  have  not  been  notified  that  our  products  infringe  the
proprietary  rights of third  parties,  but third  parties  could claim that our
current or future  products  infringe such rights.  We expect that developers of
object-oriented  technology will increasingly be subject to infringement  claims
as the number of  products,  competitors  and  patents in our  industry  segment
grows.  Any such claim,  whether  meritorious or not,  could be  time-consuming,
result in costly  litigation,  cause  product  shipment  delays or require us to
enter into royalty or licensing agreements. Such royalty or

                                       29

<PAGE>
licensing agreements might not be available on terms acceptable to us or at all,
which could have a material adverse effect upon our business,  operating results
and financial condition.

    Our future  success  will  depend in part on our  ability to  integrate  our
products with those of vendors  providing  complementary  products.  The Versant
ODBMS must be integrated with compilers,  development  tools,  operating systems
and other  software  and  hardware  components  to produce a  complete  end-user
solution.  We may not receive the support of these third-party vendors,  some of
which may compete with us, to integrate our products with the vendors' products.

     We depend on our  personnel  for whom  competition  is intense.  Our future
performance  depends in significant  part upon the continued  service of our key
technical,  sales and senior management  personnel.  The loss of the services of
one or more of our key  employees  could have a material  adverse  effect on our
business.  Our future success also depends on our continuing ability to attract,
train and motivate highly qualified technical,  sales and managerial  personnel.
Competition  for such  personnel is intense,  especially in Silicon Valley where
our  headquarters  are  located,  and we may not be able to  attract,  train and
motivate such personnel.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  Interest Rate Risk

    Our exposure to market risk for changes in interest  rates relate  primarily
to our  investment  portfolio.  Currently,  we do not use  derivative  financial
instruments  in our  investment  portfolio.  We  invest in  high-credit  quality
issuers  and,  by policy,  limits the amount of  principal  exposure  to any one
issuer.  As stated in our policy,  we seek to ensure the safety and preservation
of our invested principal funds by limiting default and market risk.

    We  seek to  mitigate  default  risk by  investing  in  high-credit  quality
securities  and  by  positioning  our  investment  portfolio  to  respond  to  a
significant reduction in a credit rating of any investment issuer,  guarantor or
depository.  We seek to  mitigate  market  risk by limiting  the  principal  and
investment  term of funds  held with any one issuer  and by  investing  funds in
marketable securities with active secondary or resale markets.

    As of December  31,  1999 we had  invested  all our excess  funds in current
money market accounts and had no fixed term investments to report.

Item 8.  Financial Statements

    The financial  statements and supplementary  data required by Item 8 are set
forth below on pages F-1 to F-20 of this report.

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

    None.

                                       30

<PAGE>



PART III

Item 10.  Directors and Executive Officers of the Registrant; Compliance with
          Section 16(a) of the Exchange Act.

    The  information   concerning  our  directors   required  by  this  Item  is
incorporated by reference to our definitive  proxy statement for our 2000 annual
meeting of  shareholders,  which we will file with the  Securities  and Exchange
Commission by April 11, 2000,  under the heading  "Election of  Directors."  The
information   concerning  our  executive  officers  required  by  this  item  is
incorporated by reference to the proxy  statement  under the heading  "Executive
Officers."

    The section  entitled  "Compliance  under  Section  16(a) of the  Securities
Exchange  Act of 1934" that will  appear in our proxy  statement  sets forth the
information   concerning   compliance  by  our   officers,   directors  and  10%
shareholders with Section 16 of the Securities  Exchange Act and is incorporated
herein by reference.

Item 11.  Executive Compensation.

    The  information  required by this item is  incorporated by reference to our
proxy statement under the heading "Executive Compensation."

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

    The  information  required by this item is  incorporated by reference to our
proxy  statement  under the heading  "Security  Ownership of Certain  Beneficial
Owners and Management."

Item 13.  Certain Relationships and Related Transactions.

    The  information  required by this Item is  incorporated by reference to our
proxy  statement   under  the  heading   "Certain   Relationships   and  Related
Transactions."

Item 14.  Other Information.

     On October 21, 1999, the board of directors  added Mr. Hank Delevati to the
board. Mr. Delevati has been the Senior Vice President of Information Technology
and CIO with Aspect Communications,  a provider of telecommunications  equipment
and application software since August 1999. Prior to Aspect Mr. Delevati was the
CIO of Quantum  Corporation  from 1995 to 1999, CIO of Borland  Corporation from
1994 to 1995 and the CIO of Logitech  from 1993 to 1994,  Between  1987 and 1993
Mr.  Delevati  worked with Sun  Microsystems  as their  Director -  Applications
Development & Global Information  Resources.  Mr. Delevati received his Bachelor
of Science in Computer Sciences from Arizona State  University.  Mr. Delevati is
also a director of Insite Objects.


Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)  Exhibits.

     See Exhibit Index, page X-1.

(b)  Reports on Form 8-K filed in quarter ending December 31, 1999.

    With the exception of the  information  incorporated  herein by reference to
our proxy  statement in Items 9, 10, 11 and 12 of Part III, the proxy  statement
is not deemed to be filed with this Form 10-KSB.

                                       31
<PAGE>



                                   SIGNATURES

    In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized  in the City of  Fremont,  State of  California,  on this 30th day of
March, 2000.

                                 VERSANT CORPORATION

                                 By:/s/ Gary Rhea
                                    -----------------------------------
                                    Gary Rhea
                                    Vice President-Finance and Administration

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

<TABLE>
<CAPTION>
         Name                                                     Title                   Date

         PRINCIPAL EXECUTIVE OFFICER:

<S>                                                      <C>                         <C>
         /s/ Nick Ordon                                   President, Chief           March  27, 2000
         --------------------------------------
         Nick Ordon                                       Executive Officer and
                                                          Director

         PRINCIPAL FINANCIAL OFFICER AND
         PRINCIPAL ACCOUNTING OFFICER:

         /s/ Gary Rhea                                    Vice President-Finance     March  27, 2000
         --------------------------------------
         Gary Rhea                                        and Administration

         ADDITIONAL DIRECTORS:

         /s/ Mark Leslie                                  Director                   March  24, 2000
         --------------------------------------
         Mark Leslie

         /s/ Stephen J. Gaal                              Director                   March  25, 2000
         --------------------------------------
         Stephen J. Gaal

         /s/ Bernhard Woebker                             Director                   March  25, 2000
         --------------------------------------
         Bernhard Woebker

         /s/ Hank Delevati                                Director                   March  24, 2000
         --------------------------------------
         Hank Delevati

         /s/ David Banks                                  Director                   March  25, 2000
         --------------------------------------
         David Banks
</TABLE>

                                       32
<PAGE>

                      VERSANT CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                        ------------------
<S>                                                                                        <C>
         Report of Independent Public Accountants.............................                 F-2
         Consolidated Balance Sheets..........................................                 F-3
         Consolidated Statements of Operations................................                 F-4
         Consolidated Statements of Shareholders' Equity (Deficit)............                 F-5
         Consolidated Statements of Cash Flows................................                 F-6
         Notes to Consolidated Financial Statements...........................             F-7 to F-19
         Schedule II - Valuation and Qualifying Accounts and Reserves.........                F-20
</TABLE>

                                       F-1
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Versant Corporation:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Versant
Corporation (a California  corporation)  and its subsidiaries as of December 31,
1999  and  1998,  and  the  related   consolidated   statements  of  operations,
shareholders'  equity (deficit) and cash flows for each of the three years ended
December 31, 1999.  These  consolidated  financial  statements  and the schedule
referred  to below  are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to  obtain  reasonable  assurance  about  whether  the  consolidated   financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Versant Corporation
and its  subsidiaries as of December 31, 1999 and 1998, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting  principles  generally accepted
in the United States.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
consolidated  financial  statements taken as a whole. The schedule  appearing on
page F-20 is  presented  for  purposes  of  complying  with the  Securities  and
Exchange  Commission's  rules  and  is  not a part  of  the  basic  consolidated
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures applied in our audits of the basic consolidated  financial statements
and, in our opinion,  fairly states in all material  respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.

