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                                 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, 1997

[ ]   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 OBJECT TECHNOLOGY 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 registrant 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 the registrant's 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, 1997 were
$29,190,000.

     As of February 27, 1998, there were outstanding 9,075,999 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 ($7.40625) for the Common Stock on the Nasdaq
National Market  on February 27, 1998) was approximately $62,598,210.  This
excludes 623,920 shares of Common Stock held by directors and officers.
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 to be filed with the
Securities and Exchange Commission relative to the issuer's 1998 annual meeting
of shareholders are incorporated by reference in Part III of this Form 10-KSB.

     Transitional Small Business Disclosure Format (check one): Yes     No  X
                                                                    ---    ---
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                     VERSANT OBJECT TECHNOLOGY CORPORATION
                              ANNUAL REPORT ON
                                 FORM 10-KSB
                     FOR THE YEAR ENDED DECEMBER 31, 1997


                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
FORM 10-KSB
 ITEM NO.    NAME OF ITEM                                                                           PAGE
-----------  ------------                                                                           ----
<S>          <C>                                                                                    <C>
  PART I
Item 1       Description of Business                                                                 1
Item 2       Description of Property                                                                 15
Item 3       Legal Proceedings                                                                       15
Item 4       Submission of Matters to a Vote of Security Holders                                     15
  PART II
Item 5       Market for Common Equity and Related Stockholder Matters                                16
Item 6       Management's Discussion and Analysis of Financial Condition and Results of Operations   17
Item 7       Financial Statements                                                                    32
Item 8       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    32
 PART III
Item 9       Directors, Executive Officers, Promoters and Control Persons; Compliance with
             Section 16(a) of the Exchange Act                                                       32
Item 10      Executive Compensation                                                                  32
Item 11      Security Ownership of Certain Beneficial Owners and Management                          32
Item 12      Certain Relationships and Related Transactions                                          32
Item 13      Exhibits and Reports on Form 8-K                                                        32
Signatures                                                                                           33
</TABLE>
                                 --------------

     Versant(R) and Versant Object Technology(R) are registered trademarks of
the Company. This Form 10-KSB also includes trade names and trademarks of other
companies.


<PAGE>   3





                                     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, as amended (the "Exchange
Act"), and Section 27A of the Securities Act of 1933, as amended (the
"Securities Act").  These forward-looking statements involve a number of risks
and uncertainties which are described throughout this Form 10-KSB, including
under "Revenues" and "Other Factors That May Affect Future Operating Results"
in Item 6,  "Management's Discussion and Analysis of Financial Condition and
Results of Operations," of this Form 10-KSB.  The actual results that the
Company achieves may differ materially from any forward-looking statements due
to such risks and uncertainties.  The Company has 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 "Other Factors
That May Affect Future Operating Results" 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.  The Company undertakes 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 the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.

OVERVIEW

     Versant Object Technology Corporation ("Versant" or the "Company")
designs, develops, markets and supports high performance object database
management systems for commercial applications in distributed computing
environments.  The Company's core product is the Versant Object Database
Management System (the "Versant 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
the Company believes often cannot be supported effectively by traditional
database technologies, including: (i) abstract data, such as graphics, images,
video, audio and unstructured text; (ii) dynamic, highly interrelated data,
such as network management data and advanced financial instruments; and (iii)
distributed, rapidly changing content in Internet/Intranet/Extranet
applications.  The Company also provides object-oriented programming language
interfaces, database query tools, application development tools, legacy
database access tools, Internet/Intranet/Extranet integration tools and
multimedia management tools (the "Peripheral Products").  In addition, the
Company offers a variety of services, including training, consulting and
technical support, to assist users in developing and deploying applications
based on the Versant ODBMS.

     The Company's customers include AT&T, Alcatel Network Systems, British
Telecommunications plc, The Chicago Stock Exchange, EDS, HNC Software, Lucent,
MCI, SABRE Decision Technologies, Scotiabank, Siemens Medical Systems, Sprint,
Texaco and TRW.  The Company is a leading provider of object database
management systems to the telecommunications industry, where its products are
used in strategic distributed applications such as network modeling and
management, fault diagnosis, service activation and assurance and customer
billing. The Company has experienced increased customer acceptance in other
vertical markets, including the financial services, health care and energy
markets, and, most recently, the market for Internet/Intranet/Extranet
applications.  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.

     The Company was incorporated in California in August 1988 as Object
Sciences Corporation.  The Company's principal executive offices are located at
6539 Dumbarton Circle, Fremont, California 94555, and its telephone number is
(510) 789-1500.



<PAGE>   4




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.  These pressures fall especially
heavily on corporate information systems, 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 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.  The Company believes that a significant
portion of existing programming resources can be consumed in maintaining older,
legacy systems that cannot be efficiently evolved.  These limitations have led
a number of industry observers to declare a "crisis" in software development.

     A newer approach to software development, object-oriented programming,
responds to many of these limitations.  Object-oriented programming languages,
such as C++, Java and Smalltalk, 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, the Company believes 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:

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

       -- Complex Data Relationships.  Telecommunications networks,
  Internet/Intranet/Extranet 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.

       -- 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.

       -- 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.

                                       2


<PAGE>   5





     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 applications, and the
proliferation of internal corporate Intranets and external corporate Extranets,
are accelerating this complexity, further increasing demand for new software
and database technologies.  Companies are increasingly seeking to integrate
Internet, Intranet and Extranet 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.

     Database management systems have evolved through several generations of
technology, each responding to the data processing demands of its time but
limited in its ability to address new problems effectively.  The first online
data management technologies indexed and stored data in a computer's file
system and provided database access to only one user at a time.  These file
systems are extremely fast for single-user applications but are impractical
when multiple users need access to common data.  Hierarchical databases, such
as IBM's IMS, enable multiple programs and users to process very large volumes
of similarly structured data, often in large batch operations.  While these
databases provide high speed performance for such tasks as processing bank
records, phone bills and insurance information, they are relatively inflexible,
and are often inefficient in handling abstract data types and complex dynamic
relationships.  The application programs developed for these systems are in
many cases over 20 years old, and can be difficult and costly to maintain and
error-prone when modified.  However, because they are well suited for certain
applications, hierarchical databases remain in wide use today.

     Relational database management systems ("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.  Complex queries are performed by
indexing multiple tables and then "joining" them to create a different view of
the data.  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 they must "decompose" into
a series of two-dimensional tables and then re-compose when needed, or must
store 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.  As a result, the Company believes
that RDBMSs cannot provide the level of performance required by many users for
a growing number of complex distributed applications.

     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.  While the Company acknowledges that the
use of object-relational and middleware approaches can improve relational
performance, the Company believes that the performance of object-relational
systems or RDBMSs augmented by middleware is limited by the two-dimensional
kernel architecture of RDBMSs.  The Company also believes that the decision of
relational database vendors to pursue object-relational or object-oriented
approaches supports the Company's belief that object-oriented database solutions
will be increasingly demanded by business organizations.

     For the foregoing reasons, the Company believes 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.


                                       3


<PAGE>   6




THE VERSANT SOLUTION

     The Versant ODBMS is a database management system that combines native
support for object-oriented languages with high performance database
functionality and a client-server architecture that supports two-tier and
n-tier applications.  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.  The
Versant ODBMS provides users with the following benefits:

     -- Management of Abstract Data Types.  The Versant ODBMS 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.

     -- Language-Independent Support for Object-Oriented Programming.  The
Versant ODBMS provides native support for the leading object-oriented software
development languages--C++, Java and Smalltalk.  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, the Versant ODBMS is language-independent, allowing objects written
in one object-oriented language to interoperate with objects written in another
object-oriented language.  Moreover, the Versant ODBMS supports Java, an
object-oriented language that allows the development of applications that will
run on any computing platform without modification.

     -- High Performance.  The Versant ODBMS 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 the Versant ODBMS have reported up to a hundred-fold
improvement in performance compared to RDBMSs running similar applications.

     -- Highly Scaleable Support for Distributed Computing.  The Versant ODBMS
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, the Versant ODBMS can be scaled from small workgroup
operations to thousands of users over wide area networks or the Internet.

     -- 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 the Company's 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.

     -- 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 ODBMS 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.

     -- Integration with Users' Existing Information Systems.  The Versant ODBMS
operates on a wide range of client and server platforms, including
industry-leading UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM,
Digital Equipment Corporation and Silicon Graphics, as well as Microsoft's
Windows 3.1, Windows 95 and Windows NT platforms and IBM's OS/2 platform.
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>   7



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.

COMPANY STRATEGY

     Versant's objective is to be the leading provider of high performance,
enterprise database management systems that store objects and support
application component development for commercial applications in distributed
computing environments.  Key elements of the Company's strategy to achieve this
objective include the following:

     -- Extend Technology Leadership.  A significant component of the Company's
strategy is to leverage its knowledge and expertise in object database
management systems for distributed commercial applications.  The Company
believes that its product architecture includes a number of important
technological advances and that this technological leadership is essential to
its continued ability to compete effectively.  In 1997, the Company released
products that enable organizations to (i) leverage Java when building
applications based on the Versant ODBMS, (ii) make Versant databases accessible
using standard Web browsers, (iii) store and manage multimedia files flexibly
and extensibly and (iv) easily construct and deploy interactive systems for
corporate Intranets and Extranets and the Internet.  *In addition, the Company
has announced the introduction of VersantACE (scheduled for introduction in the
first half of 1998), which will provide a development environment for the
creation of unique, enterprise, n-tier, Java-based applications accessing the
Versant ODBMS and will enable the integration of third-party application
development tools from NetDynamics, Inc., Rational Software Corporation and
TIBCO Inc.  *The Company intends to extend its leadership position by continuing
to invest in internal research and development, establishing strategic
relationships with leading providers of complementary technologies and
integrating the Versant ODBMS with products offered by third parties.  The
Company notes that its technological development efforts, including the
development of VersantACE, 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 "Other Factors That May Affect Future Operating Results--
Technology  Development Risks."

     -- Leverage Strength in Telecommunications to Other Vertical Markets.  The
Company is a leading provider of object database management solutions to the
telecommunications market, where its products are used in such strategic,
distributed applications as network modeling and management, fault diagnosis,
fraud prevention, service activation and assurance and customer billing.  The
Company believes that its experience and success in this demanding market
positions it to address other vertical markets such as financial services,
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 1997, the
Company increased its focus on the financial services market and conducted
several seminars worldwide to expand awareness of the Company and its products
in this market.  *The Company intends to continue to focus on telecommunications
and financial services in 1998, though it will seek additional opportunities
outside these markets as well.  The Company's success in the telecommunications,
financial service and other markets is dependent, in part, on the Company's
ability to compete with alternative technology providers and the extent to which
the Company's customers and potential customers believe the Company has the
expertise necessary to provide effective solutions in these markets.  If these
conditions, among others, are not satisfied, the Company may not be successful
in generating additional opportunities in these markets.  See "Other Factors
That May Affect Future Operating Results--Dependence upon Telecommunications,
Internet/Intranet/Extranet and Financial Services Markets."

     -- Capitalize on the Internet/Intranet/Extranet Market Opportunity.  *The
Company believes that the growth of the Internet and Intranets and Extranets as
computing environments will significantly expand the market opportunity for the
Company's object database management technology.  Internet/Intranet/Extranet
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,
Internet/Intranet/Extranet applications increasingly incorporate abstract data
types and are increasingly being addressed by object-oriented programming
languages such as C++, Java and Smalltalk.  As a result, the Company believes
that its product architecture and its telecommunications experience position it
to capitalize upon the Internet/Intranet/Extranet market.  Certain of the

                                       5


<PAGE>   8



Company's customers, including Buzzeo, EDS, Primus and Spyglass, are using the
Company's technology to develop and/or deploy Internet/Intranet/Extranet
applications, including applications designed to enhance the performance of
Internet/Intranet/Extranet infrastructures.   In 1997, the Company significantly
increased its focus on the Internet/Intranet/Extranet market opportunity,
particularly with the release of certain products designed to allow the
development of Web-based and Java applications.  *The Company intends to
continue focusing on the Internet/Intranet/Extranet market opportunity and
working with partners to improve the performance of Internet/Intranet/Extranet
infrastructures.  See "Other Factors That May Affect Future Operating
Results--Dependence upon Telecommunications, Internet/Intranet/Extranet and
Financial Services Markets."

     -- Expand Distribution Channels.  *The Company intends to expand both its
direct and indirect distribution channels by hiring additional direct sales
personnel and recruiting additional VARs, distributors and other resellers.
*As familiarity with object-oriented technology and awareness of the Company's
products increase, the Company believes that it will be able to increase its
use of indirect sales channels to address a broader market and to capitalize on
resellers' integration capabilities.  In addition, the Company believes that
international markets present attractive opportunities, particularly as
telecommunications and other industries face increasing change and competitive
pressures worldwide.  *The Company intends to continue to expand its
international distribution network and foreign direct sales operations to
capitalize on these opportunities, particularly through Versant Object
Technology GmbH, the Company's European subsidiary ("Versant Europe").
However, the Company may not be successful expanding its distribution channels,
and the Company's international business activities are subject to accompanying
international risks.  The Company has experienced only limited success
recruiting VARs to date, which the Company believes is due, in part, to the
complexity of the Company's solutions.  See "Other Factors That May Affect
Future Operating Results--Risks Associated with International Operations."

     -- Enable Customers to Implement a Complete Solution.  The Company believes
that its object database management systems can provide customers with a
foundation upon which they can build a broader object-oriented environment that
includes development language interfaces, object request brokers, class
libraries and tools for the development of applications and interfaces and for
the integration of existing data and applications.  *The Company believes that
its VersantACE product (scheduled for introduction in the first half of 1998)
will enhance customers' ability to implement a complete solution.  *The Company
intends to expand the breadth of its product offerings through internal
development efforts and through marketing, licensing and other relationships
with providers of complementary technologies and other market participants. The
Company believes that by providing its customers with a more complete solution,
it can facilitate their adoption of object-oriented technology, accelerate the
development of applications in a component framework, and expand the use and
value of its products.  However, VersantACE and other Versant product offerings
may not be commercially accepted by the Company's 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
VersantACE and other Versant product offerings.  See "Other Factors That May
Affect Future Operating Results--Technology Development Risks."

