**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**x**                              Annualreport under Section 13 or 15(d) of the Securities Exchange Act of1934 for the fiscal year ended October 31, 2006.

**Or**

**o**                                 Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition periodfrom             to             .

**Commissionfile number: 0-28540**

**VERSANTCORPORATION**

(Exact name of Registrantas specified 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 principalexecutive offices) (Zip code)

**(510) 789-1500**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act: **Common Stock, no par value**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) for theExchange Act. Yes o No x

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(check one).

| Large Accelerated Filer o |   | Accelerated Filer  o |   | Non-Accelerated  Filer x |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

The aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was sold, or the average bid and asked pricesof such common equity, as of April 30, 2006:  $23,238,899

Thenumber of shares outstanding of each of the issuer’s classes of common equity,as of January 15, 2007, was 3,611,052 shares of Common Stock, no parvalue.

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the Registrant’s definitive proxystatement relating to its 2007 Annual Meeting of Shareholders are incorporatedby reference in Part III of this Annual Report on Form 10-Kwhere indicated.

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**VERSANT CORPORATIONANNUAL REPORT ON FORM 10-KFor the Fiscal Year Ended October 31, 2006**

**TABLEOF CONTENTS**

| Item No.          | ** ** | **Name of Item**                                                                                                       | ** ** | **Page** |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                   |       |     |
| Item 1.           |       | Business                                                                                                               |       | 1        |
| Item 1A.          |       | Risk Factors                                                                                                           |       | 11       |
| Item 1B.          |       | Unresolved Staff Comments                                                                                              |       | 20       |
| Item 2.           |       | Property                                                                                                               |       | 20       |
| Item  3.          |       | Legal  Proceedings                                                                                                     |       | 20       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                    |       | 20       |
| **PART II**  |       |                                                                                                                   |       |     |
| Item 5.           |       | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 21       |
| Item  6.          |       | Selected  Financial Data                                                                                               |       | 22       |
| Item 7.           |       | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                            |       | 23       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                            |       | 56       |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                            |       | 58       |
| Item 9.           |       | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosures                                 |       | 94       |
| Item 9A           |       | Controls and Procedures                                                                                                |       | 94       |
| Item  9B.         |       | Other  Information                                                                                                     |       | 95       |
| **PART III** |       |                                                                                                                   |       |     |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                     |       | 96       |
| Item 11.          |       | Executive Compensation                                                                                                 |       | 96       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                        |       | 96       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                         |       | 96       |
| Item 14.          |       | Principal Accountant Fees and Services                                                                                 |       | 96       |
| Item 15.          |       | Exhibits and Financial Statement Schedules                                                                             |       | 96       |
| **SIGNATURES**    |       | 97                                                                                                                     |
| **CERTIFICATION** | ** ** | ** **                                                                                                             |

 

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Versant Object Database, VDS, Versant®, enJin, FastObjects, VersantJDO, Versant Open Access and VRTF are trademarks of Versant in the UnitedStates and/or other countries. All other corporate or trade names or servicemarks referred to in this report are the names or marks of their respectiveowners in the United States and/or other countries.

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**CAUTION REGARDINGFORWARD-LOOKING STATEMENTS**

*This Form 10-Kcontains forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934 and Section 27A of the Securities Actof 1933. These forward-looking statements are based on Versant’s currentexpectations about our business and industry and reflect our beliefs andassumptions based upon information that is reasonably available to us at thedate of this report. In many cases you may identify these forward-lookingstatements by words such as “will,” “should,” “may,” “might”, “believes,” “anticipates,”“expects,” “intends,” “estimates” and similar expressions. Theseforward-looking statements may include, among other things, projections of ourfuture financial performance and trends anticipated for our business.*

*We caution investors that forward-looking statementsare only predictions, forecasts or estimates based upon our currentexpectations about future events. The forward-looking statements are notguarantees or assurances of our future performance and are subject tosignificant risks and uncertainties that are inherently difficult to assess andpredict. Our actual results and performance may differ materially from theresults and performance anticipated by any forward-looking statements due tothese risks and uncertainties. Some of the important risks and factors thatcould cause our results and performance to differ from results or performanceanticipated by this report are discussed in Item 1A of this report, —Risk Factors,”which you should read carefully. We undertake no obligation to revise or updateany forward-looking statements in order to reflect events or circumstances thatmay arise or occur after the date of this report or for any other reason. Readersare urged to carefully review and consider the various disclosures made byVersant in this report and in our other reports filed with the Securities andExchange Commission that attempt to advise interested parties of the risks andfactors that may affect our business.*