                                                             ARTHUR ANDERSEN LLP

San Jose, California
January 25, 2000

                                       F-2
<PAGE>



<TABLE>

<CAPTION>

                                              VERSANT CORPORATION AND SUBSIDIARIES
                                                   CONSOLIDATED BALANCE SHEETS
                                                         (In thousands)

                                                                                             December 31,
                                                                                    --------------------------------
                                                                                        1999               1998
                                                                                    -------------      -------------
     ASSETS

     Current assets:
<S>                                                                                     <C>                <C>
           Cash and cash equivalents                                                    $  3,663           $  3,564
           Accounts receivable, net of allowance for doubtful
               accounts of $414 and $335 in 1999 and 1998, respectively                    7,278              5,878
           Other current assets                                                              753              1,318
                                                                                       ---------          ---------
                   Total current assets                                                   11,694
                                                                                                             10,760

           Property and equipment, net                                                     5,478
                                                                                                              7,381
           Other assets                                                                      190                433
           Excess of cost of investment over fair value of net assets  acquired,
               net of accumulated  amortization of $2,917 and $2,473 in 1999 and
               1998, respectively                                                          1,879              2,095
                                                                                       ---------          ---------
                                                                                        $ 19,241           $ 20,669
                                                                                       =========          =========

     LIABILITIES AND SHAREHOLDERS' EQUITY

     Current liabilities:
           Current portion of capital lease obligations                                  $   253            $   561
           Current maturities of long-term debt                                            1,240              2,223
           Short term debt                                                                 1,400              2,426
           Accounts payable                                                                  718              2,331
           Accrued liabilities                                                             3,405              3,692
           Deferred revenue                                                                3,094              2,830
                                                                                       ---------          ---------
                   Total current liabilities                                              10,110             14,063
                                                                                       ---------          ---------

     Long-term liabilities, net of current portion:
          Capital lease obligations                                                          127                369
          Long term debt                                                                       -              3,678
          Deferred revenue                                                                   416                704

     Shareholders' equity:
          Preferred stock
                Authorized - 3,000 shares
                Issued and outstanding--1,490  in 1999 and none in 1998                    5,662                  -
                Liquidation value of $9,520
           Common stock:
                Authorized - 30,000 shares
                Issued and outstanding--10,561  in 1999 and 10,150 in 1998                48,528             45,727
                Accumulated deficit                                                      (45,627)           (43,890)
                Accumulated other comprehensive income                                        25                 18
                                                                                       ---------          ---------
                     Total shareholders' equity                                            8,588              1,855
                                                                                       ---------          ---------
                                                                                       $  19,241           $ 20,669
                                                                                       =========          =========
</TABLE>

 The accompanying notes are an integral part of these consolidated balance
 sheets.

                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                                   VERSANT CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In thousands, except per share amounts)

                                                                           Year Ended December 31,
                                                                 --------------------------------------------
                                                                     1999           1998            1997
                                                                 -------------  -------------   -------------

     Revenue:
<S>                                                                 <C>             <C>            <C>
         License                                                    $  17,074       $  14,463      $  21,363
         Services
                                                                        8,794           8,770          7,827
                                                                 -------------  --------------  -------------
             Total revenue                                             25,868          23,233         29,190

     Cost of revenue:
         License                                                          745           2,846          1,445
         Services                                                       4,180           6,893          5,010
                                                                 -------------  --------------  -------------
               Total cost of revenue                                    4,925           9,739          6,455
                                                                 -------------  --------------  -------------
         Gross profit                                                  20,943          13,494         22,735

     Operating expenses:
         Marketing and sales                                            9,883          18,511         17,265
         Research and development                                       7,011           7,722          5,225
         General and administrative, excluding non-cash
           compensation expense of $337,000 in 1999 shown
           below                                                        3,658           3,857          2,880
         Amortization of goodwill                                         463             546            370
         Write down of assets                                               -           1,555              -
         Acquired in-process R&D cost                                       -             528              -
         Non-cash compensation expense                                    337               -              -
                                                                 -------------  --------------  -------------
                Total operating expenses                               21,352          32,719         25,740

     Loss from operations                                                (409)        (19,225)        (3,005)
                                                                 -------------  --------------  -------------

     Other income (expense):
         Foreign currency transaction gain (loss)                           2             (34)           133
         Interest expense                                              (1,294)           (640)          (162)
         Interest and other income (expense), net                          19             (18)           734
                                                                 -------------  --------------  -------------
                Total other income (expense)                           (1,273)           (692)           705

     Loss before taxes                                                 (1,682)        (19,917)        (2,300)

         Provision for income taxes                                        54              18            40
                                                                 -------------  --------------  -------------
     Net loss                                                    $     (1,736)  $     (19,935)   $    (2,340)
                                                                 =============  ==============  =============

     Net loss per share:
         Basic                                                         ($0.17)         ($2.16)        ($0.26)
                                                                 =============  ==============  =============
         Diluted                                                       ($0.17)         ($2.16)        ($0.26)
                                                                 =============  ==============  =============

     Weighted shares used in per share calculations
         Basic                                                         10,178           9,209          8,931
                                                                 =============  ==============  ============
         Diluted                                                       10,178           9,209          8,931
                                                                 =============  ==============  ============
</TABLE>

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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                                          VERSANT CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                          (In thousands, except share amounts)

                                                   Preferred Stock        Common Stock       Accumulated   Shareholders'
                                                   ---------------        ------------
                                                  Shares     Amount     Shares     Amount      Deficit     Equity(Deficit)
                                                 ---------  --------  ----------  --------   -----------   ---------------
<S>                                              <C>        <C>        <C>        <C>         <C>             <C>
Balance at December 31, 1996                            --       --    8,719,207  $ 40,889     $(21,615)       $ 19,274

ESPP and exercises of stock options and
warrants                                                --       --      106,866       946            --            946

Issuance of common stock to
  shareholders of Versant Europe                        --       --      167,545     1,145            --          1,145

Net loss                                                --       --           --        --       (2,340)         (2,340)

Other comprehensive income (loss), net of tax:

  Foreign currency translation adjustments              --       --           --        --           275            275
                                                                                             -----------   ------------

   Comprehensive income                                 --       --           --        --       (2,065)         (2,065)
                                                     -------- -------- ---------  --------   -----------   ------------
Balance at December 31, 1997                            --       --    8,993,618    42,980      (23,680)         19,300

ESPP and exercises of stock options and
warrants                                                --       --      210,934       734            --            734

Issuance of common stock to
  shareholders of Soft Mountain                         --       --      245,586       645            --            645

Issuance of common stock to Special Situations
Fund                                                    --       --      700,000     1,368            --          1,368

Net loss                                                --       --           --        --      (19,935)        (19,935)

Other comprehensive income (loss), net of tax:

  Foreign currency translation adjustments              --       --           --        --         (257)           (257)
                                                                                             -----------   ------------

   Comprehensive loss                                   --       --           --        --      (20,192)        (20,192)
                                                        --       --           --        --   -----------   ------------


Balance at December 31, 1998                            --       --   10,150,138   45,727       (43,872)          1,855
                                                 ---------  --------  ----------  --------   -----------   ------------

ESPP and exercises of stock options and
warrants                                                --       --      380,795      768             --            768

Issuance of common stock to
  shareholders of Soft Mountain                         --       --       30,000      148             --            148

Issuance of preferred stock and warrants to
investors in exchange for cash and notes
payable                                          1,489,799     5,662          --    1,548             --          7,210

Non cash compensation cost associated with the
issuance of warrants for consulting services            --       --           --      337             --            337

Net loss                                                --       --           --       --        (1,736)         (1,736)

Other comprehensive income (loss), net of tax:

  Foreign currency translation adjustments              --       --           --       --              7             7
                                                                                             -----------   ------------

   Comprehensive income                                 --       --           --       --        (1,729)         (1,729)
                                                 ---------  --------  ----------  --------   -----------   ------------

Balance at December 31, 1999                     1,489,799  $  5,662  10,560,933 $  48,528   $   (45,602)  $      8,588
                                                 =========  ========  ==========  ========   ===========   ============
</TABLE>


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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                      VERSANT CORPORATION AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (In thousands)

                                                                                     Year Ended December 31,
                                                                            ------------------------------------------
                                                                               1999            1998           1997
                                                                            ------------   ------------    -----------
         CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                         <C>             <C>             <C>
           Net loss                                                         $   (1,736)     $   (19,935)     $  (2,340)
           Adjustments to reconcile net loss to net
             cash used in operating activities:
                Depreciation and amortization                                     2,382           2,716          1,262
                Write-off of acquired in-process R&D cost                             -             528              -
                Write down of goodwill                                                -           1,555              -
                Non-cash compensation expense                                       337               -              -
                Accrued discount/interest on Vertex note conversion                 945               -              -
                Provision for doubtful accounts receivable                          155            (857)           208
                Changes in current assets and liabilities, net of
                acquisitions:
                   Accounts receivable                                           (1,555)          4,548         (5,030)
                   Other current assets                                             565             982         (2,476)
                   Other assets                                                     243              33           (381)
                   Accounts payable                                              (1,613)          1,259            597
                   Accrued liabilities                                             (218)           (642)           966
                   Deferred revenue                                                 (24)           (815)         1,539
                                                                            ------------   ------------    -----------
                      Net cash used in operating activities                        (520)        (10,628)        (5,655)
                                                                            ------------   -------------   -----------

         CASH FLOWS FROM INVESTING ACTIVITIES:
           Purchase of property and equipment                                       (35)         (1,989)        (6,679)
           Purchases of short-term investments                                        -               -        (20,632)
           Proceeds from sale and maturities of short-term
           investments                                                                -           6,114         29,462
           Purchase of Versant Europe, net of cash acquired                           -               -         (1,987)
           Purchase of Versant India                                                (80)              -              -
           Purchase of Soft Mountain, net of cash acquired                            -            (136)             -
                                                                            ------------   ------------    -----------
                 Net cash provided by (used in) investing activities               (115)          3,989            164
                                                                            ------------   ------------    -----------