     -- Increase Penetration of Current Customer Base.  The Company seeks to
generate incremental, recurring revenue from its installed base of customers. 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 ODBMS enables customers to add end-users, providing additional license
revenue to the Company as customers expand their use of the product.  The
adaptability of the Versant ODBMS to a wide range of applications allows
customers who have successfully implemented the Versant ODBMS for one function
to develop applications for other functions.  The Company also licenses its
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.  *The Company believes that this method of licensing will increase,
which could result in the Company 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 "Other
Factors That May Affect Future Operating Results--Unpredictability of Revenue."


                                       6


<PAGE>   9




PRODUCTS AND SERVICES

     The Company's core product is the Versant ODBMS, a high performance object
database management system.  In addition, the Company offers object-oriented
programming language interfaces, database query tools, application development
tools, legacy database access tools, Internet/Intranet/Extranet integration
tools and multimedia 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.  The Company offers 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

     -- 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 Company
believes that the customer applications developed to date have used only a small
portion of this theoretical capacity.  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 version 5.0 of
the Versant ODBMS (released in March 1997), Versant provides substantial
additional performance and scalability features, including multi-threaded
database client and server and multi-session client capabilities, logging and
memory management enhancements and full operations on Symmetric Multi-Processing
server computers.  In combination, these new features enhance the ability of the
Versant ODBMS to support massive centralized or distributed computing
infrastructures.

     -- Versant Fault Tolerant Server.  For continuous operation in mission
critical environments, the Company offers 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++, Java and Smalltalk.  The interfaces 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.  In 1997, the
Company commercially released its Versant Java Direct Interface, which enables
the development of applications that will run on any computing platform without
modification.  Versant's Smalltalk interface supports both IBM VisualAge and
ParcPlace VisualWorks Smalltalk environments.   In addition, the Company
provides a C language interface.


                                       7


<PAGE>   10




Internet/Intranet/Extranet Products

     o Versant Internet Adapter ("VIA").  Versant Internet Adapter makes the
Versant ODBMS accessible to Web users by emulating a live database session
using commercially available Web browsers.  VIA allows organizations to use
hypertext markup language ("HTML") and standard HTML authoring tools to create
data-input and data-retrieval applications.  In addition, VIA serves as the
link between the Web browser-server architecture and the Versant ODBMS by
working with diverse software components (Web browsers, compatible Web servers,
VersantWeb and the Versant ODBMS) to give Web users access to Versant object
databases.

     o Versant Multimedia Access ("VMA").  Versant Multimedia Access enables
organizations to store and manage multimedia files flexibly and extensibly.
VMA automatically loads multimedia files into the Versant ODBMS as instances of
predefined text, audio, video, URL or application-specific classes, and allows
customization of multimedia classes and loading methods.  In addition, VMA
embeds Verity, Inc.'s Verity Search '97 to create and maintain collections of
indices for each database and Verity Information Server to provide the user
with an intuitive Web interface for composing queries and data retrieval.

     o VersantWeb.  VersantWeb is a C++ application development framework that
enables developers to construct and deploy interactive systems for corporate
Intranets and Extranets and the Internet while taking advantage of the
flexibility and portability of Web servers and browsers.  VersantWeb tightly
integrates Versant databases with Web servers to extend the reach of
sophisticated client/server applications to a broad range of application users
without sacrificing performance.

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, the Company offers Open Database
Connectivity ("ODBC") capability and Structured Query Language ("SQL") 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

     The Company licenses its 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.  The Company also
licenses its products on a project basis, where the customer simultaneously
purchases development and deployment licenses for an entire project.

     List prices of a development license currently range from $1,500 to $9,000
per seat.  List prices of server deployment licenses currently range from
approximately $1,800 for a single user database to over $300,000 for an
application with 200 concurrent users.  List prices of client deployment
licenses vary from $350 to $2,000 per client, depending on the platform.  The
Company provides 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." License fees to customers may vary from list prices
depending on a number of factors.  Sales through distributors generally involve
a significant discount to list prices.  Prices for project licenses will vary
with the scope and nature of the underlying project.

     A typical VAR develops an application incorporating the Versant ODBMS and
then licenses the application to its customer.  VARs purchase development
licenses from the Company on a per seat basis on terms similar to those

                                       8


<PAGE>   11



of development licenses sold directly to end-users.  VARs are authorized by the
Company to sub-license deployment copies of the Versant ODBMS, together with
the VAR's application, to end-users.  Deployment license pricing for sales
through VARs generally is based either on a percentage of the total price
charged by the VAR to its end-user customers or are based on a percentage of
the Company's list prices.  The Company also enters into project licenses with
certain VARs.

SERVICES

     The Company offers 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, the
Company provides custom development services to customers who request unique or
proprietary product extensions.  These services may be performed by third-party
integrators, consultants or the Company, depending on the nature and complexity
of the request.  Maintenance and technical support services are available at an
annual fee typically equal to 15% of the net price of the software.
Maintenance and support contracts, which typically have twelve-month terms, are
offered concurrently with the initial license of a Company 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 is licensed for development and/or deployment in a wide
range of applications.  Many of the Company's customers have licensed multiple
copies for use in different applications.  Sales to Sprint and the United States
Government each represented at least ten percent of the Company's total revenue
in 1997.

     In any given quarter, it is typical for a relatively small number of
customers to constitute a significant percentage of the Company's total
revenue.  In 1995, 1996 and 1997, 50%, 62% and 39%, respectively, of the
Company's total revenue were attributable to sales of products and services to
telecommunications companies.  In addition, in 1997, 12% and 11% of the
Company's total revenue were attributable to sales of products and services in
the Internet/Intranet/Extranet and financial services markets, respectively.
*The Company's future performance will depend in significant part on the
continued growth of the use of ODBMSs in telecommunications applications and
the acceptance of the Company's products within the telecommunications
industry.  *In addition, the Company expects to become increasingly dependent
upon the Internet/Intranet/Extranet and financial services markets.  The
failure of the Company's products to perform favorably in and become an
accepted component of telecommunications, Internet/Intranet/Extranet or
financial services applications, or a slower than expected increase or a
decrease in the volume of sales of the Company's products and services to
telecommunications, Internet/Intranet/Extranet or financial services companies,
could have a material adverse effect on the Company.

     The following examples illustrate some of the new applications for the
Versant ODBMS in its target telecommunications, Internet/Intranet/Extranet and
financial services markets.

TELECOMMUNICATIONS

     British Telecommunications plc ("BT") is integrating the Versant ODBMS
into its SHERIFF (Statistical Heuristic Engine to Reliably and Intelligently
Fight Fraud) product, a global telephone fraud detection and management system.
SHERIFF leverages the Versant ODBMS's object-oriented architecture and ability
to define and model complex relationships in mission-critical environments in
order to identify telephone fraud online at the time of each call, rather than
over time after a pattern of fraudulent activity has been detected, thereby
helping to minimize potential damage.  The Versant ODBMS helps SHERIFF to
analyze every BT call that is made, where a call comes from and goes to, and to
whom the call is billed, and, after analyzing these criteria against a series
of rules and algorithms designed to detect abuse or other anomalies,
automatically notifies BT's specialist fraud case investigators, presenting
them with the facts necessary to make an informed decision on whether
fraudulent activity

                                       9


<PAGE>   12



is occurring and appropriate steps to combat the fraud.  *This system is
currently completing trials and is planned to cover all BT voice services over
time. As with all new applications, the rollout of SHERIFF is subject to a
number of risks, including the technological challenges of integrating the
Versant ODBMS.

INTERNET/INTRANET/EXTRANET

     Buzzeo, Inc., a provider of higher education information technology, has
developed an open, network-centric enterprise solution using the Versant ODBMS
that allows academic institutions to provide Internet or Intranet access to a
wide range of online services, including recruitment, admissions, student
registration and grade management.  Buzzeo leverages Versant's Java Direct
Language Interface to allow college and university staff to update data, run
and schedule reports and access records, all using a Web browser.  Buzzeo's
ZeoLogix Framework, written entirely in Java, relies upon the ability of the
Versant ODBMS to manage data in real-time, without database downtime, and to
provide mission-critical reliability, fault tolerance, automated replication
and interoperability.

FINANCIAL SERVICES

     The Chicago Stock Exchange has implemented an object-based, real-time
trading application built on the Versant ODBMS.  This application, responsible
for the entire volume of stock trading on The Chicago Stock Exchange, relies on
the scalability, fault tolerance and mission-critical high performance
capabilities of the Versant ODBMS.  By using the Versant ODBMS rather than a
relational database, The Chicago Stock Exchange eliminated the complexities and
overhead of mapping objects and object references to the tables and rows of a
relational database, thereby significantly increasing developer productivity.
In addition, the trading application uses Versant's ability to support a
three-tier client/application server/object server architecture to improve
network performance.

MARKETING AND SALES

     The Company markets and sells the Versant ODBMS in the United States
principally through its direct sales force and VARs and internationally through
its distributors, direct sales force and VARs.

DIRECT SALES

     As of December 31, 1997, the Company's direct sales organization consisted
of 69 employees based at the Company's corporate headquarters in Fremont,
California and at its and its subsidiaries' offices in Reston, Virginia;
Bellevue, Washington; McLean, Virginia; New York City, New York; Chicago,
Illinois; Loveland, Colorado; Dallas, Texas; Alpharetta, Georgia; Bridgewater,
New Jersey; Columbia, Maryland; Milsons Point, Australia; Frankfurt, Germany;
Munich, Germany; Paris, France; and London, England.  The direct sales
organization includes a telesales force that supports the Company's field sales
personnel, 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 1995, 1996 and 1997, sales by the
Company's direct sales force (including sales to VARs) accounted for over 90%,
89% and 99%, respectively, of the Company's total revenue.

INDIRECT SALES

     An important part of the Company's sales strategy is the development of
indirect distribution channels, such as VARs, systems integrators and foreign
distributors.  Typical VARs build application programs in which they embed a
deployment copy of the Versant ODBMS.  Systems integrators may include the
Company's products with those of others to provide a complete solution to their
customers.  Foreign distributors include distributors based in Japan, Italy and
Israel.  VARs are typically not subject to any minimum purchase or resale
requirements and can cease marketing the Company's products at any time.
Certain VARs, distributors and systems integrators also offer competing
products that they produce or that are produced by third parties.


                                      10


<PAGE>   13




MARKETING

     The Company conducts marketing programs intended to position and promote
its products and services, including direct mail, advertising, seminars, trade
shows, public relations and distribution of product literature.  The Company
also maintains a Web site where prospective customers can obtain general
information about its products, services and distribution partners, and can
download Windows NT and Solaris versions of its products for evaluation for a
limited period.  Marketing personnel provide price lists and product
descriptive materials, including white papers, and assist the direct sales
force in their efforts through lead generation and sales training.  The
marketing department also has a leading role in product marketing activities,
including product management, cooperative positioning and long-term product
direction.

SALES PROCESS

     Due in part to the strategic nature of certain Versant ODBMS applications
and magnitude of the associated hardware, networking, software and consulting
expenditures, potential customers are typically cautious when making product
acquisition decisions.  For these and other reasons, the sales cycle for the
Company's products to new customers often exceeds six months and may extend to
a year or more.  However, for existing customers with successful deployed
applications, sales cycles for new applications of the Versant ODBMS are
generally not as long.  During the sales cycle, meetings involving both
technical and management staff are frequently conducted at the customer's site
and at the Company's headquarters.  The Company faces significant competition
in the DBMS marketplace, and prospective customers typically perform a detailed
technical evaluation or benchmark of the Versant ODBMS 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 the
Company's consultants.  While the 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, 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.  Even after obtaining a development license, customers may not
complete the development of an application successfully, and even if an
application is successfully developed, the customer may decide not to deploy
the Versant ODBMS.

     For deployed applications, a customer may purchase additional deployment
licenses as additional users are added to a system, without further deliveries
from the Company, providing additional revenue over an extended period at a
relatively low incremental cost to the Company.  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 its earlier development
licenses.  However, an increasing percentage of customers are purchasing project
licenses from the Company, where the customer simultaneously purchases
development and deployment licenses for an entire project at a lower price to
the customer than if the customer had purchased such licenses separately.  *The
Company believes that this method of licensing will increase, which could result
in the Company 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.

SALES OF THIRD PARTY PRODUCTS

     In order to enhance the functionality of the Versant ODBMS, the Company
has offered certain products licensed from third parties, which are either
embedded within or offered in connection with the Versant ODBMS.  For example,
the Company has embedded Verity, Inc.'s Verity Search '97 and Verity
Information Server into its VMA product and has an agreement with Rational
Software Corporation to offer Rational Rose (an application development tool)
as part of a consulting special offering and with THOUGHT Inc. to offer a Java
application development tool.


                                      11


<PAGE>   14




SHIPPING AND BACKLOG

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

RESEARCH AND DEVELOPMENT

     *The Company has committed, and expects to continue to commit, substantial
resources to its research and development efforts. The Company's current
development efforts are focused on: (i) continuing to leverage Java; (ii)
developing application development tools, especially in
Internet/Intranet/Extranet environments; (iii) improving performance of the
Versant ODBMS, particularly on the Windows NT platform; and (iv) improving
integration between the Versant ODBMS and legacy databases.  Research and
development expenses were approximately $2.0 million, $3.3 million and $5.2
million in 1995, 1996 and 1997, respectively.  To date, all research and
development expenditures have been expensed as incurred.

     The Versant ODBMS has, to date, been almost entirely developed by the
Company's research and development personnel.  The Company's development team
consisted of 47 full-time employees as of December 31, 1997, most of whom are
software engineers with significant experience in such technologies as: (i)
object-oriented software development, including Java; (ii) relational database
technology; (iii) platform engineering; (iv) design and integration; and (v)
large-scale run-time environments.  The Company selectively supplements its
internal staff with outside consultants having expertise in specific areas.
In 1997, the Company also began performing certain porting and enhancement
engineering work in India, primarily with the assistance of contractors.  The
Company's future success will depend on its 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.  *The Company expects that such competition will
continue for the foreseeable future and may intensify.