**PART I**

**Item 1.**                 Business

***Overview of the Company***

We are a leading providerof object-oriented data management software that forms a critical component ofthe infrastructure of enterprise computing.  Companies use Versant solutions to solvecomplex data management and data integration problems. We design, develop,market and support object-oriented database management system products toaddress such problems. We also provide related product support, training, andconsulting services to assist users in developing and deploying softwareapplications based on our products. We operate our business within a singleoperating segment referred to as Data Management. We were incorporated inCalifornia in August 1988 under the name Object Sciences Corporation and completedour initial public offering of our common stock under the name of VersantObject Technology Company in July 1996. The name of the company waschanged to Versant Corporation on July 15, 1998. In November 2002, weacquired Mokume Software, Inc., a privately held company that developedtechnology for use in real-time applications. In March 2004, we acquiredPoet Holdings, Inc. (Poet) through a merger. Prior to that merger, Poetwas a provider of object-oriented data management software headquartered in theUnited States, whose stock was publicly traded on the Frankfurt stock exchange.In June 2004, we acquired the JDO Genie product line and its customersfrom JDO Genie (PTY) Ltd., a privately held South African company and in July 2004,we acquired FastObjects, Inc., a private company that held North Americandistribution rights with respect to Poet’s FastObjects database managementproduct. In September 2004, we sold Poet’s Catalog solutions business. In August of2005, we effected a 1-for-10 reverse split of our outstandingcommon stock. In February 2006, we sold our WebSphere consulting business.Our principal executive offices are located at 6539 Dumbarton Circle, Fremont,California 94555 and our telephone number is (510)789-1500. Our websiteURL is www.versant.com. Other than as expressly set forth in this annualreport, the information contained in, or referred to on, our website is not apart of this annual report.

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***Industry Background***

Computerized datamanagement has evolved significantly over the past few decades. As businesscomputing became more sophisticated, network and hierarchical databases emergedin the 1970s to serve growing business data requirements. In the 1980s, thesetypes of databases were largely superseded by relational database technology,which continues to be a widely prevalent database technology today. The mid tolate 1980s saw the emergence of object-oriented software programming, in whichsmaller software building blocks called objects, which can perform specificfunctions, are aggregated with other objects in order to create larger softwaresystems. With the advent of object-oriented software programming, it becamepossible to incorporate the unique features and advantages of object-basedsoftware into database management solutions. Our principal products areobject-based database management software solutions, which we believe haveadvantages over relational database technology. In particular, we believe thatobject-based database management solutions are especially well suited forsuccessfully addressing the complex and challenging data management andanalytical requirements of companies who need to rapidly source, update,analyze and use very large changing bodies of complex data for a wide varietyof business applications.

**Certain IndustryTerms**

For referencepurposes we have listed below certain well-known technical terms often used inour data management industry to assist readers in better understanding theinformation provided in this report:

·       *Application Server Software*—Deployment software that is usedto build and deploy Internet applications, including commercial websites andinternal company websites.

·       *Cache*—Performance enhancing software that works with serversto improve their response times and throughput.

·       *Data Integration*—a broad term for a variety of techniquesthat enable the data from one software system to be used in other softwaresystems.

·       *Disk mirroring*—a technique using specialized software, andoften specialized hardware, to get the same data on two storage disksfor the purpose of increasing the reliability or making a quick snapshot(duplicate backup) of a database.

·       *Fault tolerant server*—a server that offers higherreliability by the use of duplicated hardware and specialized software. In thecase of a failure of one database, the surviving database can continue offeringnormal service.

·       *J2EE-based*—an application or software component that isdeployed in a Java 2 Enterprise Edition (J2EE) software environment.

·       *JDO*—Java Data Object, a standard based Java API for Versant.

·       *JDBC*—Java Database Connectivity, a standard in relationalDatabase world for processing SQL to Java.

·       *JVI*—Java Versant Interface, a proprietary based Java API forVersant.

·       *Object-Oriented*—object oriented software uses smallerbuilding blocks called objects to create larger software systems.

·       *ODBC*—Open Database Connectivity, a standard in relationalDatabase world for processing SQL to other than Java.

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·       *Relational Database*—Data management software that storesdata as tables and columns and can be accessed using an industry standardlanguage called SQL.

·       *Replication*—a range of technical approaches that enablemultiple databases to be approximately synchronized, or to contain the samedata.

·       *Two-Phase Commitment*—A specialized protocol for performingdatabase transactions across multiple distributed resources.

·       *UMTS*—Universal Mobile Telecommunication System, a thirdgeneration mobile phone technology.

·       *XML*—Astandard format used to exchange data (information) between multiple softwaresystems.

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

We provide sophisticated data management solutionsdesigned to address complex data management needs. Our Versant Object Databaseproduct is used primarily by larger enterprises which have significantlarge-scale data management requirements, such as technology providers,telecommunications carriers, government defense agencies and defensecontractors, healthcare companies and companies in the financial services andtransportation industries. Since the incorporation of Poet’s FastObjectssolution into our product line in March 2004, we have expanded the scopeof our solutions to address the data management needs of smaller systems aswell. The data management needs of our customers usually involve many businessfunctions, ranging from usage and management of the customer’s internal data tothe processing of externally originated information; such as customerenrollment, billing and payment transaction data. Our solution has also beenused to solve complex data management issues such as fraud detection, riskanalysis, yield management, and a host of other problems that requires anapplication specific data management solution.

In addition to our productofferings, to assist users in their development and deployment of applicationsbased on the Versant Object Database and FastObjects, we offer a variety ofservices, including consulting, training, and technical support services. Wealso provide maintenance and support services with respect to our own products.