         CASH FLOWS FROM FINANCING ACTIVITIES:
           Proceeds from sale of common stock, net                                  768           2,102            946
           Proceeds from sale of preferred stock, net                               970               -              -
           Proceeds from sale of warrants                                         1,548               -              -
           Net borrowings(payments) under short term note and bank
           loan                                                                  (2,009)          1,797            735
           Principal payments under capital lease obligations                      (550)           (627)          (262)
           Borrowings(principal payments) under long term bank note                   -            (106)         2,522
           Net proceeds from long-term borrowings                                     -           3,320              -
                                                                            ------------   ------------    -----------
           Net cash provided by financing activities                                727           6,486          3,941
                                                                            ------------   ------------    -----------

           Effects of exchange rate changes on cash                                   7               -              -

         NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        99            (153)        (1,550)
         CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                           3,564           3,717          5,267
                                                                            ------------   ------------    -----------
         CASH AND CASH EQUIVALENTS AT END OF YEAR                           $     3,663           3,564      $   3,717
                                                                            ============   ============    ===========

         SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
         Cash paid for:
                Interest                                                     $      348        $    378       $    180
                Foreign withholding and state income taxes                           54              18              -

        SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
        FINANCING ACTIVITIES
         Capital lease obligations incurred for acquisition of
         equipment                                                           $        -        $    607       $    574
         Issuance of common stock to shareholders of Versant
         Europe                                                                      -                -          1,145
         Issuance of common stock to shareholders of Soft
         Mountain                                                                   148             645              -
         Issuance of warrants for consulting services                               337               -              -
         Conversion of notes payable to Series A
         Preferred Stock                                                          3,619               -              -
         Conversion of accrued interest and discount to Series A
         Preferred Stock                                                           945
</TABLE>
  The accompanying notes are an integral part of these consolidated statements

                                      F-6
<PAGE>

                      VERSANT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

1.       Organization, Operations and Liquidity

     Versant   Corporation  was  incorporated  in  California  in  August  1988.
References to the "Company" in these Notes to Consolidated  Financial Statements
refer to Versant  Corporation and its  subsidiaries.  The Company  operates in a
single industry  segment and is involved in the design,  development,  marketing
and support of high performance object database management software systems.

     The Company is subject to the risks  associated  with other  companies in a
comparable  stage of development.  These risks include,  but are not limited to,
fluctuations  in  operating  results,   seasonality,   a  lengthy  sales  cycle,
dependence  on the  acceptance of object  database  technology,  competition,  a
limited customer base, dependence on key individuals, product concentration, and
the ability to adequately finance its ongoing operations.

     To date, the Company has not achieved business volume sufficient to restore
profitability and positive cash flow on an annual basis. The Company operated at
a net loss of $1.7 million and $19.9 million in 1999 and 1998, respectively. The
Company did achieve  positive  cash flow from  operations  in the second half of
1999.  Management  anticipates  funding future  operations and repaying its debt
obligations  from current cash resources and future cash flows from  operations.
If financial results fall short of projections, additional debt or equity may be
required  and the  Company  may need to  implement  further  cost  controls.  No
assurances can be given that such efforts will be successful, if required.

2.      Summary of Significant Accounting Policies

Cash and Cash Equivalents

     For  purposes of the  consolidated  statements  of cash flows,  the Company
considers all highly liquid cash investments with an original  maturity of three
months or less to be cash equivalents. Cash equivalents consist of United States
Government  obligations.  Investments have been accounted for in accordance with
Statement of Financial  Accounting  Standards  (SFAS) No. 115,  "Accounting  for
Certain Investments in Debt and Equity Securities." The Company's investments in
debt  securities  matured at various dates through March 1998. The fair value of
available-for-sale  securities was  determined  based on quoted market prices at
the reporting date for the instruments.

     As of December 31, 1999 and 1998,  the Company did not have  investments in
securities.

Foreign Currency Translation

     The functional currency of each of the Company's  subsidiaries is its local
currency.  Accordingly, the Company applies the current rate method to translate
the  subsidiaries'   financial   statements  into  U.S.   dollars.   Translation
adjustments are included as a separate component of shareholders'  equity in the
accompanying consolidated financial statements.

Revenue Recognition

     The Company  adopted the  provisions  of Statement of Position  (SOP) 97-2,
"Software Revenue  Recognition",  for transactions entered into after January 1,
1998.   Revenue  consists  mainly  of  revenue  earned  under  software  license
agreements, maintenance agreements and consulting and training activities.

     Revenue from perpetual software license agreements is recognized as revenue
upon  shipment of the software if there is no  significant  modification  of the
software,  payments  are due  within  the  Company's  normal  payment  terms and
collection of the resulting  receivable is probable.  If an acceptance period is
required,  revenue is recognized upon the earlier of customer  acceptance or the
expiration of the acceptance period.

     During 1997 and 1998,  the Company  entered into  contracts with certain of
its customers that require the Company to perform development work in return for
nonrecurring  engineering fees. Revenue related to such nonrecurring

                                       F-7

<PAGE>

engineering  fees is generally  recognized on a percentage of completion  basis.
There were no such contracts during 1999.

     Maintenance  revenue is recognized ratably over the term of the maintenance
contract.  Consulting  and  training  revenue is  recognized  when a  customer's
purchase order is received and the services are performed.

     Cost  of  license   revenue   consists   principally  of  product   royalty
obligations,   product  packaging,   freight,  users  manuals,   product  media,
production labor costs and reserves for estimated bad debts.

     Cost of services revenue consists principally of personnel costs associated
with  providing  training,   consulting,   technical  support  and  nonrecurring
engineering work paid for by customers.

Segment Information

     In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise  and Related  Information."  SFAS No. 131  established  standards for
reporting  information about operating  segments in annual financial  statements
and requires selected  information about operating segments in interim financial
reports  issued to  stockholders.  It also  established  standards  for  related
disclosures  about  products  and  services,  and  geographic  areas.  Operating
segments  are  defined as  components  of an  enterprise  about  which  separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.

     The  Company  is  organized  geographically  and by line of  business.  The
Company has three major lines of business operating segments:  license, support,
and  consulting/training.  However,  the Company also evaluates certain lines of
business segments by vertical industries as well as by product categories. While
the Executive  Management  Committee  evaluates results in a number of different
ways, the line of business  management  structure is the primary basis for which
it assesses financial performance and allocates resources.

     The  license  line  of  business   licenses  an  object  oriented  database
management software (ODBMS). The ODBMS software can be classified into two broad
categories: systems and development tools. ODBMS enables users to create, store,
retrieve,  and modify the various types of data stored in a computer system. The
support  line of  business  provides  customers  with a wide  range  of  support
services that include on-site  support,  telephone or internet access to support
personnel,  as well as software  upgrades.  The  consulting and training line of
business  provides  customers  with a wide  range  of  consulting  and  training
services to assist the customer in evaluating,  installing and  customizing  the
database as well as training  classes on the use and  operation of the Company's
products.

     The accounting  policies of the line of business operating segments are the
same as those described in the summary of significant accounting policies.

     The Company does not track assets by operating segments.  Consequently,  it
is not practicable to show assets by operating segment.

                                      F-8

<PAGE>

     The table below presents a summary of operating segments (in thousands):

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                   -------------------------------------------
                                                                      1999             1998             1997
                                                                   ----------       ----------      ----------
<S>                                                                <C>              <C>             <C>
   Revenues from Unaffiliated Customers
     License                                                       $  17,074        $  14,463       $  21,363
     Support                                                           5,780            4,428           3,804
     Consulting & Training                                             3,014            4,342           4,023
                                                                   ----------       ----------      ----------
        Total Revenue                                                 25,868           23,233          29,190

   Distribution Margin
     License                                                          16,329           11,617          19,915
     Support                                                           4,261              445             264
     Consulting & Training                                               353            1,432           2,556
                                                                   ----------       ----------      ----------
        Total Distribution Margin                                     20,943           13,494          22,735

   Profit Reconciliation:
     Other Operating Expenses                                         21,015           32,191          25,740
     Acquired In-Process R&D Cost                                          -              528               -
     Non-Cash Compensation Expense                                       337                -               -
     Other Income (Expense)                                           (1,273)            (692)            705
                                                                   ----------       ----------      ----------
        Loss Before Provision for Income Taxes                     $  (1,682)       $ (19,917)      $  (2,300)
                                                                   ==========       ==========      ==========
</TABLE>

     The table below  presents the Company's  revenues by legal  subsidiary  (in
thousands):

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                     ---------------------------------
                                                                        1999         1998       1997
                                                                     --------     --------    --------
<S>                                                                  <C>          <C>         <C>
       Total Revenues Attributable To:
         United States                                               $ 13,287     $ 13,280    $ 22,149
         Germany                                                        4,243        3,663       4,627
         France                                                         3,822        2,659       1,356
         United Kingdom                                                 3,568        2,411         354
         Australia                                                        948        1,220         704
                                                                     --------     --------    --------
            Total                                                    $ 25,868     $ 23,233    $ 29,190
                                                                     ========     ========    ========
</TABLE>

Property and Equipment

     Property and equipment, at cost, consisted of the following (in thousands)
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                 -----------------------
                                                                                   1999           1998
                                                                                 --------       --------
<S>                                                                              <C>            <C>
               Computer equipment                                                $ 9,066        $ 8,574
               Furniture and fixtures                                              2,092          2,110
               Software                                                            1,165          1,138
               Leasehold improvements                                              1,316          1,782
                                                                                 --------       --------
                                                                                  13,639         13,604
               Less--Accumulated depreciation and amortization                    (8,161)        (6,223)
                                                                                 --------       --------
                                                                                 $ 5,478        $ 7,381
                                                                                 ========       ========
</TABLE>

    The Company has entered into capital lease  agreements for equipment with an
original cost of  $1,856,000,  $1,856,000  and  $1,199,000 at December 31, 1999,
1998 and 1997,  respectively.  Accumulated  depreciation of leased equipment was
$1,446,000,  $926,000  and  $249,000  at  December  31,  1999,  1998  and  1997,
respectively.