     *The Company believes that its future results will depend on its ability
to improve its current technologies and to develop new products and product
enhancements on a timely basis.  The market for the Company's 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 the Company's products are difficult to
estimate.  *The Company has in the past experienced delays in the introduction
of new products and features, and may experience such delays in the future.  If
the Company is 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, the Company's business,
operating results and financial condition will be materially adversely
affected.

     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 the Company's business, operating results and
financial condition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology.  For example, the Company licenses its
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,
the Company seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to the

                                      12


<PAGE>   15



Company's proprietary information to execute confidentiality agreements with
the Company and restricting access to the Company's source code.  The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.  The
Company presently has no patents but has one patent application pending.

     Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or
make copies of the Company's products in violation of license agreements.
Policing unauthorized use of the Company's products is difficult.  In addition,
the laws of many jurisdictions do not protect the Company's proprietary rights
to as great an extent as do the laws of the United States.  In particular,
"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.  The Company's means
of protecting its proprietary rights may not be adequate, and the Company's
competitors may independently develop similar technology.

     To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but third parties could claim that the
Company's current or future products infringe such rights.  The Company expects
that developers of object-oriented technology will increasingly be subject to
infringement claims as the number of products, competitors and patents in the
Company's industry segment grows.  Any such claim, whether meritorious or not,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.

     The Company's future success will depend in part on the Company's ability
to integrate its 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.  The Company may not receive the support of these
third-party vendors, some of which may compete with the Company, to integrate
the Company's products with the vendors' products.

COMPETITION

     The market for the Company's products is intensely competitive.  The
Company believes that the primary competitive factors in its market include
database performance (including the speed at which operations can be executed
and the ability to support large amounts of different information), vendor
reputation, the ability to handle abstract data types and more complex data
relationships, ease of use, database scalability, the reliability, availability
and serviceability of the database, compatibility with customers' existing
technology platforms and the ease and speed with which applications can be
developed, price and service and support.

     The Company's current and prospective competitors include companies that
offer a variety of database solutions using various technologies including
object database, object-relational database and relational database
technologies.  Competitors offering object and object-relational database
management systems include Oracle Corporation, Computer Associates
International, Inc., Object Design, Inc., Informix and its Illustra Information
Technologies, Inc.  subsidiary, Objectivity, Inc., Gemstone Systems, Inc., Poet
Software Corporation, O2 Corp., ONTOS, Inc., and Fujitsu America, Inc.  In
addition, the Company's products compete with traditional relational database
management systems, many of which have been or are expected to be modified to
incorporate object-oriented interfaces and other functionality, and to leverage
Java.  The principal competitors in the relational database market are Oracle,
Sybase, Informix, IBM and Microsoft.  *The Company expects to face additional
competition from other established and emerging companies as the object
database market continues to develop and expand.  In 1997, Oracle released its
Oracle8 product, which, with its objects option, provides object-relational
database capabilities, and Computer Associates released its Jasmine ODBMS,
which is a pure object-oriented database.  Although the Company believes that
the decision of relational database vendors to pursue object-relational or
object-oriented approaches validates the Company's belief that object-oriented
database solutions will be increasingly demanded by today's business
organizations, the Company is facing heightened competition, which could result
in fewer customer orders, price reductions, reduced transaction size, reduced
gross margins and loss of

                                      13


<PAGE>   16



market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition and on the market
price of the Company's Common Stock.  The Company believes that the Versant
ODBMS is currently more expensive than typical RDBMSs as well as Oracle's
Oracle8 and Computer Associate's Jasmine.  Due to the introduction by Oracle
and Computer Associates of competing products with lower prices than the
Versant ODBMS, the Company may not be able to maintain prices for its products
at levels that will enable the Company to market its products profitably.  Any
decrease in per unit prices, as a result of competition or otherwise, could
have a material adverse effect on the Company's business, operating results and
financial condition.

     The Company is also indirectly facing competition from developers of
middleware products that allow users to connect object-oriented applications to
existing legacy data and RDBMSs.  To the extent that these products gain market
acceptance, they may reduce the market for the Versant ODBMS for less complex
object-oriented applications.

     Many of the Company's 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 the Company.  In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company.  As a result, the Company's 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.  There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on its
business, operating results and financial condition.

EMPLOYEES

     As of December 31, 1997, the Company and its subsidiaries had a total of
196 employees, 149 of whom were based in the United States, 36 of whom were
based in Europe, 10 of whom were based in Australia and one of whom were based
in India.  Of the total, 47 were engaged in engineering and technical services,
88 were engaged in sales and marketing, 39 were engaged in the services
organization and 22 were engaged in administration and finance.  None of the
Company's employees is represented by a labor union with respect to his or her
employment by the Company.  The Company has experienced no organized work
stoppage to date, and believes that its relationship with its employees is good.

     *The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel.
The loss of the services of one or more of the Company's key employees could
have a material adverse effect on the Company's business, operating results and
financial condition.  *The Company's future success also depends on its
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 the Company's headquarters are located, and
there can be no assurance that the Company will be able to attract, train and
motivate such personnel.

                                      14


<PAGE>   17




ITEM 2.  DESCRIPTION OF PROPERTY

     In August 1997, the Company moved its principal administrative, sales,
marketing and research and development operations to its new headquarters
facility in Fremont, California, where the Company occupies 54,000 square feet
under a 10-year lease.  The Company believes that the Fremont facility will be
adequate for its requirements for several years.  The Company and its
subsidiaries also lease space for sales offices, generally under one-year
operating lease agreements, in Reston, Virginia; Bellevue, Washington; McLean,
Virginia; New York City, New York; Chicago, Illinois; Loveland, Colorado;
Dallas, Texas; Bridgewater, New Jersey; Alpharetta, Georgia; Columbia,
Maryland; Milsons Point, Australia; Frankfurt, Germany; Munich, Germany; Paris,
France; and London, England.

ITEM 3.  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. The
complaints each allege violations of Sections 10(b) and 20(a) of the Exchange
Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the
Exchange Act, in connection with public statements about the Company's expected
financial performance.  The complaints seek an unspecified amount of damages.
The Company vigorously denies the plaintiffs' claims and has moved to dismiss
the allegations. However, 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.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                      15


<PAGE>   18




                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

     The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "VSNT."  The Company's Common Stock commenced trading on the Nasdaq
National Market on July 18, 1996.  Prior to July 18, 1996, there was no public
trading market for the Company's Common Stock.  The following table lists the
high and low closing prices during for the last two quarters of 1996 and for
1997 (based on closing prices as reported by the Nasdaq National Market).


<TABLE>
<CAPTION>
   <S>            <C>                                       <C>      <C>
                                                            HIGH     LOW
                                                            -------  -------
   Fiscal  1996:
                  First Quarter                              --        --
                  Second Quarter                             --        --
                  Third Quarter (commencing July 18, 1996)  $27 5/8  $8
                  Fourth Quarter                            $24      $15 7/8

   Fiscal  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
</TABLE>


     There were approximately 155 holders of record of the Company's Common
Stock as of February 27, 1998.  The Company believes that a significant number
of beneficial owners of its Common Stock hold their shares in street name.
Based on information available to the Company, the Company believes it has at
least 400 beneficial shareholders of its Common Stock.

DIVIDEND POLICY

     The Company has neither declared nor paid cash dividends on its Common
Stock in the past.  *The Company intends to retain future earnings, if any, to
fund development and growth of its business and, therefore, does not anticipate
that it will declare or pay cash dividends on its Common Stock in the
foreseeable future.

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

     On August 13, 1996, the Company completed an initial public offering of
its Common Stock, no par value (the "Offering").  The shares of Common Stock
sold in the Offering were registered under the Securities Act on a Registration
Statement on Form SB-2 (the "Registration Statement") (Registration Number
333-4910-LA).  The Registration Statement was declared effective by the
Securities and Exchange Commission on July 17, 1996.

     After deducting the underwriting discounts and commissions and the
expenses of the Offering, net proceeds to the Company from the Offering were
approximately $14.8 million.  Of this amount, the Company has used
approximately $300,000 to repay indebtedness of the Company, $2 million to
acquire Versant Europe, $7.3 million to acquire network and computer equipment,
associated services, leasehold improvements, furnishings and fixtures for the
Company's new headquarters and payment of the cash portion of the lease
security deposit on the new headquarters.  In addition, $4.8 million has been
used for working capital to support the Company's operations, and the remaining
amount of $400,000 has been invested in United States Government securities.

                                      16


<PAGE>   19





ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS 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 Section 21E
of the Exchange Act and Section 27A of the Securities Act.  The Company has
identified, with 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
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 "Other
Factors That May Affect Future Operating Results" within this Item 6.  The
actual results that the Company achieves may differ materially from any forward
looking statements due to such risks and uncertainties.

     The following table presents Statement of Operations Data for the five
years ended December 31, 1997.



<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                          -------------------------------------------------------------------
<S>                      <C>                              <C>            <C>            <C>            <C>         <C>
STATEMENT OF OPERATIONS DATA:                                 1997           1996           1995          1994        1993
                                                          -------------  -------------  -------------  ----------  ----------
                                                             (in thousands, except per share data)
Revenue:
  License                                                      $21,363         $12,202       $ 7,810     $ 5,649     $ 2,485
  Services                                                       7,827           6,191         4,067       2,590       3,526
                                                          ------------   -------------  ------------   ---------   ---------
    Total revenue                                               29,190          18,393        11,877       8,239       6,011
Cost of revenue:
  License                                                        1,445           1,144         1,062         930         276
  Services                                                       5,010           2,987         2,258       1,563         906
                                                          ------------   -------------  ------------   ---------   ---------
    Total cost of revenue                                        6,455           4,131         3,320       2,493       1,182
                                                          ------------   -------------  ------------   ---------   ---------
  Gross profit                                                  22,735          14,262         8,557       5,746       4,829
                                                          ------------   -------------  ------------   ---------   ---------
Operating expenses:
  Marketing and sales                                           17,265           8,327         6,319       5,710       4,060
  Research and development                                       5,225           3,323         2,048       2,063       2,334
  General and administrative                                     2,880           1,501         1,419       1,093       1,098
  Amortization of goodwill                                         370               -             -           -           -
                                                          ------------   -------------  ------------   ---------   ---------
    Total operating expenses                                    25,740          13,151         9,786       8,866       7,492
                                                          ------------   -------------  ------------   ---------   ---------
Income (loss) from operations                                   (3,005)          1,111        (1,229)     (3,120)     (2,663)
  Interest income and other, net                                   705             429            70         117         131
                                                          ------------   -------------  ------------   ---------   ---------
Income (loss) before taxes                                      (2,300)          1,540        (1,159)     (3,003)     (2,532)
  Provision for income taxes                                        40             129            73          56          99
                                                          ------------   -------------  ------------   ---------   ---------
Net income (loss)                                              $(2,340)        $ 1,411       $(1,232)    $(3,059)    $(2,631)
                                                          ============   =============  ============   =========   =========
Basic net income (loss) per share                               ($0.26)        $  0.24        ($0.41)     ($1.57)     ($8.77)
                                                          ============   =============  ============   =========   =========
Shares used in calculating basic net income
  (loss) per share                                               8,931           5,916         2,987       1,953         300
                                                          ============   =============  ============   =========   =========
Diluted net income (loss) per share                             ($0.26)        $  0.18        ($0.41)     ($1.57)     ($8.77)
                                                          ============   =============  ============   =========   =========
Shares used in calculating diluted net income
  (loss) per share                                               8,931           7,690         2,987       1,953         300
                                                          ============   =============  ============   =========   =========
</TABLE>

OVERVIEW

     Versant was incorporated in August 1988 and commenced commercial shipments
of its principal product, the Versant ODBMS, in 1991.  Since that time,
substantially all of the Company's revenue has been derived from (i) sales of
development, deployment licenses and project licenses for the Versant ODBMS,
(ii) sales of the Peripheral Products, (iii) related maintenance and support,
training, consulting and nonrecurring engineering fees (the "Associated
Services") and (iv) the resale of licenses, maintenance, training and
consulting for third-party products that complement the Versant ODBMS.  The
Company released Version 5.0 of the Versant ODBMS in March 1997.  *The Company
currently expects that licenses of the Versant ODBMS and Peripheral and sales
of Associated Services will be the Company's principal sources of revenue for
the foreseeable future.  *As a consequence, the Company's future operating
results will depend upon its ability to expand market acceptance of the Versant

                                      17


<PAGE>   20



ODBMS.  *A significant portion of the Company's total revenue has been, and the
Company believes 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 likely will continue to cause, material
fluctuations in the Company's operating results, particularly on a quarterly
basis.  In 1995, 1996 and 1997, three customers accounted for approximately
43%, 49% and 36% of the Company's total revenue, respectively, and the
telecommunications industry accounted for 50%, 62% and 39% of the Company's
total revenue, respectively during these time periods.  In addition, in 1997,
12% and 11% of the Company's total revenue were attributable to sales of
products and services in the Internet/Intranet/Extranet and financial services
markets, respectively.  *The Company's future performance will depend in
significant part on the continued growth of the use of ODBMSs in
telecommunications applications and the acceptance of the Company's products
within the telecommunications industry.  *In addition, the Company expects to
become increasingly dependent upon the Internet/Intranet/Extranet and financial
services markets.  The failure of the Company's products to perform favorably
in and become an accepted component of telecommunications,
Internet/Intranet/Extranet or financial services applications, or a slower than
expected increase or a decrease in the volume of sales of the Company's
products and services to telecommunications, Internet/Intranet/Extranet or
financial services companies, could have a material adverse effect on the
Company.

     The Company licenses its 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.  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 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, the
Company offers deployment licenses priced on a "per user" basis.  The Company
also licenses its products on a project basis, where the customer simultaneously
purchases development and deployment licenses for an entire project.  *The
Company believes that this method of licensing will increase, which could result
in the Company 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.

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

     The Company's development, deployment and project license agreements and
agreements with VARs typically require the payment of a nonrefundable, one-time
license fee for a license of perpetual term, although certain licenses to VARs
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 the
Company's 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.  The Company has 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 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 of the Company are included on the
Company's balance sheet as deferred revenue.