Depreciation and Amortization

     Property and equipment are  depreciated on a  straight-line  basis over the
estimated  useful lives of the assets of three to ten years.  Leased  assets are
amortized over the shorter of the estimated useful life or the lease term.

                                      F-9
<PAGE>


Amortization of Excess Cost of Assets Acquired

     Amortization  of excess  of cost of  investment  over fair  value of assets
acquired related to the Company's acquisitions. The goodwill associated with the
acquisition  of Versant  Europe in 1997 (see note 9) was being  recognized  on a
straight-line basis over seven years, but this estimate was changed in 1998 to a
five year period. The goodwill  associated with the acquisition of Soft Mountain
is recognized over five years (see note 10).

Software Development Costs

     Under the criteria set forth in SFAS No. 86,  "Accounting  for the Costs of
Computer Software to be Sold, Leased or Otherwise  Marketed,"  capitalization of
software  development  costs  begins  upon the  establishment  of  technological
feasibility.   The  Company  has  defined  the  establishment  of  technological
feasibility as the completion of a working model. Amounts  capitalizable to date
under the provisions of SFAS No. 86 have not been material.

Deferred Revenue

     Deferred revenue  represents  amounts received from customers under certain
license,  maintenance  and  nonrecurring  engineering  agreements  for which the
revenue earnings process has not been completed.

     Deferred revenue consisted of the following components (in thousands):

                                                     December 31,
                                                   ----------------
                                                     1999     1998
                                                   -------  -------
                 Maintenance                       $ 3,395  $ 3,160
                 Development work                       30       39
                 Training and consulting                85      335
                                                   -------  -------
                                                   $ 3,510  $ 3,534
                                                   =======  =======

Accrued Liabilities

     Accrued liabilities consisted of the following components (in thousands):

                                                     December 31,
                                                   ----------------
                                                     1999     1998
                                                   -------  -------

                 Payroll and related               $ 1,676  $ 1,869
                 Taxes payable                         968      851
                 Other                                 761      972
                                                   -------  -------
                                                   $ 3,405  $ 3,692
                                                   =======  =======

Significant Customers

     The Company had no sales to customers  representing  more than 10% of total
revenue in 1999 and 1998. In 1997 two  customers  accounted for $5.8 million and
$3.1 million in revenue, respectively.

International Sales

     International sales, consisting of sales to customers in foreign countries,
were $12.7  million,  $10.5  million and $8.6 million of total  revenue in 1999,
1998 and 1997, respectively.

     International sales by country or region were as follows (in thousands):

                                                  Year Ended December 31,
                                           -----------------------------------
                                               1999          1998         1997
                                           --------      --------      -------
                 Europe                    $ 11,633      $  8,733      $ 6,337
                 Canada                          74           286        1,163
                 Australia                      398           825          603
                 Japan                          530           226          361
                 Other                           21           417          106
                                           --------      --------      -------
                                           $ 12,656      $ 10,487      $ 8,570
                                           ========      ========      =======

                                      F-10

<PAGE>



Concentration of Credit Risk

     Financial   instruments   that   potentially   subject  the  Company  to  a
concentration  of credit risk  principally  consist of accounts  receivable  and
short-term  investments.  Credit  is  extended  based  on an  evaluation  of the
customer's financial condition,  and generally collateral is not required. As of
December 31, 1999,  approximately  26% of accounts  receivable were concentrated
with three  customers.  Also 30%, 42% and 39% of our total revenue in 1999, 1998
and  1997,   respectively,   were   attributable   to  sales  of   products   to
telecommunications  companies. The Company generally does not require collateral
on accounts  receivable  because the  majority of the  Company's  customers  are
large, well established  companies.  The Company provides reserves for estimated
credit losses in accordance with management's ongoing evaluation.

Use of Estimates

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

Net Loss Per Share

     The Company adopted SFAS No. 128, "Earnings per Share",  effective December
15, 1997.  This standard  revised  certain  methodology for computing net income
(loss) per share and requires the  reporting of two net income  (loss) per share
figures:  basic net income  (loss) per share and diluted  net income  (loss) per
share.  Basic net income  (loss) per share is computed  by  dividing  net income
(loss) by the weighted average number of shares outstanding.  Diluted net income
(loss) per share is  computed by  dividing  net income  (loss) by the sum of the
weighted average number of shares outstanding plus the dilutive effect of shares
issuable  through the exercise of stock  options.  The dilutive  effect of stock
options is computed using the treasury stock method,  and the dilutive effect of
convertible preferred stock is computed using the if converted method.  Dilutive
securities are excluded from the diluted net income (loss) per share computation
if their effect is antidilutive.

     The  reconciliation  of the  numerators and  denominators  of the basic and
diluted net loss per share computations is as follows (in thousands,  except per
share amounts):

<TABLE>
<CAPTION>
                                                                     Income         Shares       Per Share
                                                                  (Numerator)    (Denominator)     Amount
                                                                  -----------    -------------  -----------
<S>                                                               <C>               <C>          <C>
   FOR THE YEAR ENDED 1997:
     Basic and diluted net loss per share:


         Losses attributable to holders of common stock           $  (2,340)         8,931       $ (0.26)
                                                                  ==========        ======       ========

   FOR THE YEAR ENDED 1998:
     Basic and diluted net loss per share:

         Losses attributable to holders of common stock           $ (19,935)         9,209       $ (2.16)
                                                                  ==========        ======       ========

   FOR THE YEAR ENDED 1999:
     Basic and diluted net loss per share:

         Losses attributable to holders of common stock           $  (1,736)        10,178       $ (0.17)
                                                                   =========        ======       ========
</TABLE>

     The diluted net loss per share for the years ended 1999,  1998 and 1997 was
the same as basic net loss per share due to losses in these periods and thus the
inclusion of potential common shares would have been antidilutive.

Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.

Reclassifications

     Certain  reclassifications  have been  made to  amounts  in prior  years to
conform to the 1999 presentation.

                                      F-11

<PAGE>

3.       Recently Issued Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging Activities",  which requires
companies to value derivative  financial  instruments,  including those used for
hedging foreign currency  exposures,  at current market value with the impact of
any change in market value being  charged  against  earnings in each period.  In
June 1999,  the  Financial  Accounting  Standards  Board  issued  SFAS No.  137,
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective  Date of SFAS No.  133" to defer the  effective  date of SFAS No.  133
until fiscal years  beginning  after June 15, 2000. To date, the Company has not
entered into any derivative  financial  instrument  contracts.  Thus the Company
anticipates  that  SFAS  No.  133  will  not  have  a  material  impact  on  its
consolidated financial statements.

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial  Statements".
SAB 101 provides guidance on applying generally accepted  accounting  principles
to revenue recognition issues in financial statements.  We will adopt SAB 101 as
required in the second quarter of 2000. We do not expect the adoption of SAB 101
to  have a  material  impact  on our  consolidated  results  of  operations  and
financial position.

4.       Lease Obligations

     In November  1996,  the Company  entered into an agreement to lease its new
corporate  headquarters  facility  under a ten-year  operating  lease  agreement
commencing on June 1, 1997 and expiring on May 31, 2007.  The terms of the lease
provide for certain  increases in rental payments during the lease term.  Rental
expense under this agreement is recognized on a straight-line basis. The Company
also leases field office space in Europe and India,  generally under  multi-year
operating lease  agreements.  Consolidated  rent expense for 1999, 1998 and 1997
was approximately $1,743,000, $2,043,000 and $1,358,000, respectively.