                                      18


<PAGE>   21

     The Company licenses the Versant ODBMS and Peripheral Products, and sells
Associated Services primarily through its direct sales force to end-user
customers and VARs.  Through late 1993, the Company focused its sales efforts
on developing indirect sales channels and contracting for nonrecurring
engineering fees from its marketing partners.  In late 1993, the Company
changed its sales strategy to a direct sales model and began increasing the
size of its direct sales force.  In 1995, 1996 and 1997, sales by the Company's
direct sales force (including sales through VARs) accounted for more than 90%,
89% and 99%, respectively, of the Company's total revenue.

     During 1995, the Company entered into an agreement with
ISAR-Vermogensverwaltung Gbr mbH ("ISAR"), 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 the Company's products, subject to the rights of existing distributors, and
with management responsibilities for Versant's existing distributors in Europe.
In March 1997, the Company exercised its 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 11 of Notes to
Consolidated Financial Statements. As of February 28, 1998, Versant
Europe had 36 employees and consultants.

     Since inception, the Company has invested significant resources in
developing the Versant ODBMS and in building the Company's sales, marketing,
consulting and administrative organizations.  *The Company expects to hire
additional personnel in all of these functional areas and increase its
promotion and selling expenditures during 1998.  The labor market in which the
Company operates is highly competitive, and there can be no assurance that key
employees can be employed or retained without substantial increases in the
Company's operating expenses.

RESULTS OF OPERATIONS

REVENUE


<TABLE>
<CAPTION>
                              1995        % Change      1996        % Change        1997
                          -----------     --------   -----------    --------    -----------
<S>                       <C>              <C>       <C>              <C>       <C>
License revenue           $ 7,810,000        56%     $12,202,000        75%     $21,363,000
As a percentage of
total revenue                      66%                        66%                        73%
Services revenue            4,067,000        52%       6,191,000        26%       7,827,000
As a percentage of
total revenue                      34%                        34%                        27%
Total revenue              11,877,000        55%      18,393,000        59%      29,190,000
</TABLE>

     Total revenue increased 55% from 1995 to 1996 and 59% from 1996 to 1997.
However, Versant experienced, and continues to experience, significant quarterly
fluctuations in total revenue.  For example, total revenue in the first quarter
of 1997 was $3.8 million, representing a 19% increase over first quarter 1996
total revenue of $3.2 million, and a 32% decrease from fourth quarter 1996 total
revenue of $5.6 million.  The Company attributed the first quarter 1997 total
revenue performance to the timing and complexity issues associated with selling
licenses of the Company's products.  Similarly, the decrease from total revenue
of $9.4 million in the quarter ended September 30, 1997 to $8.6 million in the
quarter ended December 31, 1997 was due primarily to license revenue shortfall
resulting principally from the timing and complexity of large project
opportunities.  *The Company has experienced a seasonal pattern in its operating
results, with the fourth quarter typically having higher total revenue and
income from operations than the first quarter of the following year, and the
Company expects this trend to continue in 1998 compared to 1997. See  "Other
Factors That May Affect Future Operating Results."

     The increase in license revenue during 1996 compared to 1995 was
attributable principally to an increased number of license sales, significant
revenue from deployment licenses sold to several telecommunications companies
and sales to Versant Europe, then an independent distributor of the Company.
In addition, in 1996, Versant began receiving revenues from the
Internet/Intranet/Extranet market.  The increase in license revenue during 1997
compared to 1996 was attributable principally to: (i) wider acceptance of
object databases and market growth of the object database market; (ii)
increased customer deployments of applications previously subject only to
development licenses, particularly in the telecommunications market; (iii) a
substantial increase in the number of

                                      19


<PAGE>   22



Company sales personnel; (iv) increased sales within the
Internet/Intranet/Extranet and financial services markets; and (v) the
acceleration of deployment revenue associated with project licenses.  *The
Company expects license revenue to increase in 1998 in absolute dollar terms
due to increased license purchases by telecommunications,
Internet/Intranet/Extranet, financial services and other customers, and
increased sales by its Versant Europe subsidiary.  *The Company also believes
that license revenue as a percentage of total revenue will increase in 1998
compared to 1997. However, due to risks highlighted in the section, "Other
Factors That May Affect Future Operating Results," below, there can be no
assurance that license revenue will increase or remain level, in absolute
dollar terms or as a percentage of total revenue, in 1998 when compared to
1997.

     The increase in services revenue during 1996 compared to 1995 was
attributable principally to increased maintenance revenue from a significantly
larger installed customer base and substantial growth in training and
consulting revenue, offset in part by a decrease in nonrecurring engineering
fees.  The increase in services revenue during 1997 compared to 1996 was
attributable principally to increased maintenance revenue from a significantly
larger installed customer base, while training and consulting revenue remained
relatively constant.  *The Company expects that services revenue will increase
in absolute dollar terms in 1998, attributable principally to increased
maintenance and consulting revenue associated with expected increases in the
Company's license revenue, and that services revenue will decline as a
percentage of total revenue as the Company increases its focus on licensing its
products.  However, due to the risks highlighted in the section, "Other Factors
That May Affect Future Operating Results," below, there can be no assurance
that services revenue will increase in absolute dollar terms, or decrease as a
percentage of total revenue, in 1998 compared to 1997.

     The following table sets forth, for the periods indicated, the revenues
generated by the Company's largest customers in 1995, 1996 and 1997, other
domestic customers as a group and other international customers as a group, in
absolute dollars and as a percentage of total revenue.

Source of Total Revenue


<TABLE>
<CAPTION>
                                   1995      % Change      1996      % Change      1997
                                -----------   --------  -----------  --------   -----------
<S>                            <C>           <C>       <C>           <C>       <C>
Sprint                          $ 1,575,000      31%    $ 2,067,000     179%    $ 5,776,000
United States Government            100,000       8%        108,000   2,775%      3,105,000
MCI                               1,248,000     310%      5,117,000     (98%)       107,000
Versant Europe                           --      n/a      1,868,000      n/a             --
Scotiabank                        2,321,000     (85%)       355,000      n/a             --
Other Domestic Customers          5,429,000      27%      6,887,000      69%     11,632,000
Other International Customers     1,204,000      65%      1,991,000     330%      8,570,000
                                -----------   ------    -----------    -----    -----------
        Total revenue           $11,877,000      55%    $18,393,000      59%    $29,190,000
                                ===========   ======    ===========    =====    ===========
</TABLE>


                                      20


<PAGE>   23




Percentage of Total Revenue


<TABLE>
<CAPTION>
                                     1995     1996     1997
                                     ----     ----     ----
<S>                                  <C>      <C>      <C>
Sprint                                13%      11%      20%
United States Government               1%       1%      11%
MCI                                   11%      28%       0%
Versant Europe                        --       10%      --
Scotiabank                            20%       2%      --
Other Domestic Customers              45%      37%      40%
Other International Customers         10%      11%      29%
                                     ---      ---      ---
        Total revenue                100%     100%     100%
                                     ===      ===      ===
</TABLE>

     As illustrated in the table above, the Company sells a substantial
majority of its products to a limited number of customers.  In addition, the
Company's major customers tend to change from year to year  *The loss of any
one or more of the Company's major customers or the Company's 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 the Company's
business and operating results.  See "Other Factors That May Affect  Future
Operating Results-- Customer Concentration."

     International revenue increased by 20% to $4.2 million in 1996 compared to
$3.5 million in 1995.  The increase in international revenue during 1996
compared to 1995 resulted primarily from higher sales to Versant Europe, then
an independent distributor, as well as higher sales to Australia.
International revenue increased 105% from $4.2 million in 1996 to $8.6 million
in 1997.  The significant increase in international revenue from 1996 to 1997
was driven principally by significantly higher sales by Versant Europe
resulting from the Company's increased marketing and sales investment,
including the hiring of additional personnel, partially offset by decreased
sales in Australia.  In addition, as a result of the acquisition of Versant
Europe in March 1997, the Company began recognizing license and service revenue
from Versant Europe that would have been recognized only at a 40 percent
royalty rate and 25 percent royalty rate, respectively, had Versant Europe not
been acquired.  *The Company intends to continue to expand its sales and
marketing activities outside the United States, including Europe, Hong Kong,
mainland China, Malaysia, 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.  The Company's 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 the Company's products
more expensive and, therefore, less competitive in foreign markets.  The
Company believes that the increase in the value of the United States dollar
relative to foreign currencies in 1997 did not have a material effect on the
Company's operating results.  *To the extent that the Company increases its
international sales, its 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 decreased from 30% in 1995 to 23% in
1996 and then increased to 29% in 1997.  *Due to the Company's increased
emphasis on international sales, especially through Versant Europe, the Company
expects international revenue to increase slightly as a percentage of total
revenue; however, international revenue may not grow faster than domestic
revenue, if at all.  The Company's international operations are subject to
corresponding risks; see "Other Factors That May Affect Future Operating
Results--Risks Associated with International Operations."


                                      21


<PAGE>   24




COST OF REVENUE AND GROSS PROFIT


<TABLE>
<CAPTION>
                           1995        % Change      1996         % Change      1997
                        ----------     --------   -----------     --------   ------------
<S>                     <C>            <C>       <C>             <C>         <C>
Cost of license
revenue                 $1,062,000         8%     $ 1,144,000        26%     $ 1,445,000
As a percentage of
license revenue                 14%                         9%                         7%
Cost of services
revenue                  2,258,000        32%       2,987,000        68%       5,010,000
As a percentage of
services revenue                56%                        48%                        64%
Gross profit             8,557,000        67%      14,262,000        59%      22,735,000
As a percentage of
total revenue                   72%                        78%                        78%
</TABLE>

     Cost of license revenue consists primarily of product royalty obligations
incurred by the Company when it sub-licenses tools provided by third parties,
royalty obligations incurred by the Company under a porting services agreement,
product packaging, freight, user manuals, product media, production labor costs
and reserves for estimated bad debts.  Cost of license revenue during 1996
compared to 1995 remained level as costs related to overall growth in license
revenue and additions to bad debt reserves were offset by reduced royalty
obligations associated with the sub-license of third-party tools.  The increase
in cost of license revenue during 1997 compared to 1996 was principally
attributable to additions to bad debt reserves and the recognition of certain
deferred license costs associated with the acquisition of Versant Europe.  As
part of the acquisition of Versant Europe, the Company allocated $1.4 million
of the purchase price to deferred license costs.  In 1997, the Company
recognized $372,000 of these deferred license costs as a cost of license
revenue.  *The Company expects to recognize the remaining $1 million in
deferred license cost as a cost of license revenue during the next five
quarters.  *Although the Company's royalty payments to third parties in 1997
were minimal due to the integration of additional functionality into version
5.0 of the Versant ODBMS and the Peripheral Products, the Company expects that
its royalty obligations may increase in 1998 to the extent the Company
sub-licenses third-party technology in connection with licenses of its
Peripheral Products.  *For these reasons, the Company expects cost of license
revenue to increase in absolute dollar terms, though the Company believes cost
of license revenue will decrease as a percentage of license revenue in 1998 if
expected revenue growth materializes.  Revenue growth in 1998, and therefore
license revenue margin improvement, are subject to the risks highlighted in the
section, "Other Factors That May Affect Future Operating Results," below.

     Cost of services revenue consists principally of personnel costs
associated with providing training, consulting, technical support and
nonrecurring engineering work paid for by customers.  The increase in cost of
services revenue during 1996 compared to 1995 was attributable principally to a
significant increase in training and consulting business, as well as costs
associated with customer support activities to service a growing customer base,
offset by a reduction in subcontractor cost.  The significant increase during
1997 compared to 1996 was attributable principally to significant investments
in the Company's services organization infrastructure to support the Company's
sales efforts, including higher compensation and operating costs resulting from
additions in domestic and international services management, and compensation
pressures.  Cost of services revenue as a percentage of services revenue
increased in 1997 compared to 1996 due to staff additions in the consulting,
training and support organizations without an immediate increase in consulting
and training revenue.  The delay between upgrading the Company's services
organization infrastructure and the recognition of significant additional
services revenue resulted principally from: (i) customer scheduling conflicts,
particularly during the fourth quarter holiday season, that created delays in
beginning or continuing consulting services; (ii) the inability to attain
sufficient paid attendee levels to generate a profitable margin on training
services; and (iii) the employee training time required prior to their
assignment to billable consulting engagements and training courses.  *During
1998, the Company will experience a full year of relatively fixed costs
associated with its upgraded services infrastructure, compared to approximately
one-half of a year of such costs in 1997.  Therefore, the Company expects that
cost of services revenue will increase in absolute dollar terms.  In addition,
the Company expects cost of services revenue to increase as a percentage of

                                      22


<PAGE>   25

services revenue in 1998 due to the need for the Company to maintain a
significant services organization due to the lack of third-party service
support, the difficulty in forecasting billable service demand, the unevenness
of demand for services (which has historically been reduced during holiday
periods) and pricing pressure on fees for services  encountered in connection
with license sales.  *The Company also expects to experience increased
compensation pressures as a result of the intense demand for managers and
engineers in Silicon Valley, which the Company may not be able to offset with
increases in the fees the Company charges for maintenance and training and
consulting projects due to competitive pressures and restrictions in
contractual provisions regarding Associated Services.

MARKETING AND SALES EXPENSES


<TABLE>
<CAPTION>
                                1995      % Change     1996       % Change      1997
                             ----------   --------   ----------   --------   -----------
<S>                          <C>          <C>        <C>          <C>        <C>
Marketing and sales
  expenses                   $6,319,000        32%   $8,327,000       107%   $17,265,000
As a percentage of revenues          53%                     45%                      59%
</TABLE>

     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 during 1996 compared to 1995 resulted from costs
associated with higher compensation, including increased sales commissions
related to increased total revenue, increased costs of the Company's annual
sales training conference and the expansion of the direct sales force.  The
significant increase during 1997 compared to 1996 resulted from unusual
regional concentrations of sales, which resulted in higher commission costs,
and higher than expected fees associated with the recruiting of new company
personnel, primarily in the sales and marketing area.  In addition, in 1996 and
1997, the Company continued to expand its direct sales force to new sales
territories, including Hong Kong, mainland China and Malaysia, and increased
marketing spending to expand worldwide awareness of Versant's products and
services, particularly in the Internet/Intranet/Extranet and financial services
markets.  *The Company expects marketing and sales expenses to increase in
absolute dollar terms as the Company attempts to create the opportunities
necessary to generate higher revenues, but to decrease as a percentage of
revenue due to the Company's efforts to control commission costs and costs
associated with marketing programs.  The Company's operating results will be
adversely affected if its increased marketing and sales expenditures do not
result in increased revenue.

RESEARCH AND DEVELOPMENT EXPENSES


<TABLE>
<CAPTION>
                                 1995      % Change     1996      % Change     1997
                              ----------   --------   ----------   --------   -----------
<S>                           <C>          <C>        <C>          <C>        <C>
Research and development
  expenses                    $2,048,000        62%   $3,323,000        57%   $5,225,000
As a percentage of revenues           17%                     18%                     18%
</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 1996 compared to 1995 resulted primarily from
increases in compensation, recruiting expense associated with headcount growth
allotted to new product development and costs of consultants used to supplement
the efforts of Company software engineers in porting the Company's products to
additional platforms, and increased depreciation, amortization and equipment
expense, as well as the cost of initiating the Company's ISO 9000 training and
certification program.  The increase during 1997 compared to 1996 resulted
from: (i) higher compensation and other personnel expenses resulting from an
increase in the number of software engineers employed for new product
development and quality assurance programs; (ii) the expense of completing the
ISO 9001 quality certification program; (iii) increased depreciation or
expensing of engineering computer workstations, components and related
supplies; and (iv) the costs of funding ongoing engineering activities in
India.  The Company believes that a significant level of research and
development expenditures is required to remain competitive and complete
products under development.  *Accordingly, the Company anticipates that it will
continue

                                      23


<PAGE>   26



to devote substantial resources to research and development to design, produce
and increase the quality, competitiveness and acceptance of its products.  *The
Company expects research and development expenses to increase in absolute
dollar terms in 1998, but to remain relatively constant as a percentage of
revenue.  However, if the Company continues to upgrade its engineering
infrastructure and hire additional personnel without corresponding increases in
revenue, the Company's 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>
                                 1995       % Change     1996      % Change     1997
                              ----------   --------   ----------   --------   ----------
<S>                           <C>            <C>     <C>           <C>       <C>
General and administrative
  expenses                    $1,419,000        6%    $1,501,000       92%    $2,880,000
As a percentage of revenues          12%                       8%                     10%
</TABLE>

     General and administrative expenses consist primarily of salaries,
recruiting and other personnel-related expenses for the Company's 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 increase during 1996 compared to
1995 was attributable principally to higher compensation, liability insurance
and other public company reporting costs, recruiting, publications, printing and
maintenance costs offset by lower legal fees resulting from the 1995 settlement
of litigation as well as lower depreciation and equipment costs. The significant
increase during 1997 compared to 1996 resulted from the inclusion of general and
administrative expenses related to its Versant Europe subsidiary, compensation
costs associated with an increased number of information systems, human
resources and accounting employees, relocation and ongoing facility costs
resulting from the occupancy of a significantly larger facility and increased
legal, accounting and investor relation costs associated with being a public
company with significant international operations.  *The Company anticipates
that general and administrative expenses will increase in absolute dollar terms
in 1998 due to the costs associated with supporting the Company's expected
growth, the costs associated with defending the securities litigation against
the Company and certain of its current and former directors and officers and
certain severance costs incurred in connection with recent changes to the
Company's management, but that general and administrative expenses will decrease
as a percentage of revenue.  However, if the Company continues to upgrade its
administration infrastructure and hire additional personnel without
corresponding increases in revenue, the Company's results of operations would be
adversely affected.

AMORTIZATION OF GOODWILL

     The acquisition of Versant Europe in March 1997 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 seven-year period.  During 1997, the Company amortized $370,000 of this
amount.  *The Company will amortize $485,000 of this amount in 1998. See Note 11
of the Notes to Consolidated Financial Statements.

INTEREST INCOME AND OTHER, NET


<TABLE>
<CAPTION>
                                    1995      % Change      1996      % Change     1997
                                 ----------   --------   ----------   --------   ----------
<S>                               <C>         <C>        <C>          <C>        <C>
Interest income and other, net     $70,000       513%     $429,000       64%      $705,000
As a percentage of revenues              1%                      2%                      2%
</TABLE>

     Interest income represents income earned on the Company's cash, cash
equivalents and short-term investments. The increase in interest income and
other, net from fiscal 1995 to fiscal 1996 was due to increased interest income
from higher cash balances resulting from the 1996 initial public offering and
the positive cash flow from operating activities.  The increase in interest and
other income, net from fiscal 1996 to fiscal 1997 was due to increased interest
income from higher cash balances, partially offset by higher interest expense.


                                      24


<PAGE>   27





PROVISION FOR INCOME TAXES


<TABLE>
<CAPTION>
                                    1995      % Change      1996      % Change      1997
                                 ----------   --------   ----------   --------   ----------
<S>                              <C>          <C>        <C>          <C>         <C>
Provision  for income taxes        $73,000       77%      $129,000      (69%)     $40,000
As a percentage of income
  (loss) before income taxes           (6%)                      8%                    (2%)
</TABLE>

     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No.  109, "Accounting for Income Taxes."  The
Company incurred net operating losses in 1995 and 1997, resulting in no federal
or state tax liability based on income.  However, the Company did incur foreign
withholding taxes of $73,000 and $40,000 during 1995 and 1997, respectively,
which are included within the income tax provision.  The Company had net income
of $1.4 million for 1996 and provided an income tax provision of $129,000 for
federal and state income taxes of $115,000 not offset by net operating loss
carryforwards and foreign withholding taxes of $14,000.  *The Company expects
that its effective income tax rate in 1998 will be 9% due to the utilization of
operating loss carryforwards at the federal level.

     At December 31, 1997, the Company had federal and state net operating loss
carryforwards of $21.0 million and $7.6 million, respectively, and tax credit
carryforwards of $1.6 million, expiring on various dates through 2012.  *Due to
the Company's history of operating losses through 1995 and in 1997 and other
factors, the Company believes that there is sufficient uncertainty regarding
the realizability of these carryforwards, and therefore a valuation allowance
of approximately $10.0 million has been recorded against the Company's net
deferred tax assets of approximately $10.0 million.  Management will continue
to assess the realizability of the tax benefits available to the Company 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.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE


<TABLE>
<CAPTION>
                                      1995       % Change      1996     % Change     1997
                                   ----------    --------   ----------   --------   ----------
<S>                                <C>           <C>        <C>          <C>        <C>
Basic net income (loss) per
  share                                ($0.41)       n/a     $    0.24      n/a        ($0.26)
Shares used in computing
  basic net income (loss) per
  share                             2,987,000        98%     5,916,000      51%     8,931,000
Diluted net income (loss) per
  share                                ($0.41)       n/a     $    0.18      n/a        ($0.26)
Shares used in computing
  diluted net income (loss) per
  share                             2,987,000       157%     7,690,000      16%     8,931,000
</TABLE>

     The increase to basic and diluted net income per share in 1996 from basic
and diluted net loss per share in 1995 was due to the increase in net income,
which resulted principally from the Company's growth in revenues and operating
expenses increasing at a slower rate than revenues, as discussed above.  The
increases in basic and diluted net income per share was slightly offset by a
greater number of shares used to calculate basic and diluted net income (loss)
per share principally as a result of the Company's 1996 initial public offering
and, for shares used in computing diluted net income (loss) per share, the
dilutive effect of stock options due to the Company having net income in 1996.
The decrease to a basic and diluted net loss per share in 1997 compared to 1996
was due to the decrease in net income, which resulted principally from
operating expenses increasing at a higher rate than revenues, as discussed
above.


                                      25


<PAGE>   28




     In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130").  SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements.  SFAS No. 130 requires that items be recorded in
comprehensive income, which includes unrealized gains/losses on marketable
securities classified as available-for-sale and cumulative translation
adjustments, be displayed with the same prominence as other financial
statements.  SFAS No. 130 is required to be adopted in the Company's financial
statements for the year ending December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES


<TABLE>
<CAPTION>
                                       1995      % Change       1996       % Change      1997
                                   ------------  --------    -----------   --------  -------------
<S>                                <C>           <C>         <C>          <C>       <C>
Net cash provided by (used in)
operating activities               ($2,107,000)       n/a    $ 2,889,000       n/a     ($5,655,000)
Year end cash, cash equivalents
and short-term investments         $ 1,281,000     1,460%    $19,983,000     (51%)    $  9,831,000
Year end working capital           $ 1,548,000     1,123%    $18,927,000     (32%)    $ 12,949,000
</TABLE>

     In 1997, net cash of $5.7 million was used in operating activities
primarily due to the cash component of the Company's net loss for 1997, a
significant increase in accounts receivable compared to 1996 and an increase in
prepaid expenses and other current assets, which were partially offset by
increases in deferred revenue and accrued liabilities and taxes.  The increase
in accounts receivable was due to an increase in days-sales-outstanding, higher
revenues in the fourth quarter of 1997 compared to the fourth quarter of 1996
and longer payment terms in Europe. Through February 28, 1998, the Company had
collected $4.3 million of its December 31, 1997 accounts receivable balance,
leaving an accounts receivable balance of $5.3 million related to the December
31, 1997 balance.

     The Company purchased $7.3 million of property and equipment during 1997,
primarily for the acquisition of network and computer equipment, associated
services, leasehold improvements, furnishings and fixtures for the Company's new
headquarters and payment of the cash portion of the lease security deposit on
the new headquarters.  In addition, in March 1997, the Company acquired Versant
Europe and paid the shareholders of Versant Europe $2.0 million in cash in
addition to issuing them 167,545 shares of Common Stock.  These uses of cash for
investing activities were almost entirely offset by net sales and maturities of
short-term investments.  Financing activities provided $3.9 million in 1997,
primarily due to proceeds from long-term bank borrowings and proceeds from sale
of common stock to employees and borrowings under a short-term note and bank
loan, slightly offset by principal payments made under capital lease
obligations.

     *The Company has and will continue to make certain investments in software
applications and systems to ensure that the Company's products are Year 2000
compliant.  In particular, the Company's purchase of $7.3 million of property
and equipment during 1997 included substantial investments in management and
information systems designed to be Year 2000 compliant.  The Company does not
currently have any information concerning the Year 2000 compliance status of its
suppliers and customers or of providers of third-party technology that may be
integrated with the Company's products.  In the event that any of the Company's
significant suppliers or customers, or such third-party technology providers,
does not successfully and timely achieve Year 2000 compliance, the Company's
business or operations could be adversely affected.  See "Other Factors That May
Affect Future Operating Results--Year 2000 Risks."

     At December 31, 1997, the Company had $9.8 million in cash, cash
equivalents and short-term investments and approximately $12.2 million in
working capital.  The Company also maintains a revolving credit line with a
bank that expires in June 1998.  The maximum amount that can be borrowed under
the revolving credit line is $5.0 million, and the Company has not drawn down
this credit line.  Borrowings under the revolving credit line are limited to
80% of eligible accounts receivable and subject to the Company meeting certain
tangible net worth and other financial ratio tests.  The Company currently
meets these tests.  These borrowings bear interest at the bank's prime lending
rate.  The loan agreement contains certain financial covenants and also
prohibits cash dividends and mergers and acquisitions without the bank's prior
approval.


                                       26


<PAGE>   29




     The Company also has a $2.5 million variable rate, term loan with principal
and interest payable over 36 months.  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, currently at 8.5%, plus 0.5%.  The
loan contains certain financial covenants and also prohibits cash dividends and
mergers and acquisitions without the bank's prior approval.  The Company is
in compliance with these covenants at December 31, 1997.

     *The Company believes that its current cash, cash equivalents and
short-term investment balances, its lines of credit, and the net cash provided
by operations, if any, will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next twelve
months.  At December 31, 1997, the Company's commitments for capital
expenditures were not material.  *If cash provided by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek additional debt or equity financing.  There can be no assurance that such
financing will be available on terms acceptable to the Company, if at all.  The
sale of additional equity or convertible debt securities could result in
dilution to the Company's shareholders.  *A portion of the Company's 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, the
Company evaluates potential acquisitions of such businesses, products and
technologies.

OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     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 the Company's business and prospects.

     UNPREDICTABILITY OF REVENUE.  The Company's revenue has fluctuated
dramatically on a quarterly and annual basis, and the Company expects this trend
to continue.   These dramatic fluctuations result from a number of factors,
including: (i) the lengthy and highly consultative sales cycle associated with
the Company's products; (ii) uncertainty regarding the timing and scope of
customer deployment schedules of applications based on the Versant ODBMS; (iii)
fluctuations in domestic and foreign demand for the Company's products and
services, particularly in the telecommunications, Internet/Intranet/Extranet and
financial services markets; (iv) the impact of new product introductions by the
Company and its competitors; (v) the Company's inability or unwillingness to
meet lower prices set by the Company's competitors; (vi) the effect of
publications of opinions about the Company and its competitors and their
respective products; and (vii) customer order deferrals in anticipation of
product enhancements or new product offerings by the Company or its competitors.
A number of other factors make it impossible to predict the Company's operating
results for any period prior to the end of that period.  The Company's software
is typically shipped to a customer shortly after the Company's receipt of the
customer's order, and consequently, the Company usually has little if any order
backlog.  As a result, license revenue in any quarter is substantially dependent
on orders booked and shipped in that quarter.  Historically, a majority of the
Company's total revenue in any quarter has been recorded, and a majority of the
orders for the Company's products have been booked, in the third month of that
quarter, with a concentration of such revenue and orders in the last few days of
that quarter. The Company expects this trend to continue.  Many of these factors
are beyond the Company's control.  In addition, the Company's increasing
practice of licensing products on a project basis may reduce the potential for
recurring deployment revenue for certain customer applications.

     UNCERTAIN ABILITY TO MANAGE COSTS GIVEN UNPREDICTABILITY OF REVENUE.  The
Company expended significant resources in 1997 to build its infrastructure and
hire personnel, particularly in the services and sales and marketing sectors,
in expectation of higher revenue growth than actually occurred.  Although the
Company is seeking to control costs, the Company continues to plan for revenue
growth in 1998 and is maintaining its investments in infrastructure and
personnel accordingly.  If planned revenue growth does not materialize, the
Company's business, financial condition and results of operations will be
materially adversely affected.