     The future  annual  minimum  lease  payments  at  December  31,  1999 under
non-cancelable operating leases were as follows (in thousands):

                  Year                               Amount
                  ----                             --------
                  2000                             $  1,538
                  2001                                1,555
                  2002                                1,529
                  2003                                1,510
                  2004                                1,534
                  Thereafter                          4,604
                                                   --------
                                                   $ 12,270

    The future  minimum lease  payments  required  under these capital leases at
December 31, 1999 were as follows (in thousands):

                  Year                                                    Amount
                  ----                                                    ------
                  2000                                                    $ 297
                  2001                                                       72
                  2002                                                       42
                                                                          ------
                  Minimum lease payments                                    411
                  Less--amount representing interest (7 1/2%-14.7%)          31
                                                                          ------
                     Present value of net minimum lease payments            380
                           Current maturities                               253
                                                                          ------
                           Long term maturities                           $ 127
                                                                          ======

5.   Line of Credit

     The Company  maintains a revolving  credit line with a bank that expires on
September 30, 2000.  The maximum amount that can be borrowed under the revolving
credit line is $5.0 million.  As of December 31, 1999, $900,000 was allocated to
a standby  letter of credit to support the Company's  European  banking line and
$1.4 million of borrowings were  outstanding.  Borrowings and the standby letter
of  credit  under the  revolving  credit  line are  limited  to 80% of  eligible
accounts  receivable  and are  secured  by  substantially  all of the  Company's
assets.  These  borrowings bear

                                      F-12

<PAGE>

interest at the bank's  base  lending  rate  (8.50%,  at December  31, 1999 plus
2.0%). The loan agreement contains financial covenants,  commencing with quarter
ended  December 31, 1999,  and also  prohibits  cash  dividends  and mergers and
acquisitions  without the bank's  prior  approval.  Certain of these  covenants,
which the Company was not in compliance  with as of December 31, 1999, have been
waived  through  March  31,  2000.  In March  2000 the  Company  negotiated  new
covenants  for the  year  ending  December  31,  2000,  based  on the  Company's
forecasted performance in 2000.

     On March 19, 1998, the Company  converted an interest  only,  variable rate
note to a variable rate,  term loan with principal and interest  payable over 36
months.  The term loan  covenants and interest rate were amended in  conjunction
with the new line of credit  agreement in March 1998.  Borrowings under the loan
are secured by on all assets acquired using the proceeds of the loan, which have
been used for the acquisition of equipment and leasehold improvements.  The loan
bears interest at the bank's base lending rate (8.50%, at December 31, 1999 plus
2.5%).  The loan contains  certain  financial  covenants and also prohibits cash
dividends  and  mergers and  acquisitions  without  the bank's  prior  approval.
Certain of these  covenants,  which the Company was not in compliance with as of
December 31, 1999,  have been waived  through  March 31, 2000. In March 2000 the
Company negotiated new covenants for the year ending December 31, 2000, based on
the Company's forecasted performance in 2000.

6.       Common Stock

     During 1995,  the Company sold shares of Common Stock to employees at $1.00
per share,  which  represented  fair market value on April 22, 1995. These share
issuances  were made pursuant to the 1989 Stock Option Plan and such amounts are
included in the option grant and option exercise table in Note 7 below.

     In July and  August of 1996,  the  Company  completed  its  initial  public
offering of 2,380,500 shares of Common Stock (including an over-allotment option
of 310,500 shares) at $8.00 per share,  resulting in net proceeds to the Company
of $14.9 million after  offering  costs.  In May 1996,  the Company sold 100,000
shares of Common Stock to the owners of Versant Europe, which at the time was an
independent distributor of the Company's products, at a price of $7.50 per share
for total proceeds to the Company of $750,000.

     In September  1998 in  connection  with the Company's  acquisition  of Soft
Mountain,  the Company  agreed to register  the  245,586  shares  issued in such
transaction  with the SEC on Form S-3 by December  31,  1998 (see Note 10).  The
selling  shareholders  of the Soft  Mountain  shares  demanded  that the Company
repurchase for approximately  $1.1 million these 245,586 shares due to delays in
the  registration  of such  shares.  The  Company  disputed  the  right  of such
shareholders  to receive such payment,  however,  the Company agreed to issue an
additional  30,000  shares  of  common  stock,  with a value of  $148,000.  This
additional  amount was treated as additional  purchase price and  capitalized as
additional  goodwill and will be amortized equally over the remaining four years
of goodwill amortization.

     In December 1998, in connection  with the sale of shares of common stock to
Special  Situations  Fund, the Company issued warrants to purchase an additional
350,000  shares.  In 1999,  Special  Situation  Fund  exercised  its warrants to
purchase  the  350,000  shares of Common  Stock  for a total  purchase  price of
$787,500.

7.       Stock Option and Stock Purchase Plans

1996 Equity Incentive Plan

     In May 1996,  the Board adopted the 1996 Equity  Incentive  Plan (the "1996
Equity  Plan") and the Company's  shareholders  approved the 1996 Equity Plan in
June 1996. The 1996 Equity Plan serves as the successor equity incentive program
to the Company's  1989 Stock Option Plan.  The 1996 Equity Plan provides for the
grant of stock options and stock bonuses and the issuance of restricted stock by
the Company to its  employees,  officers,  directors,  consultants,  independent
contractors  and  advisors.  Options  granted  under the 1989 Stock  Option Plan
before its termination remain outstanding in accordance with their terms, but no
further  options  have been  granted  under the 1989 Stock Option Plan since the
Company's initial public offering.  Any authorized shares that are not issued or
subject to outstanding grants under the 1989 Stock Option Plan will be available
for grant and issuance in  connection  with future  awards under the 1996 Equity
Plan. As of December 31, 1999,  the Company has authorized  1,900,000  shares of
Common Stock, plus any shares previously issuable under the 1989 Option Plan and
now  issuable  under the 1996 Equity Plan,  for  issuance  under the 1996 Equity
Plan.  As of  December  31,  1999,  options to  purchase  2,261,280  shares were

                                      F-13

<PAGE>

outstanding  under the 1996 Equity  Plan,  options to purchase  9,000 shares had
been exercised under the 1996 Equity Plan, and 152,944 shares were available for
grant under the 1996 Equity Plan,  including  shares  previously  available  for
grant  under the 1989 Stock  Option  Plan.  At  December  31,  1999,  options to
purchase 770,637 shares were exercisable under the 1996 Equity Plan.

1996 Directors Stock Option Plan

     In May 1996,  the Board adopted the 1996  Directors  Stock Option Plan (the
"Directors Plan") and the Company's  shareholders approved the Directors Plan in
June 1996.  The  Directors  Plan  provides for the grant of  nonqualified  stock
options to non-employee directors of the Company,  including automatic grants of
options to purchase 10,000 shares of Common Stock to non-employee directors that
were granted  concurrently  with the initial public  offering,  an option to new
non-employee  directors to purchase 10,000 shares of Common Stock on the date on
which the new  director  joins the Board and an  additional  option to  purchase
5,000 shares of Common Stock to each eligible  director on each anniversary date
of such  director's  initial  option  grant  under  the  Directors  Plan if such
director  has served  continuously  as a member of the Board since the date such
director was first  granted an option  under the  Directors  Plan.  The exercise
price of all options  granted under the  Directors  Plan will be the fair market
value of the Common  Stock on the date of grant.  All options  issued  under the
Directors  Plan  will  vest as to 50% of the  shares  on each of the  first  two
anniversaries  following the date of grant, provided the optionee continues as a
member of the Board or as a consultant to the Company.  As of December 31, 1999,
the Company has authorized 125,000 shares of Common Stock for issuance under the
Directors Plan. At December 31, 1999,  options for an aggregate of 92,500 shares
were outstanding, and options to purchase 57,500 shares were exercisable.

1989 Stock Option Plan

     The 1989 Stock  Option  Plan was  succeeded  by the 1996 Equity Plan during
1996. Under the provisions of the 1989 Stock Option Plan, the Board of Directors
granted  either   incentive  or   non-statutory   stock  options  to  employees,
consultants,  directors  and  officers to purchase  Common  Stock at an exercise
price of not less than 100% of the fair  value  (as  determined  by the Board of
Directors) of the shares on the date of grant, except that non-statutory options
were granted at 85% of such fair value.  Options  expire no later than ten years
from  the date of grant  and  generally  vest  over a period  of 5 years.  As of
December 31, 1999,  options to purchase 63,700 shares were outstanding under the
1989 Stock Option Plan, options to purchase  1,579,927 shares had been exercised
under the 1989 Stock Option Plan,  and no shares were  available for grant under
the 1989 Stock Option Plan. As of December 31, 1999,  options to purchase 54,176
shares were exercisable under the 1989 Stock Option Plan.