     RELIANCE ON TELECOMMUNICATIONS, INTERNET/INTRANET/EXTRANET AND FINANCIAL
SERVICES MARKETS.  Historically, the Company has been highly dependent upon the
telecommunications industry and is becoming increasingly

                                      27


<PAGE>   30



dependent upon the Internet/Intranet/Extranet and financial services markets.
The Company's success in the telecommunications, Internet/Intranet/Extranet and
financial service markets is dependent, in part, on the Company's ability to
compete with alternative technology providers and the extent to which the
Company's customers and potential customers believe the Company has the
expertise necessary to provide effective solutions in these markets.  If these
conditions, among others, are not satisfied, the Company may not be successful
in generating additional opportunities in these markets.  The need for and type
of applications and commercial products for the telecommunications,
Internet/Intranet/Extranet 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 the Company.  As a
result, it is difficult to predict the future growth of these markets, and
demand for object-oriented databases in these markets may not develop or be
sustainable.  The Company also may not be successful in attaining a significant
share of such market.  In addition, organizations in these markets generally
develop sophisticated and complex applications that require substantial
customization of the Company's products.  Although the Company seeks to
generate consulting revenue in connection with these customization efforts, the
Company has offered, and will likely continue to offer, free or reduced price
consulting in certain circumstances.  This practice has impacted, and will
continue to impact, the Company's service margins and will require that the
Company maintain a highly skilled service infrastructure with specific
expertise in these markets.

     CUSTOMER CONCENTRATION. A significant portion of the Company's total
revenue has been, and the Company believes will continue to be, derived from a
limited number of orders placed by large organizations, and the timing of such
orders and their fulfillment has caused, and is likely to cause in the future,
material fluctuations in the Company's operating results, particularly on a
quarterly basis.  For example, in 1997, one customer accounted for 20% of the
Company's total revenue, and the Company's three largest customers accounted
for 36% of the Company's total revenue.  In addition, the Company's major
customers tend to change from year to year  The loss of any one or more of the
Company's major customers or the Company's 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 the Company's business and operating
results.

     LENGTHY SALES CYCLE.  The Company's sales cycle, which varies
substantially from customer to customer, often exceeds six months and can
extend to a year or more.  Due in part to the strategic nature of the Company's
products and associated expenditures, potential customers are typically
cautious in making product acquisition decisions.  The decision to license the
Company's products generally requires the Company to provide a significant
level of education to prospective customers regarding the uses and benefits of
the Company's products, and the Company must frequently commit 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 the Company's operating results for a
particular period.  Moreover, to the extent that significant sales occur
earlier than expected, operating results for the subsequent quarters may be
adversely affected.

     TECHNOLOGY DEVELOPMENT RISKS.  Versant believes that significant research
and development expenditures will be necessary to remain competitive.  While the
Company believes its research and development expenditures will improve the
Versant ODBMS and result in successful Peripheral Product introductions, 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.  In particular, the Company notes that it
has not yet achieved commercial acceptance for its VMA, VIA and VersantWeb
products, which the Company believes is due to the fact that these products are
new and to the highly competitive nature of the markets for
Internet/Intranet/Extranet development tools, and there is a risk that these
products may not achieve commercial acceptance.

     Versant also faces certain challenges in integrating third-party
technology with its products, including the technological challenges of
integration, which may result in development delays, and uncertainty regarding
the economic terms of the relationship between the Company and the third-party
technology provider, which may result in delays of the commercial release of
new products.  In particular, the Company is currently negotiating the terms
of relationships with providers of certain third-party technology that may be
integrated with VersantACE; however,

                                      28


<PAGE>   31



the Company may not be successful in establishing these relationships on
commercially acceptable terms in the time frame scheduled for introduction of
VersantACE.

     COMPETITION. The market for the Company's products is intensely
competitive.  The Company believes that the primary competitive factors in its
market include database performance (including the speed at which operations
can be executed and the ability to support large amounts of different
information), vendor reputation, the ability to handle abstract data types and
more complex data relationships, ease of use, database scalability, the
reliability, availability and serviceability of the database, compatibility
with customers' existing technology platforms and the ease and speed with which
applications can be developed, price and service and support.

     The Company's current and prospective competitors include companies that
offer a variety of database solutions using various technologies including
object database, object-relational database and relational database
technologies.  Competitors offering object and object-relational database
management systems include Oracle Corporation, Computer Associates
International, Inc., Object Design, Inc., Informix and its Illustra Information
Technologies, Inc.  subsidiary, Objectivity, Inc., Gemstone Systems, Inc., Poet
Software Corporation, O2 Corp., ONTOS, Inc., and Fujitsu America, Inc.  In
addition, the Company's products compete with traditional relational database
management systems, many of which have been or are expected to be modified to
incorporate object-oriented interfaces and other functionality, and to leverage
Java.  The principal competitors in the relational database market are Oracle,
Sybase, Informix, IBM and Microsoft.  The Company expects to face additional
competition from other established and emerging companies as the object
database market continues to develop and expand.  In 1997, Oracle released its
Oracle8 product, which, with its objects option, provides object-relational
database capabilities, and Computer Associates released its Jasmine ODBMS,
which is a pure object-oriented database.  Although the Company believes that
the decision of relational database vendors to pursue object-relational or
object-oriented approaches validates the Company's belief that object-oriented
database solutions will be increasingly demanded by today's business
organizations, the Company is facing heightened competition, which could result
in fewer customer orders, price reductions, reduced transaction size, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition and on the market price of the Company's Common Stock.  The Company
believes that the Versant ODBMS is currently more expensive than typical RDBMSs
as well as Oracle's Oracle8 and Computer Associate's Jasmine.  Due to the
introduction by Oracle and Computer Associates of competing products with lower
prices than the Versant ODBMS, the Company may not be able to maintain prices
for its products at levels that will enable the Company to market its products
profitably.  Any decrease in per unit prices, as a result of competition or
otherwise, could have a material adverse effect on the Company's business,
operating results and financial condition.

     The Company is also indirectly facing competition from developers of
middleware products that allow users to connect object-oriented applications to
existing legacy data and RDBMSs.  To the extent that these products gain market
acceptance, they may reduce the market for the Versant ODBMS for less complex
object-oriented applications.

     Many of the Company's 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 the Company.  In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company.  As a result, the Company's 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.  There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on its
business, operating results and financial condition.

     DEPENDENCE ON AND INTENSE COMPETITION FOR PERSONNEL.  The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and senior management personnel.  The loss of the services of
one or more of the Company's key employees could have a material adverse effect
on the Company's

                                      29


<PAGE>   32



business, operating results and financial condition.  The Company's future
success also depends on its 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 the Company's
headquarters are located, and there can be no assurance that the Company will
be able to attract, train and motivate such personnel.

     RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.  The Company's
international operations are subject to a number of risks.  Such risks include,
but are not limited to: (i) longer receivable collection periods; (ii) changes
in regulatory requirements; (iii) dependence on independent resellers; (iv)
multiple and conflicting regulations and technology standards; (v) import and
export restrictions and tariffs; (vi) difficulties and costs of staffing and
managing foreign operations; (vii) potentially adverse tax consequences; (viii)
foreign exchange fluctuations; (ix) the burdens of complying with a variety of
foreign laws; and (x) the impact of business cycles and economic instability
outside the United States.

     STOCK PRICE VOLATILITY.  The Company's revenue, operating results and
stock price have been and may continue to be subject to significant volatility,
particularly on a quarterly basis.  Versant has previously experienced
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 the Company's Common Stock.  This may occur again in the
future.  Additionally, as a significant portion of the Company's revenues often
occur late in the quarter, the Company 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 the Company's Common Stock.

     SECURITIES LITIGATION. 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.  The complaints each allege violations of Sections
10(b) and 20(a) of the Exchange Act, and Securities and Exchange Commission Rule
10b-5 promulgated under the Exchange Act, in connection with public statements
about the Company's expected financial performance.  The complaints seek an
unspecified amount of damages.  The Company vigorously denies the plaintiffs'
claims and has moved to dismiss the allegations.  However, 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.

     INTELLECTUAL PROPERTY RISKS.  Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products, obtain or use information that the Company regards as
proprietary or use or make copies of the Company's products in violation of
license agreements.  Policing unauthorized use of the Company's products is
difficult.  In addition, the laws of many jurisdictions do not protect the
Company's proprietary rights to as great an extent as do the laws of the United
States.  In particular, "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.
The Company's means of protecting its proprietary rights may not be adequate,
and the Company's competitors may independently develop similar technology.

     To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but third parties could claim that the
Company's current or future products infringe such rights.  The Company expects
that developers of object-oriented technology will increasingly be subject to
infringement claims as the number of products, competitors and patents in the
Company's industry segment grows.  Any such claim, whether meritorious or not,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms

                                      30


<PAGE>   33



acceptable to the Company or at all, which could have a material adverse effect
upon the Company's business, operating results and financial condition.

     The Company's future success will depend in part on the Company's ability
to integrate its 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.  The Company may not receive the support of these
third-party vendors, some of which may compete with the Company, to integrate
the Company's products with the vendors' products.

     YEAR 2000 RISKS.  The Company has and will continue to make certain
investments in software applications and systems to ensure that the Company's
products are Year 2000 compliant.  In particular, the Company's purchase of $7.3
million of property and equipment during 1997 included substantial investments
in management and information systems designed to be Year 2000 compliant.  The
Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers or of providers of third-party
technology that may be integrated with the Company's products.  In the event
that any of the Company's significant suppliers or customers, or such
third-party technology providers, does not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected.


                                      31


<PAGE>   34




ITEM 7.  FINANCIAL STATEMENTS

     The financial statements and supplementary data required by Item 7 are set
forth below on pages F-1 to F-19 of this report.

ITEM 8.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

  None.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
        SECTION 16(A) OF THE EXCHANGE ACT.

     The information concerning the Company's directors required by this Item
is incorporated by reference to the Company's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholder (the "Proxy Statement") under the
heading "Election of Directors." The information concerning the Company's
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" appearing in the Proxy Statement sets forth the
information concerning compliance by officers, directors and 10% shareholders
of the Company with Section 16 of the Exchange Act and is incorporated herein
by reference.

ITEM 10.  EXECUTIVE COMPENSATION.

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)  Exhibits.

  See Exhibit Index, page X-1.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed by the Company during the last quarter
of the year for which this report is filed.

     With the exception of the information incorporated herein by reference to
the Proxy Statement in Items 9, 10, 11 and 12 of Part III, the Proxy Statement
is not deemed to be filed with this Report.


                                      32


<PAGE>   35




                                   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 26th day
of March, 1998.
                                       VERSANT OBJECT TECHNOLOGY 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
----                             -----                   ----
<S>                              <C>                     <C>
PRINCIPAL EXECUTIVE OFFICER:

/s/ Nick Ordon                   President, Chief        March  26, 1998
--------------                   Executive Officer
Nick Ordon                       and Director

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Gary Rhea                    Vice President-Finance  March  26, 1998
-------------                    and Administration
Gary Rhea

ADDITIONAL DIRECTORS:

                                 Director                March  __, 1998
---------------
Mark Leslie

/s/ Stephen J. Gaal              Director                March  26, 1998
-------------------
Stephen J. Gaal

/s/ Lawrence K. Orr              Director                March  26, 1998
-------------------
Lawrence K. Orr

/s/ James Simpson                Director                March  30, 1998
-----------------
James Simpson

/s/ David Banks                  Director                March  30, 1998
---------------
David Banks
</TABLE>


                                      33


<PAGE>   36





             VERSANT OBJECT TECHNOLOGY 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-18
Schedule II - Valuation and Qualifying Accounts and Reserves  F-19
</TABLE>




<PAGE>   37




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Versant Object Technology
Corporation:

We have audited the accompanying consolidated balance sheets of Versant Object
Technology Corporation (a California corporation) and its subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 Object
Technology Corporation and its subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

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-19 is presented for purposes of complying with the Securities and
Exchange Commission 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
March 19, 1998

                                      F-2


<PAGE>   38





             VERSANT OBJECT TECHNOLOGY CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                              ----------------------------
                                                                                 1997              1996
                                                                              ----------        ----------
<S>                                                                           <C>               <C>
ASSETS
Current assets:
Cash and cash equivalents                                                      $  3,717          $  5,267
Short-term investments                                                            6,114            14,716
Accounts receivable, net of allowance for doubtful
accounts of $666 and $603 in 1997 and 1996, respectively                          9,569             4,747
Deferred license cost, net of accumulated amortization
of $372 in 1997                                                                   1,028                --
Other current assets                                                              1,272               198
                                                                               --------          --------
Total current assets                                                             21,700            24,928
Property and equipment, net                                                       7,067               675
Other assets                                                                        466                85
Excess of cost of investment over fair value of
net assets acquired, net of accumulated amortization
of $370 in 1997                                                                   2,973                --
                                                                               --------         ---------
                                                                               $ 32,206          $ 25,688
                                                                               ========          ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations                               $    404          $    226
Current maturities of long-term liabilities                                         721                --
Short term debt                                                                     629                --
Note payable                                                                        106                --
Accounts payable                                                                  1,072               475
Accrued liabilities                                                               3,278             2,489
Deferred revenue                                                                  3,262             2,811
                                                                               ---------         --------
Total current liabilities                                                         9,472             6,001
Long-term liabilities, net of current portion:
Capitalized lease obligations                                                       546               413
Long term debt                                                                    1,801                 -
Deferred revenue                                                                  1,087                 -
Shareholders' equity:
Common stock:
Authorized - 30,000 shares
Issued and outstanding--8,994  in 1997 and 8,719 in 1996                         42,980            40,889
Accumulated foreign currency translation adjustments                                275                 -
Accumulated deficit                                                             (23,955)          (21,615)
                                                                               --------          --------
                                    Total shareholders' equity                   19,300            19,274
                                                                               --------          --------
                                                                               $ 32,206          $ 25,688
                                                                               ========          ========
</TABLE>
The accompanying notes are an integral part of these statements.