Reserved for Future Issuance

     As of December  31, 1999,  the Company had reserved  shares of Common Stock
for the following purposes:

               Employee stock purchase plan              325,017
               Stock options available for grant         185,444
               Exercise of stock options outstanding   2,417,480
                                                       ---------
                                                       2,927,941

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
accounting  for its option plans.  Accordingly,  no  compensation  cost has been
recognized for its option plans. Had compensation  cost for the Company's option
plans been determined  based on the fair value at the grant dates for the awards
calculated in accordance  with SFAS No. 123, the Company's net loss and net loss
per share would have been reduced to the pro forma amounts  indicated  below (in
thousands except for per share amounts):

<TABLE>
<CAPTION>
                                                            1999          1998          1997
                                                         ---------    -----------    ---------

<S>                                                      <C>           <C>           <C>
        Net loss                         As Reported     $ (1,736)     $ (19,935)    $ (2,340)
                                         Pro forma       $ (3,709)     $ (21,987)    $ (3,750)

        Basic net loss per share         As Reported     $   (.17)     $   (2.16)    $  (0.26)
                                         Pro forma       $   (.36)     $   (2.39)    $  (0.42)

        Diluted net loss per share       As Reported     $   (.17)     $   (2.16)    $  (0.26)
                                         Pro forma       $   (.36)     $   (2.39)    $  (0.42)
</TABLE>


                                      F-14
<PAGE>
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes  option-pricing model with the following  assumptions used for
1999, 1998 and 1997:
<TABLE>
<CAPTION>
                                                              1999            1998          1997
                                                             -------        -------      --------
<S>                                                          <C>            <C>           <C>
      Risk free interest rate                                 5.6%            5.1%          6.1%
      Dividend yield                                           0%              0%            0%
      Volatility                                               80%            80%           60%
      Expected life                                          3 years        3 years       3 years
      Weighted average fair value of options granted          $1.22          $2.69         $4.99
</TABLE>

     Option activity under all of the Company's option plans is as follows:
<TABLE>
<CAPTION>
                                                                              Options Outstanding
                                                                        ------------------------------
                                                                                          Weighted
                                                       Options           Number of        Average
                                                      Available           Shares       Exercise Price
                                                     -----------        -----------   ----------------
<S>                                                  <C>                 <C>               <C>
                   Balance at December 31, 1996         744,040            765,528         $ 5.48
                     Authorized                         850,000              --                --
                     Granted                         (1,194,215)         1,194,215          11.71
                     Exercised                             --              (69,424)          2.28
                     Repurchased                         89,480              --              0.90
                     Canceled                           555,268           (555,268)         13.20
                                                     -----------        -----------     ---------
                   Balance at December 31, 1997       1,044,573          1,335,051         $ 8.01
                     Authorized                            --                --                --
                     Granted                         (1,112,700)         1,112,700           4.84
                     Exercised                             --              (27,257)          1.42
                     Repurchased                          7,033               --             1.23
                     Canceled                           381,445           (381,445)          7.59
                                                     -----------        -----------     ---------
                   Balance at December 31, 1998         320,351          2,039,049         $ 6.45
                     Authorized                         250,000              --                --
                     Granted                         (1,534,450)         1,534,450           2.20
                     Exercised                             --              (62,990)          0.88
                     Repurchased                         56,378              --                --
                     Canceled                         1,093,029         (1,093,029)          6.68
                                                     -----------        -----------     ---------
                   Balance at December 31, 1999         185,308          2,417,480         $ 3.79
                                                     ===========        ===========     =========
</TABLE>

The  following  table   summarizes   information   concerning   outstanding  and
exercisable options at December 31, 1999.
<TABLE>
<CAPTION>
                                      Options Outstanding                                     Options Exercisable
                            --------------------------------------                  -----------------------------------
                                  Number              Weighted          Weighted          Number
                               Outstanding            Average           Average      Exercisable at        Weighted
                             at December 31,         Remaining         Exercise       December 31,          Average
      Exercise Prices             1999           Contractual Life        Price            1999          Exercise Price
     -----------------      -----------------   ------------------    -----------   ----------------   ----------------
<S>                            <C>                     <C>              <C>              <C>               <C>
  From $  0.25 to $  2.00        699,919               8.82             $ 1.33           275,891           $ 1.39
  From $  2.22 to $  4.00        893,700               9.65               2.78           103,746             2.66
  From $  4.75 to $  6.88        636,716               8.02               5.86           362,340             5.82
  From $  7.25 to $ 10.00        137,539               7.22               8.11           106,869             7.85
  From $ 18.00 to $ 18.75         49,606               7.40              18.13            33,467            18.15
                               ---------               ----             ------           -------           ------
  From $  0.25 to $ 18.75      2,417,480               8.79             $ 3.79           882,313           $ 3.74
                               =========               ====             ======           =======           ======
</TABLE>

1996 Employee Stock Purchase Plan

     In May 1996,  the Board adopted the 1996 Employee  Stock Purchase Plan (the
"Purchase Plan"), and the Company's  shareholders  approved the Purchase Plan in
June 1996. The Company has reserved  650,000 shares of Common Stock for issuance
under the Purchase  Plan.  The Purchase Plan will enable  eligible  employees to
purchase  common  stock  at 85% of the  lower of the  fair  market  value of the
Company's Common Stock on the first or the last day of each offering period.  As
of December 31, 1999, 324,983 shares had been issued.

     On  November  1,  1999,  the  Company  signed  an  agreement  with a public
relations firm,  whereby the firm provided certain public relations services for
the Company.  The Company agreed to compensate the firm for services rendered at
a monthly  rate of $5,000  per month and as  further  compensation  the  Company
issued warrants to purchase up to 125,000 shares of the Company's  common stock.
Warrants for 25,000  shares  vested  immediately  and have an exercise  price of

                                      F-15
<PAGE>

$3.00 per share. The remaining  warrants for up to 100,000 shares were scheduled
to vest in  November  2003 with an  exercise  price of $10.00  per share  unless
certain target stock prices were achieved. If target stock prices were achieved,
the exercise  price of the warrants  would be adjusted and vesting  accelerated.
The public relations firm achieved a majority of its performance criteria during
the fourth  quarter of 1999.  As a result,  the  warrants  were valued using the
Black-Scholes  valuation model at the dates when the  performance  criteria were
met. The Company recorded $337,000 to general and administrative expense in 1999
related to the  warrants.  As of December 31,  1999,  warrants for 75,000 of the
100,000  shares had vested and the  exercise  prices were  reduced to a weighted
average of $4.50 per vested share. These warrants expire in November 2002.

8.       Income Taxes

     The Company  accounts for income taxes  pursuant to the  provisions of SFAS
No. 109,  "Accounting  for Income  Taxes," which requires an asset and liability
approach to  accounting  for income  taxes.  The Company  incurred net operating
losses in 1999,  1998 and 1997 and  consequently  paid no federal or state taxes
based on income.  The Company did pay foreign  withholding  taxes  during  those
periods.

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

                                                    December 31,
                                               ----------------------
                                                1999    1998    1997
                                               ------  ------  ------
            Current:
              Federal                            $--     $--     $--
              State                               --      --      --
              Foreign withholding                 54      18      40
                                               ------  ------  ------
            Total current                         54      18      40
            Deferred:
              Federal                             --      --      --
              State                               --      --      --
                                               ------  ------  ------
            Total deferred                        --      --      --
            Total provision for income taxes     $54     $18     $40
                                               ======  ======  ======

     The  provision  for  income  taxes  differs  from the amount  estimated  by
applying the  statutory  federal  income tax rate to income (loss) before income
taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           December 31,
                                                           ------------------------------------------
                                                              1999             1998            1997
                                                           ---------       -----------      ---------
<S>                                                         <C>              <C>             <C>
           Benefit computed at federal statutory rate       $ (218)          $(5,134)        $ (805)
           State income taxes, net of federal benefit           --                --             --
           Change in valuation allowance                       218             5,134            805
           Other                                                54                18             40
                                                           ---------       -----------      ---------
           Provisions for income taxes                      $   54           $    18         $   40
                                                           ---------       -----------      ---------

           Effective tax rate                                   --                --             --
</TABLE>

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

                                                     December 31,
                                         -------------------------------------
                                           1999          1998          1997
                                         ---------     ---------     ---------
  Deferred tax asset:
    Net operating loss carryforwards     $ 12,246      $ 12,782      $  7,954
    Tax credit carryforwards                2,408         2,259         1,556
                                         ---------     ---------     ---------
    Other                                     731           126           523
                                           15,385        15,167        10,033
  Valuation allowance                     (15,385)      (15,167)      (10,033)
                                         ---------     ---------     ---------
  Net deferred tax asset                 $     --      $     --      $     --
                                         =========     =========     =========

                                      F-16
<PAGE>

     At December 31, 1999,  the Company had federal and state net operating loss
carryforwards  of $33.6 million and $8.4 million,  respectively,  and tax credit
carryforwards  of $2.4 million,  expiring on various dates through 2019.  Due to
the Company's  history of operating  losses through 1995, and in 1997,  1998 and
1999  and  other  factors,   the  Company  believes  that  there  is  sufficient
uncertainty regarding the realizability of these carryforwards,  and therefore a
valuation allowance of approximately $15.4 million has been recorded against the
Company's net deferred tax assets of  approximately  $15.4  million.  Management
will continue to assess the  realizability of the tax benefits  available to the
Company based on actual and forecasted operating results.

9.       Acquisition of Versant Europe

     On March 26, 1997, the Company  acquired  Versant Europe,  an independently
owned  distributor  of the Company's  products in Europe.  The Company paid $3.6
million to the shareholder of Versant Europe  consisting of $2.0 million in cash
and 167,545  shares of Common Stock valued at $9.75 per share.  The  acquisition
was  accounted for using the purchase  method of  accounting.  Accordingly,  the
results of  operations  of  Versant  Europe are  reflected  in the  consolidated
financial statements commencing on the date of the acquisition.

     The  acquisition  of Versant  Europe  resulted in the Company  recording an
intangible asset representing the cost in excess of fair value of the net assets
acquired  in the  amount  of $3.3  million,  which  is  being  amortized  over a
five-year  period.  The Company  also  acquired  approximately  $1.4  million of
prepaid  sublicense  credits  which are being  amortized and included in cost of
license  revenue in conjunction  with associated  license  revenue  transactions
realized by Versant Europe (fully amortized at December 31, 1998). In the fourth
quarter of 1998, the Company  determined that the value of its intangible  asset
had been impaired due to weaker than  anticipated  operating  results in Europe.
Therefore,  the Company  recorded a  "write-down  of asset" charge of $1,555,000
during 1998. This charge represented the shortfall between projected future cash
flows for Europe (as discounted) and the net book value of the intangible asset.
As of December  31,  1998,  the Company  also changed its estimate of the future
life of the acquired intangible asset from seven to five years.

     The table below  presents the unaudited  pro forma  results (in  thousands,
except per share data) for the year ended December 31, 1997.

                                                                     1997
                                                                   --------

          Total revenue                                           $ 29,579
          Net loss                                                  (2,457)
          Pro forma basic and diluted net loss per share            ($0.27)
          Shares used in computing pro forma loss per share          9,088

10.      Acquisition of Soft Mountain

     On September 15, 1998, the Company acquired 100% of the outstanding  equity
(the  "Acquisition") of Soft Mountain S.A. ("Soft Mountain"),  a French company.
Soft Mountain develops  event-driven  middleware software solutions that combine
object orientation and deterministic event processing in a distributed  business
system.

     The Acquisition was effected pursuant to a Share Purchase Agreement,  dated
July 30, 1998 (the "Agreement"),  by and between Versant and the shareholders of
Soft Mountain.

     Pursuant to the terms of the Agreement,  the Company acquired the equity of
Soft Mountain in return for approximately $136,000 in cash and 245,586 shares of
Versant Common Stock,  valued at $2.625 and incurred  approximately  $300,000 in
acquisition  expenses.  The cash  portion  of the  purchase  price was funded by
working capital.

     The  acquisition  of Soft  Mountain  was  accounted  for using the purchase
method and resulted in the Company  recording an intangible  asset  representing
the cost in excess of fair market value of the net assets acquired (goodwill) in
the amount of $1.2 million,  which is being  amortized  over a five year period.
The  Company  wrote  off  approximately  $528,000  of  in-process  research  and
development  (IPR&D)  costs  associated  with  the  purchased  software,  as the
software had not yet reached  technological  feasibility  and had no alternative
future use. The amount  allocated to IPR&D was estimated based upon the stage of
completion  of the  project,  the costs to complete  the  project,  the expected

                                      F-17
<PAGE>

future cash flow,  the life cycle of the product  ultimately  developed  and the
associated  risks. If the product is not successfully  developed the revenue and
profitability  of the Company may be adversely  affected in future  periods.  In
November 1999,  the Company issued an additional  30,000 shares of Common Stock,
to  the  original   shareholders   of  Soft  Mountain  in  connection  with  the
acquisition.  This additional cost was added to the original goodwill amount and
is amortized equally over the remaining goodwill period.

     The following table presents the unaudited pro forma results  assuming that
the Company had acquired Soft  Mountain at the  beginning of 1997.  Net loss per
share has been adjusted to exclude the write-off of acquired in-process research
and development of $528,000 in the twelve month period ended December 31, 1998.

                                              Twelve Months      Twelve Months
                                              Ended 12/31/98     Ended 12/31/98
                                                (unaudited)        (unaudited)
                                             ----------------   ----------------

       Revenue                                    23,460            30,108
       Net Loss                                  (20,113)           (2,701)
       Basic and Diluted Loss Per Share          ($2.18)            ($0.29)

11.      Vertex Note Conversion and Equity Financing

     In July 1999,  the Company  converted  $3,846,551 of principal and interest
outstanding  under a note payable to Vertex (an investor) into 902,946 shares of
Series A  Convertible  Preferred  Stock  (Preferred  Stock).  The Company had an
initial  $846,000 of note discount  associated with the Vertex  convertible note
requiring the Company to recognize  the  differential  value between  market and
below market equity conversion  feature as a discount.  The discounted value has
been amortized  equally over the life of the note, as an interest expense in the
statements of operations.  Upon the early conversion of the Note, the balance of
the  unamortized  discount  was  charged to  interest  expense  during the third
quarter of 1999. In addition,  the Company  issued  586,853  shares of Preferred
Stock to a Vertex affiliate and other investors in consideration for $2,499,994.
The  holders of Series A Stock will  generally  vote with the  holders of common
stock  provided  that the Series A Stock is only  entitled  to a number of votes
equal to 50% of the  number of shares of common  stock  into  which the Series A
Stock is  convertible.  The  holders of Series A Stock were also  provided  with
certain voting protective provisions.

     In  connection  with the issuance of Preferred  Stock,  the Company  issued
warrants to purchase  1,489,799  shares of the  Company's  Common Stock for cash
consideration  of $73,357.  The  warrants  have an  exercise  price of $2.13 per
share, are immediately exercisable and expire upon the earlier of:

     (1) July 11, 2004,
     (2) an acquisition of the Company (whether by merger, consolidation, tender
         offer or otherwise) in which the  Company's  shareholders  prior to the
         acquisition own less than a majority of the surviving  corporation,  or
         the sale of all or substantially all of the Company's assets, or

     (3) 15 business  days after the Company gives notice to the holder that the
         Company's   stock  price  has  closed  above   $12.00  for   forty-five
         consecutive business days.

     The fair value of the  warrants  was  estimated  to be  approximately  $1.5
million on the date of grant using the  Black-Scholes  option pricing model with
the following assumptions:

     (1) risk free interest rate of 6.0%,
     (2) expected dividend yields of zero,
     (3) expected volatility factor of the market price of the common stock of
         80% and
     (4) an expected life of the warrants of 2 years.

     The Preferred Stock has a liquidation preference initially equal to 150% of
the full  amount  paid for such  stock  with  the  preference  increasing  by an
additional  50%  per  year  over  each of the  next  two  years,  so long as the
Preferred Stock is outstanding.  The liquidation value of the Preferred Stock at
December 31, 1999 is $9.5 million.

     The  shares  eligible  for  resale  upon  execution  of  the  warrants  and
conversion of the Preferred Stock have been registered  under the Securities Act
of 1933, under two separate  registration  statements on Form S-3. Each investor
also agreed not to purchase more than 100,000  additional  shares in the Company
without the Company's  approval so long as such  investor  holds more than 5% of
the Company's outstanding securities.


                                      F-18
<PAGE>

12.      Special Situations Warrant Exercise

     On December 30, 1998, the Company  raised $1.4 million  through the private
placement  of  700,000  shares of Common  Stock plus  Warrants  to  purchase  an
additional  350,000  shares of Common  Stock.  The funding was provided by funds
affiliated with Special  Situations Fund, a current  stockholder in the Company.
The Common Stock was sold at $2.00 per share and the warrants,  which permit the
purchase of an additional  350,000 shares at a price of $2.25,  were sold for an
additional $43,750.  The Warrants were exercised on December 1, 1999 for a total
purchase price of $787,500.

13.   Legal Proceedings

     The Company and certain of its present and former  officers  and  directors
were named as  defendants  in four  class  action  lawsuits  filed in the United
States District Court for the Northern District of California,  filed on January
26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998, respectively.  On
June 19, 1998, a Consolidated Amended Complaint was filed in the above mentioned
court, by the lead Plaintiff named by the court. The amended  complaint  alleges
violations  of Sections  10(b) and 20(a) of the  Securities  Exchange  Act,  and
Securities and Exchange  Commission Rule 10b-5  promulgated under the Securities
Exchange Act, in connection with public statements about the Company's  expected
financial performance. The complaint seeks an unspecified amount of damages. The
Company  vigorously  denies the plaintiffs'  claims and has moved to dismiss the
allegations.  The  Plaintiff  has filed a response  to the  Company's  motion to
dismiss and the Company has filed an opposition  to  Plaintiff's  response.  The
motion to dismiss was submitted to the court for  consideration  on November 13,
1998 and the court has not yet issued a decision.  Securities  litigation can be
expensive to defend,  consume  significant amounts of management time and result
in adverse judgments or settlements that could have a material adverse effect on
the Company's  results of operations  and financial  condition.  Also see Note 6
with respect to the resolution of a matter with Soft Mountain.