                                      F-3


<PAGE>   39





             VERSANT OBJECT TECHNOLOGY CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                          ----------------------------------------------------
                                                                1997              1996              1995
                                                          ----------------  ----------------  ----------------
<S>                                                       <C>               <C>               <C>
Revenue:
  License                                                         $21,363           $12,202           $ 7,810
  Services                                                          7,827             6,191             4,067
                                                          ---------------   ---------------   ---------------
    Total revenue                                                  29,190            18,393            11,877
                                                          ---------------   ---------------   ---------------
Cost of revenue:
  License                                                           1,445             1,144             1,062
  Services                                                          5,010             2,987             2,258
                                                          ---------------   ---------------   ---------------
    Total cost of revenue                                           6,455             4,131             3,320
                                                          ---------------   ---------------   ---------------
  Gross profit                                                     22,735            14,262             8,557
                                                          ---------------   ---------------   ---------------
Operating expenses:
  Marketing and sales                                              17,265             8,327             6,319
  Research and development                                          5,225             3,323             2,048
  General and administrative                                        2,880             1,501             1,419
  Amortization of goodwill                                            370                 -                 -
                                                          ---------------   ---------------   ---------------
    Total operating expenses                                       25,740            13,151             9,786
Income (loss) from operations                                      (3,005)            1,111            (1,229)
                                                          ---------------   ---------------   ---------------
Other income and expense:
  Currency translation gain                                           133                 -                 -
  Interest expense                                                   (162)              (58)               (5)
  Interest income and other, net                                      734               487                75
                                                          ---------------   ---------------   ---------------
    Total other income and expense                                    705               429                70
Income (loss) before taxes                                         (2,300)            1,540            (1,159)
  Provision for income taxes                                           40               129                73
                                                          ---------------   ---------------   ---------------
Net income (loss)                                                 $(2,340)          $ 1,411           $(1,232)
                                                          ===============   ===============   ===============
Net income (loss) per share:
  Basic                                                            ($0.26)          $  0.24            ($0.41)
                                                          ===============   ===============   ===============
  Diluted                                                          ($0.26)          $  0.18            ($0.41)
                                                          ===============   ===============   ===============
Weighted shares used in per share
  calculations
    Basic                                                           8,931             5,916             2,987
                                                          ===============   ===============   ===============
    Diluted                                                         8,931             7,690             2,987
                                                          ===============   ===============   ===============
</TABLE>
         The accompanying notes are an integral part of these statements.


                                      F-4


<PAGE>   40




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


<TABLE>
<CAPTION>

                                                                              ACCUMULATED
                                                        COMMON STOCK        FOREIGN CURRENCY      TOTAL
                                                    --------------------      TRANSLATION      ACCUMULATED     SHAREHOLDERS'
                                                     SHARES     AMOUNT         ADJUSTMENT        DEFICIT      EQUITY (DEFICIT)
                                                    ---------  ---------    ----------------   ----------     ----------------
<S>                                                 <C>        <C>          <C>                 <C>           <C>
Balance at December 31, 1994                        2,761,261    $20,171         $     --        $(21,794)          $(1,623)
Exercise of stock options                              77,679         17               --              --                17
Issuance of common stock to employees                 300,000        300               --              --               300
Net loss                                                   --         --               --          (1,232)           (1,232)
                                                    ---------  ---------         --------      ----------     -------------
Balance at December 31, 1995                        3,138,940     20,488               --         (23,026)           (2,538)
Conversion of mandatorily redeemable convertible
  preferred stock to common stock                   2,367,424      4,429               --              --             4,429
Issuance of common stock in initial public
  offering                                          2,136,842     14,879               --              --            14,879
Exercise of stock options and warrants                976,001        343               --              --               343
Issuance of  common stock to shareholders of          100,000        750               --              --               750
  Versant Europe
Net income                                                 --         --               --           1,411             1,411
                                                    ---------  ---------         --------      ----------     -------------
Balance at December 31, 1996                        8,719,207     40,889               --         (21,615)           19,274
                                                    ---------  ---------         --------      ----------     -------------
ESPP and exercise of stock options and warrants       106,866        946               --              --               946
Issuance of  common stock to shareholders of          167,545      1,145               --              --             1,145
  Versant Europe
Foreign currency translation adjustments                                              275              --               275
Net loss                                                   --         --               --          (2,340)           (2,340)
                                                    ---------  ---------         --------      ----------     -------------
Balance at December 31, 1997                        8,993,618    $42,980         $    275        $(23,955)          $19,300
                                                    =========  =========         ========      ==========     =============
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-5


<PAGE>   41




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


<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                         ---------------------------------------------------------
                                                                               1997                1996                1995
                                                                         ----------------  --------------------  -----------------
<S>                                                                      <C>               <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                               $ (2,340)              $ 1,411            $(1,232)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization                                                      1,262                   387                286
Provision for doubtful accounts receivable                                           208                   621                 63
Changes in current assets and liabilities, net of acquisition:
  Accounts receivable                                                             (5,030)               (1,382)            (1,524)
  Prepaid expenses and other current assets                                       (2,476)                  437               (437)
  Deposits and other assets                                                         (381)                  (29)                65
  Accounts payable                                                                   597                   403                303
  Accrued liabilities and taxes                                                      966                    94                  -
  Deferred revenue                                                                 1,539                   947                369
                                                                         ---------------   -------------------   ----------------
Net cash provided by (used in) operating activities                               (5,655)                2,889             (2,107)
                                                                         ---------------   -------------------   ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                                (6,679)                  (72)              (250)
Purchases of short-term investments                                              (20,632)              (18,716)                 -
Proceeds from sale and maturities of short-term investments                       29,462                 4,000              1,692
Purchase of Versant Europe, net of cash acquired                                  (1,987)                    -                  -
                                                                         ---------------   -------------------   ----------------
Net cash provided by (used in) investing activities                                  164               (14,788)             1,442
                                                                         ---------------   -------------------   ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock                                                   946                15,972                317
Borrowings under short term note and bank loan                                       735                     -                  -
Principal payments under capital lease obligations                                  (262)                  (87)               (18)
Proceeds from long-term bank borrowings                                            2,522                     -
                                                                         ---------------   -------------------   ----------------
Net cash provided by financing activities                                          3,941                15,885                299
                                                                         ---------------   -------------------   ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              (1,550)                3,986               (366)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   5,267                 1,281              1,647
                                                                         ---------------   -------------------   ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $  3,717               $ 5,267            $ 1,281
                                                                         ===============   ===================   ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest                                                                        $    180               $    52            $     5
Foreign withholding taxes                                                              -                    14                 73
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred for acquisition of equipment                 $    574               $   625            $   104
Conversion of preferred stock to common stock                                          -               $ 4,429                  -
Issuance of common stock to shareholder of Versant Europe                       $  1,145                     -                  -
The accompanying notes are an integral part of these statements
</TABLE>


                                      F-6


<PAGE>   42




             VERSANT OBJECT TECHNOLOGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1997


1. ORGANIZATION AND OPERATIONS

Versant Object Technology Corporation was incorporated in California in August
1988.  References to the "Company" in these Notes to Consolidated Financial
Statements refer to Versant Object Technology 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 employees and product concentration.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents and Short-term Investments

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 No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities."  As of
December 31, 1997, the Company transferred all investments in marketable
securities classified as held-to-maturity to available-for-sale under SFAS No.
115.  The Company elected this classification to provide for greater liquidity
in its investment balances.  There were no unrealized gains or losses on these
securities at the date of transfer; these securities had an amortized cost at
December 31, 1997 of $6.1 million.  The Company's investments in debt securities
mature 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, 1997 and 1996, the
Company's investments consisted of the following (in thousands):


<TABLE>
<CAPTION>
                                                                       MATURITY OF
                             FAIR MARKET   AMORTIZED    UNREALIZED      SECURITIES
                      YEAR      VALUE      COST BASIS   GAIN (LOSS)   WITHIN ONE YEAR
                      ----    -----------  ----------   -----------   ---------------
<S>                   <C>     <C>          <C>          <C>           <C>
United States
Government and
Agency Investments    1997       $ 6,114     $ 6,114      --               $ 6,114
United States
Government and
Agency Investments    1996       $14,716     $14,716      --               $14,716
</TABLE>

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

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

                                      F-7


<PAGE>   43



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.

The Company has 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 engineering fees is
generally recognized on a percentage of completion basis.

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.

The Company acted as sublicensor under an agreement, that expired on
December 31, 1996 and was not renewed, on behalf of a certain developer of
software tools products that are used in the development of applications on the
Company's object-oriented database product.  The Company also subcontracts a
portion of its consulting work to this developer.  The Company incurred product
royalty obligations totaling approximately $33,000 and $627,000 under the terms
of the sublicense agreement in 1996 and 1995, respectively.

Property and Equipment

Property and equipment, at cost, consisted of the following (in thousands):


<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                                 ------------------
                                                   1997      1996
                                                 --------  --------
<S>                                              <C>       <C>
Computer equipment                               $ 7,678   $ 2,864
Furniture and fixtures                             1,222       451
Software                                             626       521
Other                                              1,652       163
                                                 -------   -------
                                                  11,178     3,999
Less--Accumulated depreciation and amortization   (4,111)   (3,324)
                                                 -------   -------
                                                 $ 7,067   $   675
                                                 =======   =======
</TABLE>

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.

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 acquisition of Versant Europe is recognized on a
straight-line basis over seven years.

Software Development Costs

Under the criteria set forth in Statement of Financial Accounting Standards No.
86 ("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.

                                      F-8


<PAGE>   44





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. Amounts that will not be
recognized within the next twelve months have been classified as long-term in
the accompanying consolidated balance sheets.

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


<TABLE>
<CAPTION>
                             DECEMBER 31,
                            --------------
                             1997    1996
                            ------  ------
<S>                         <C>     <C>
Maintenance                 $3,560  $1,878
Development work               398     706
Training and consulting        391     227
                            ------  ------
                            $4,349  $2,811
</TABLE>

Accrued Liabilities

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


<TABLE>
<CAPTION>
                             DECEMBER 31,
                          -----------------
                           1997       1996
                          ------    -------
<S>                       <C>       <C>
Payroll and related       $1,985    $1,709
VAT tax payable              509         -
Other                        784       780
                          ------    ------
                          $3,278    $2,489
                          ======    ======
</TABLE>

Major Customers

The Company had sales to major customers as follows (in thousands):


<TABLE>
<CAPTION>
                  YEAR ENDED DECEMBER 31,
                ----------------------------
                  1997      1996      1995
                --------  --------  --------
<S>              <C>       <C>       <C>
Customer A          *       $5,117    $1,248
Customer B        $5,776    $2,067    $1,575
Customer C          *       $1,868      *
Customer D          *         *       $2,321
Customer E        $3,105      *         *
</TABLE>

* less than 10%

International Sales

International sales, consisting of sales to customers in foreign countries,
were $8.6 million, $4.2 million and $3.5 million of total revenue in 1997, 1996
and 1995, respectively.


                                      F-9


<PAGE>   45

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


<TABLE>
<CAPTION>
                    YEAR ENDED DECEMBER 31,
                 ----------------------------
                     1997      1996      1995
                 --------  --------  --------
<S>                <C>       <C>       <C>
Europe             $6,337    $1,871         *
Canada              1,163       702     2,583
Australia             603     1,237       232
Japan                 361       101       166
Other                 106       303       544
                 --------  --------  --------
                   $8,570    $4,214    $3,525
</TABLE>

* not material

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, 1997, approximately 41% of accounts receivable were concentrated with three
customers.  The Company generally does not require collateral on accounts
receivable as 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 Income (Loss) Per Share

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), effective
December 15, 1997. This standard revises 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.



                                      F-10


<PAGE>   46


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


<TABLE>
<CAPTION>
                                                               Income        Shares        Per Share
                                                             (Numerator)  (Denominator)     Amount
                                                            -----------   -------------    ----------
<S>                                                          <C>          <C>              <C>
FOR THE YEAR 1995:
Basic and diluted net loss per share:
  Losses available to holders of common stock                    (1,232)      2,987          $(0.41)
                                                                 ======       =====          ======
FOR THE YEAR 1996:
Basic net income per share:
  Income available to holders of common stock                     1,411       5,916          $ 0.24
                                                                 ======                      ======
  Shares issuable upon exercise of stock options using
  treasury stock method                                                         490
  Shares outstanding based on assumed conversion of
preferred stock                                                               1,284
                                                                              -----
Diluted net income per share:
  Income available to holders of common stock plus
  assumed conversions                                             1,411       7,690          $ 0.18
                                                                 ======       =====          ======
FOR THE YEAR 1997:
Basic and diluted net loss per share:
  Losses available to holders of common stock                    (2,340)      8,931          $(0.26)
                                                                 ======       =====          ======
</TABLE>

Basic net income per (loss) share was computed using the weighted average number
of shares outstanding.  Diluted net income per share for the year ended December
31, 1996 was computed using the weighted average number of shares outstanding
plus the weighted average number of potential common shares for outstanding
stock options using the treasury stock method plus the weighted average shares
outstanding issued upon conversion of common stock equivalents.  Potential
common shares have been excluded in loss years as their effect would be
antidilutive. The number of weighted average common stock equivalents
outstanding not included in diluted loss per shares for the year ended December
31, 1997, because they were antidilutive, and may be dilutive in future periods,
was 518,276. The change in the way the Company previously reported net income
(loss) per share for financial reporting purposes is due in part to the adoption
of SFAS No. 128 and subsequently, Staff Accounting Bulletin No. 98 on
"Computations of Earnings per Share," which became effective in February 1998.

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 1997 presentation.


3. RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), which
will be adopted by the Company in fiscal 1998.  SOP 97-2 clarifies and amends
certain provisions of Statement of Position 91-1, "Software Revenue
Recognition."

                                      F-11


<PAGE>   47


In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which is required to be adopted by the Company in fiscal 1998.  At
that time, the Company will be required to disclose, in financial statement
format, all non-owner changes in equity.  Such changes include, for example,
cumulative foreign currency translation adjustments, certain minimum pension
liabilities and unrealized gains and losses on available-for-sale securities.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for reporting information about operating segments in annual
financial statements and interim financial reports.  It also establishes
standards for related disclosure about products and services, geographic areas
and major customers.  As defined in SFAS No. 131, operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operation decision-maker in
deciding how to allocate resources and in assessing performance.  Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.  The Company will adopt SFAS No. 131 in fiscal 1998.


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
has outstanding $106,000 in the form of a note payable issued as a security
deposit to the lessor of its corporate headquarters facility. The note bears
interest at zero percent and matures on June 1, 1998. The Company also leases
field office space generally under one-year operating lease agreements.
Consolidated rent expense for 1997, 1996 and 1995 was approximately $1,358,000,
$427,000 and $357,000, respectively.  The future annual minimum lease payments
at December 31, 1997 under noncancellable operating leases were as follows (in
thousands):


<TABLE>
<CAPTION>
      Year
      ----
<S>              <C>
      1998       $ 1,438
      1999         1,354
      2000         1,088
      2001         1,098
      2002         1,131
Thereafter         5,381
                 -------
                 $11,490
                 =======
</TABLE>

The Company has entered into capital lease agreements for equipment with an
original cost of $1,199,000 and $625,000 at December 31, 1997 and 1996,
respectively.  Accumulated amortization of leased equipment was $249,000 and
zero at December 31, 1997 and 1996, respectively. The future minimum lease
payments required under these capital leases at December 31, 1997 were as
follows (in thousands):


<TABLE>
<CAPTION>
Year
----
<S>                                                                        <C>
1998                                                                       $ 465
1999                                                                         362
2000                                                                         156
2001                                                                          72
2002                                                                          42
                                                                           -----
Minimum lease payments                                                     1,097
Less--amount representing interest (7 1/2%-14.7%)                            147
  Present value of net minimum lease payments                                950
Current maturities                                                           404
                                                                           -----
  Long term maturities                                                       546
                                                                           =====
</TABLE>


                                      F-12


<PAGE>   48



5. LINE OF CREDIT

The Company maintains a revolving credit line with a bank that expires June 1,
1998. The maximum amount that can be borrowed under the revolving credit line is
$5.0 million. As of December 31, 1997, no borrowings were outstanding; however,
a standby letter of credit issued on behalf of Versant Europe in the amount of
$1.0 million had reduced the amount available to $4.0 million. Borrowings under
the revolving credit line are limited to 80% of eligible accounts receivable and
are secured by a lien on substantially all of the Company's assets (which lien
shall be released at such time and for so long as the Company meets certain net
profit and tangible net worth tests.) These borrowings bear interest at the
bank's base lending rate (8.5 percent at December 31, 1997). The loan agreement
contains certain financial covenants and also prohibits cash dividends and
mergers and acquisitions without the bank's prior approval. The Company is in
compliance with these covenants at December 31, 1997.

The Company entered into an interest only, variable rate note with a bank that
matures March 1, 1998.  The note, at maturity, converts to a variable rate, term
loan with principal and interest payable over 36 months.  The maximum amount
that can be borrowed under the note is $3.0 million.  Borrowings under the note
are secured by a lien on all assets acquired using the proceeds of the note. As
of December 31, 1997, $2.5 million was outstanding on the note, which had been
used for the acquisition of equipment and leasehold improvements.  These
borrowings bear interest at the bank's base lending rate, 8.5% at December 31,
1997, plus 0.5%.  The note contains certain financial covenants and also
prohibits cash dividends and mergers and acquisitions without the bank's prior
approval. The Company is in compliance with these covenants at
December 31, 1997.


6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

Prior to 1994, the Company had issued Mandatorily Redeemable Preferred Stock to
private investors in a series of transactions.  In conjunction with the
Company's initial public offering of Common Stock in July 1996, all outstanding
shares of Mandatorily Redeemable Convertible Preferred Stock were converted into
Common Stock. The effects of this conversion have been reflected in the
accompanying consolidated financial statements at and for the year ended
December 31, 1996.

The Company's subsidiary, Versant Europe, has a credit facility which bears
interest at 8.25% as of December 31, 1997. The total amount available under
this credit facility is $1.2 million and is secured by a letter of credit
issued by the Company. The outstanding balance at December 31, 1997 is $629,000
and is payable on demand.

7. 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 as pursuant to the 1989 Stock Option Plan and such amounts
are included in the option grant and option exercise table in Note 8.

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.


8. 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

                                      F-13


<PAGE>   49



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.  In 1997, the Company and its
shareholders approved an amendment to the 1996 Equity Plan, increasing the
number of shares available for issuance thereunder by 800,000 shares.  As of
December 31, 1997, the Company has authorized 1,650,000 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, 1997, options to purchase 1,008,681 shares were outstanding under
the 1996 Equity Plan, options to purchase 7,125 shares had been exercised under
the 1996 Equity Plan, and 1,279,575 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, 1997, options to purchase 72,468 shares were
exercisable under the 1996 Equity Plan.

During 1997, the Company canceled options to purchase an aggregate of 238,686
shares with exercise prices ranging from $18.125 to $18.75 per share that had
been previously granted and replaced them with options to purchase an aggregate
of 238,686 shares at an exercise price of $7.875 per share, the fair value of
the Company's Common Stock on May 23, 1997.  This transaction was treated as a
cancellation of the old options and the grant of the new options in accordance
with the provisions of 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 nonemployee directors of the Company, including automatic grants of
options to purchase 10,000 shares of Common Stock to nonemployee directors that
were granted concurrently with the initial public offering, an option to new
nonemployee 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,
1997, the Company has authorized 125,000 shares of Common Stock for issuance
under the Directors Plan.  At December 31, 1997, options for an aggregate of
60,000 shares were outstanding, and options to purchase 20,000 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, 1997, options to purchase 266,370 shares were outstanding under the
1989 Stock Option Plan, options to purchase 1,191,555 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, 1997, options to purchase
100,401 shares were exercisable under the 1989 Stock Option Plan.


                                      F-14


<PAGE>   50




Reserved for Future Issuance

As of December 31, 1997, the Company had reserved shares of Common Stock for
the following purposes:


<TABLE>
<CAPTION>
<S>                                <C>
Employee stock purchase plan         214,209
Stock options available for grant  1,044,573
Exercise of stock options          1,335,051
                                   ---------
                                   2,593,833
                                   =========
</TABLE>

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 the method prescribed by FASB Statement
No. 123, the Company's net income (loss) and net income (loss) per share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):


<TABLE>
<CAPTION>
                                                          1997      1996       1995
                                                        -------    ------     -------
<S>                                     <C>             <C>         <C>       <C>
Net income (loss)                       As Reported     $(2,340)    $1,411     $(1,232)
                                        Pro forma       $(3,750)    $  989      $1,270)
Basic net income (loss) per share       As Reported     $ (0.26)    $ 0.24      $(0.41)
                                        Pro forma       $ (0.42)    $ 0.17      $(0.43)
Diluted net income (loss) per share     As Reported     $ (0.26)    $ 0.18      $(0.41)
                                        Pro forma       $ (0.42)    $ 0.13      $(0.43)
</TABLE>

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
1997, 1996 and 1995, respectively: zero dividend yield for all years;
volatility of 60%, 90% and 90%, respectively; risk-free interest rates of 6.1%,
7.0%, 7.0%, respectively; and expected life of 3 years, 5.75 years and 5.75
years, respectively.

The weighted average fair value of options granted during 1997, 1996 and 1995
was $4.99, $5.55 and $0.73 per share, respectively.  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, 1994                   77,313             864,439           $    0.25
  Authorized                                  800,000                  --                 --
  Granted                                    (873,361)            873,361               0.95
  Exercised                                        --            (377,679)              0.35
  Canceled                                    198,977            (198,977)              0.25
                                            ---------             --------          --------
Balance at December 31, 1995                  202,929           1,161,144               0.59
  Authorized                                1,075,000                  --                 --
  Granted                                    (608,365)            608,365               7.31
  Exercised                                        --            (929,505)              0.59
  Canceled                                     74,476             (74,476)              4.92
                                            ---------             --------          --------
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
                                           ==========           =========           ========
</TABLE>


                                      F-15


<PAGE>   51




The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997.


<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                   1997         CONTRACTUAL LIFE    PRICE           1997        EXERCISE PRICE
----------------              ---------------   ----------------    -----     --------------    --------------
<S>                              <C>                <C>            <C>            <C>              <C>
From $  0.25 to  $  1.50          233,237           7.53           $ 1.11         86,786          $ 1.11
From $  5.25 to  $  8.88          875,141           8.76             7.25        104,625            7.96
From $ 18.00 to  $ 18.75          226,673           9.62            18.05          1,458           18.75
                                 ---------          ----           ------        -------          ------
From $  0.25 to  $ 18.75         1,335,051          8.69           $ 8.01        192,869          $ 4.96
                                 =========          ====           ======        =======          ======
</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 325,000 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, 1997, 110,791 shares had been issued.


9. 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 1997 and 1995 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):


<TABLE>
<CAPTION>
                                      DECEMBER 31,
                                  --------------------
                                  1997    1996    1995
                                  ----    ----    ----
<S>                               <C>     <C>     <C>
Current:
  Federal                         $ --    $ 75    $ --
  State                             --      40      --
  Foreign withholding               40      14      73
                                  ----    ----    ----
Total current                       40     129      73
Deferred:
  Federal                           --      --      --
  State                             --      --      --
                                  ----    ----    ----
Total deferred                      --      --      --
Total provision for income taxes  $ 40    $129    $ 73
                                  ====    ====    ====
</TABLE>

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,
                                                        ---------------------
                                                         1997    1996    1995
                                                        -----   -----   -----
<S>                                                     <C>     <C>     <C>
Provision (benefit) computed at federal statutory rate  $(805)  $ 534   $(431)
State income taxes, net of federal benefit                 --      92      --
Change in valuation allowance                             805    (750)    376
Other                                                      40     253     128
                                                        -----   -----   -----
Provisions for income taxes                             $  40   $ 129   $  73
                                                        =====   =====   =====
Effective tax rate                                         --     7.5%     --

</TABLE>


                                      F-16


<PAGE>   52




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


<TABLE>
<CAPTION>
                                       DECEMBER 31,
                                    -----------------
                                      1997    1996
                                    -------   -------
<S>                                 <C>       <C>
Deferred tax asset:
  Net operating loss carryforwards  $ 7,954   $ 7,073
  Tax credit carryforwards            1,556     1,282
  Other                                 523       873
                                    -------   -------
                                     10,033     9,228
Valuation allowance                 (10,033)   (9,228)
                                    -------   -------
Net deferred tax asset              $    --   $    --
                                    =======   =======
</TABLE>

At December 31, 1997, the Company had federal and state net operating loss
carryforwards of $21.0 million and $7.6 million, respectively, and tax credit
carryforwards of $1.6 million, expiring on various dates through 2012.  *Due to
the Company's history of operating losses through 1995 and in 1997 and other
factors, the Company believes that there is sufficient uncertainty regarding
the realizability of these carryforwards, and therefore a valuation allowance
of approximately $10.0 million has been recorded against the Company's net
deferred tax assets of approximately $10.0 million.  Management will continue
to assess the realizability of the tax benefits available to the Company based
on actual and forecasted operating results.


10. RELATED PARTIES

The Company has an agreement with a shareholder, under which a) the Company
licenses for resale certain of the shareholder's products and remits a royalty
to the shareholder and b) the shareholder performed certain porting of the
Company's products in exchange for a royalty payment related to ongoing sales
of these products. Royalties due under these agreements were zero and $41,000
at December 31, 1997 and 1996, respectively. In 1992, the Company also entered
into a distribution agreement with this shareholder, under which revenue to
date has not been material.


11. 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 shares of Common
Stock paid to the shareholder of Versant Europe were issued in a transaction
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof.  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
seven-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.


                                      F-17


<PAGE>   53


The table below presents the pro forma results (in thousands, except for per
share data) for the years ended December 31, 1997 and 1996 had the Company's
acquisition of Versant Europe occurred at the beginning of 1996.


<TABLE>
<CAPTION>
                                                               1997       1996
                                                             --------    -------
<S>                                                          <C>         <C>
Total revenue                                                 $29,579    $18,039
Net loss                                                       (2,457)    (2,057)
Pro forma basic and diluted net loss per share                 ($0.27)    ($0.34)
Shares used in computing pro forma net loss
  per share                                                     9,088      5,916
</TABLE>

12. SUBSEQUENT EVENTS

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. The
complaints each allege violations of Sections 10(b) and 20(a) of the Exchange
Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the
Exchange Act, in connection with public statements about the Company's expected
financial performance.  The complaints seek an unspecified amount of damages.
The Company vigorously denies the plaintiffs' claims and has moved to dismiss
the allegations. However, 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 conditions.


The Company entered into an interest only, variable rate note with a bank that
matures March 1, 1998. On March 19, 1998, this note was converted to a variable
rate, term loan with principal and interest payable over 36 months. 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, currently at 8.5%, plus 0.5%. The loan contains certain financial
covenants and also prohibits cash dividends and mergers and acquisitions
without the bank's prior approval. The Company is currently in compliance with
these covenants.

                                      F-18


<PAGE>   54




                     VERSANT OBJECT TECHNOLOGY CORPORATION

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)
<S>                                        <C>          <C>           <C>          <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
CUSTOMER RETURNS:
Year ended December 31, 1995                 $ 73          63            55         $ 81
Year ended December 31, 1996                 $ 81         621            99         $603
Year ended December 31, 1997                 $603         208           145         $666
</TABLE>


                                      F-19


<PAGE>   55

                                 EXHIBIT INDEX

EXHIBIT   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)

  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)

 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)*/**



                                      X-1
<PAGE>   56


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

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

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

 10.16 -- Form of Letter Agreement dated October 22, 1997 between
          registrant and its executive officers(7)**

 10.17 -- Severance Agreement and Release of Claims dated January 7, 1998
          between registrant and David Banks(7)**

 10.18 -- Letter Agreement dated November 26, 1997 between registrant and
          Nick Ordon(7)**

 21.01 -- Subsidiaries of the registrant (7)

 23.01 -- Consent of Arthur Andersen LLP, Independent Public
          Accountants(7)

 27.01 -- Financial Data Schedule(7)

  (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.
  (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
       fiscal year ended December 31, 1996, filed with the Securities and
       Exchange Commission on March 31, 1997.
  (7)  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.




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