                                      F-19

<PAGE>




                      VERSANT CORPORATION AND SUBSIDIARIES

SCHEDULE II  -  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
                                                 Balance at       Additions
                                                  Beginning       Charged to                       Balance at
                                                   of Year          Income        Deductions      End of Year
                                                ------------     ------------   -------------   ---------------
                                                                        (in thousands)
    Allowance for doubtful accounts and
        customer returns:
<S>                                                 <C>              <C>             <C>             <C>
        Year ended December 31, 1997                $ 603            208              145            $ 666
        Year ended December 31, 1998                $ 666            857             1,188           $ 335
        Year ended December 31, 1999                $ 335            155              76             $ 414
</TABLE>


                                      F-20
<PAGE>


                                  EXHIBIT INDEX

                                             EXHIBIT INDEX

EXHIBIT      TITLE
NUMBER

     2.01   --  Acquisition  Agreement dated as of March 26, 1997 by and between
                registrant and ISAR-Vermogensverwaltung Gbr mbH ("ISAR")(1)

     3.01   --  Registrant's Amended and Restated Articles of Incorporation,  as
                amended(2)

     3.02   --  Registrant's   Certificate   of   Amendment   of   Articles   of
                Incorporation filed prior to the closing of registrant's initial
                public offering(2)

     3.03   --  Registrant's  Amended and  Restated  Articles  of  Incorporation
                filed  following  the  closing of  registrant's  initial  public
                offering(2)

     3.04   --  Registrant's Bylaws(2)

     3.05   --  Registrant's  Amended and Restated  Bylaws  adopted prior to the
                closing of registrant's initial public offering(2)

     3.06   --  Certificate  of Amendment  of Amended and  Restated  Articles of
                Versant Object Technology Corporation(7)

     3.07   --  Registrant's  Certificate of Determination  dated July 12, 1999,
                incorporated  by reference to the  Company's  current  report on
                Form 8-K (Exhibit 3.01) filed July 12, 1999.

     4.01   --  [intentionally omitted]

     4.02   --  Preferred Stock Purchase Agreement,  dated as of April 27, 1994,
                as amended(2)

     10.01  --  Registrant's  1989 Stock  Option Plan,  as amended,  and related
                documents(2)**

     10.02  --  Registrant's 1996 Equity Incentive Plan, as amended, and related
                documents(3)**

     10.03  --  Registrant's  1996 Directors Stock Option Plan, as amended,  and
                related documents(4)**

     10.04  --  Registrant's 1996 Employee Stock Purchase Plan, as amended,  and
                related documents(5)**

     10.05  --  Registrant's 401(k) Plan and addendum thereto(2)

     10.06  --  Lease Agreement  dated March 22, 1993 between  Lincoln  Property
                Company N.C., Inc. and Registrant, as amended(2)

     10.07  --  Master  Lease  Agreement  dated  January 26, 1996  between  LINC
                Capital  Management,  a division of Scientific Leasing Inc., and
                Registrant(2)

                                      X-1
<PAGE>

     10.08  --  Amended and Restated Loan and Security  Agreement dated as of
                June 14, 1996 between Registrant and Silicon Valley Bank(2)

     10.09  --  Joint  Venture  Agreement  dated  as of July  26,  1995  between
                Registrant and ISAR-Vermogensverwaltung Gbr mbH(2)*

     10.10  --  Form of Indemnity Agreement entered into by Registrant with each
                of its directors and executive officers(2)

     10.11  --  1996 Executive Compensation Plan -- Rich Kadet (2)*/**

     10.12  --  1996 Executive Compensation Plan -- George Franzen (2)*/**

     10.13  --  1996 Executive Compensation Plan -- Jim Lochry (2)*/**

     10.14  --  Form  of   Amendment   to  Versant   Corporation   Stock  Option
                Agreement(2)**

     10.15  --  Lease  Agreement dated November 25, 1996 between John Arrillaga,
                Trustee et. al. and Versant Corporation(6)

     10.16  --  Form  of  Letter   Agreement  dated  October  22,  1997  between
                registrant and its executive officers(9)**

     10.17  --  Severance  Agreement and Release of Claims dated January 7, 1997
                between registrant and David Banks(9)**

     10.18  --  Letter Agreement dated November 26, 1997 between  registrant and
                Nick Ordon(9)**

     10.19  --  Revolving  Credit  Loan and  Security  Agreement  dated  May 15,
                1997(7)

     10.20  --  Consulting  Agreement  between  Company  and David  Banks  dated
                January 7, 1998(7)

     10.21  --  Variable Rate-Installment Note dated March 19, 1998(7)

     10.22  --  Equipment Rider dated March 19, 1998(7)

     10.23  --  Corporate  Resolution and Incumbency  Certification  dated March
                30, 1998(7)

     10.24  --  Modification to Loan and Security Agreement dated May 6, 1998(7)

     10.25  --  Waiver to Loan and Security Agreement Covenants Dated August 10,
                1998(8)

     10.26  --  Waiver to Loan and Security Agreement Dated August 11, 1998(8)

     10.27  --  Loan and Security  Agreement Consent and Amendment Dated October
                16, 1998(10)

     10.28  --  Vertex Note Purchase Agreement Dated October 16, 1998(10)

     10.29  --  Vertex Convertible  Secured  Subordinated  Promissory Note Dated
                October 16, 1998(10)

                                      X-2
<PAGE>

     10.30  --  Vertex Security Agreement Dated October 16, 1998(10)

     10.31  --  Vertex Registration Rights Agreement Dated October 16, 1998(10)

     10.32  --  Vertex Subordination Agreement Dated October 16, 1998(10)

     10.33  --  Special  Situations  Fund  Common  Stock  and  Warrant  Purchase
                Agreement Dated December 28, 1998(10)

     10.34  --  Special   Situations  Fund  Stock  Warrant  Dated  December  28,
                1998(10)

     10.35  --  Special  Situations  Fund  Registration  Rights  Agreement Dated
                December 28, 1998(10)

     10.36  --  Modification  to Loan & Security  Agreement  dated June 18, 1999
                incorporated  by reference to the Company's  previous  quarterly
                report on Form 10-Q filed August 2, 1999.

     10.37  --  Preferred Stock and Warrant Purchase  Agreement  entered into as
                of June 28, 1999  incorporated  by  reference  to the  Company's
                current report on Form 8-K (Exhibit 10.01) filed July 12, 1999.

     10.38  --  Form of Common Stock  Purchase  Warrant.  1999  incorporated  by
                reference to the Company's  current  report on Form 8-K (Exhibit
                10.02) filed July 12, 1999.

     10.39  --  Debt  Cancellation  Agreement  between  the  Company  and Vertex
                Technology  Fund, Inc incorporated by reference to the Company's
                current report on Form 8-K (Exhibit 10.03) filed July 12, 1999.

     10.40  --  Supplement to  Registration  Rights  Agreement among the Company
                and the parties  listed on the  Schedule of  Investors  attached
                thereto  incorporated  by  reference  to the  Company's  current
                report on Form 8-K (Exhibit 10.04) filed July 12, 1999.

     10.41  --  1996 Equity Incentive Plan, Amended as of January 19,2000 (11)

     10.42  --  Public Relations Firm Agreement Dated November 1,1999 (11)

     10.43  --  Bank Covenant Waiver Dated January 1, 2000 (11)

     10.44  --  Bank Financial Covenant Modifications Dated March 16, 2000 (11)

     21.01  --  Subsidiaries of the registrant(11)

     23.01  --  Consent   of   Arthur   Andersen   LLP,    Independent    Public
                Accountants(11)

     27.01  --  Financial Data Schedule(11)

     (1)        Incorporated by reference to the registrant's  Current Report on
                Form 8-K filed with the  Securities  and Exchange  Commission on
                April 10, 1997


     (2)       Incorporated  by  reference  to  the  registrant's   Registration
               Statement on Form SB-2 (file number  333-4910-LA)  filed with and
               declared  effective by the Securities and Exchange  Commission on
               July 17, 1996.

                                      X-3
<PAGE>

     (3)       Incorporated  by reference  to Exhibit  4.05 to the  registrant's
               Registration Statement on Form S-8 (file number (333-29947) filed
               with the Securities and Exchange Commission on June 24, 1997.

     (4)       Incorporated  by reference  to Exhibit  4.06 to the  registrant's
               Registration Statement on Form S-8 (file number (333-29947) filed
               with the Securities and Exchange Commission on June 24, 1997.

     (5)       Incorporated  by reference  to Exhibit  4.07 to the  registrant's
               Registration Statement on Form S-8 (file number (333-29947) filed
               with the Securities and Exchange Commission on June 24, 1997.

     (6)       Incorporated by reference to the registrant's Form 10-KSB for the
               year ended  December  31,  1996,  filed with the  Securities  and
               Exchange Commission on March 31, 1997.

     (7)       Incorporated by reference to the registrant's Form 10-QSB for the
               quarter  ended  June 30,  1998,  filed  with the  Securities  and
               Exchange Commission on August 14, 1998.

     (8)       Incorporated by reference to the registrant's Form 10-QSB for the
               quarter ended  September 30, 1998,  filed with the Securities and
               Exchange Commission on November 13, 1998.

     (9)       Incorporated by reference to the registrant's Form 10-KSB for the
               quarter ended  December 31, 1997,  filed with the  Securities and
               Exchange Commission on April 3, 1998.

     (10)      Incorporated by reference to the registrant's Form 10-KSB for the
               quarter ended  December 31, 1998,  filed with the  Securities and
               Exchange Commission on April 3, 1999.

     (11)      Filed herewith.

     *         Confidential  treatment  has been granted with respect to certain
               portions of this agreement.  Such portions have been omitted from
               the filing and have been filed separately with the Securities and
               Exchange Commission.

     **        Management contract or compensatory plan.


                                      X-4