***Benefits of Versant Solutions***

Our productsprovide customers the following benefits for specialized data management:

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

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

·       *Reliability, Availability and Serviceability*.   OurVersant Object Database product offers a number of features designed to permitcontinuous operation, including features providing online backup and recoveryand online modification of the database system, as well as system utilitiesthat can operate while the system is running. These features, together withreplication and disk mirroring provided by a Fault Tolerant Server, supportcontinuous operation of our products.

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·       *Language-Independent Support for Object-Oriented Programming*.   Ourproducts provide native support for the leading object-oriented softwaredevelopment languages of C++, Microsoft .NET and Java. This facilitates rapidand flexible application development by our customers and the maintenance andevolution of complex and dynamic applications that closely model real-worldsystems and processes.

·       *Support for Component Architectures*.   The VersantObject Database client integrates with leading J2EE application servers,including IBM WebSphere and BEA Weblogic application servers. These applicationservers enable users to build and deploy J2EE-based applications that will workcompatibly and directly with the Versant Object Database in order to gain ourinherent productivity and performance advantages.

·       *Support ofMajor Operating Systems*.   Versant products operate on a widerange of server platforms, including UNIX platforms from Sun Microsystems,Hewlett-Packard and IBM, Linux platforms from Red Hat, and Microsoft Windowsplatforms.

***Our Strategy***

We were involved in the following activities in fiscal2006, which are likely to impact our operations and business in fiscal 2007 andbeyond:

We further implemented a restructuring plan tosignificantly reduce our operating expenses by consolidating our product linesand streamlining our engineering, marketing, sales, and administrativeresources. The purpose of the restructuring was to refocus our business back toour core object database product offerings.

In accordance with the aforementioned restructuringplan, we elected not to renew the building office lease for Versant Ltd in theUnited Kingdom, which terminated on October 24, 2006. The remainingemployees, including a salesperson and consultant/engineer, continue to belocated in the United Kingdom. Maintenance agreements have been transferred toour international operations in Germany, and technical support for thesemaintenance agreements is being provided through our European operations. As wecontinue to maintain a sales presence in the United Kingdom while providingtechnical support for maintenance agreements through our European operations,we believe that operations in the United Kingdom will not be adversely impacted.We anticipate formally winding down the Versant Ltd entity during fiscal 2007.

Additionally, in February 2006, we sold ourWebSphere consulting business in exchange for a one-time cash payment pluscertain contingent payments during a 24-month period following the closeof the transaction. We believe that the sale of the WebSphere consultingbusiness will allow us to better focus our resources on our core objectdatabase offerings.

We also continued to focus our sales and marketingefforts on our data management products, Versant Object Database andFastObjects, and related consulting and training services. Versant Object Databasewas the key focus of our marketing efforts and by far the major source of ourlicense revenues in fiscal 2006.

The technology sector was the largest vertical marketfor our revenues in fiscal 2006. The incorporation of the Versant products intothe offerings of independent software vendors (ISVs) has increased our share oflicense revenues in this sector. Examples of the technology applications inwhich our products are used are demand consensus forecasts, collaborativeplanning, and requirements management applications.

The telecommunications industry also continued to be avery significant vertical market for our revenues in fiscal 2006. Customers inthe telecommunications industry have used our products in such 

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strategic distributedapplications as network modeling and management, fault diagnosis, fraudprevention, service activation and assurance, and customer billing. Mostnotably, we were able to deploy our software in the next generation 3G UMTSapplications built by several leading telecommunications equipment providers.

We have also been able togain customer acceptance in other vertical markets, including defense,financial services, transportation, and health care, and hope to continue toderive revenues from customers in these markets.

***Products and Services***

*Versant ObjectDatabase (VOD)*

VOD, a seventhgeneration object database management system, is designed to supportmulti-user, commercial applications in distributed computing environments. VODenables users to store, manage, and distribute information that often cannot beadministered effectively through traditional database technologies, includingthe following types of information:

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

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

·       meta-data,data aiding integration of diverse systems, and workflow information, whichtogether         enable the constructionof applications that integrate diverse systems and add new functionality, oftenmaking this functionality available over the Internet.

The object-oriented, balanced client-serverarchitecture of VOD provides the basis for high-performance, scalabledistributed applications. We believe that VOD’s performance is superiorcompared to relational database management systems, particularly for complexdata applications, for which VOD has the capability of processing a widevariety of abstract data types in a highly concurrent, high performance manner.We also believe that use of VOD allows our customers to reduce the time theyneed to develop applications for their data management systems and improvestheir system performance.

VOD is designed to integrate up to 65,000 databasesconnected over a like number of locations on a variety of hardware and softwareplatforms. Each database has a theoretical storage capacity of 4.6 millionterabytes, an amount far beyond the actual capacity of most existing operatingsystems. VOD implements a variety of database features, including two-phasecommitment for distributed transaction integrity and “database triggers” tomonitor changing events and data and to notify users and applications whenspecified events occur. In addition, on-line management utilities enableroutine maintenance to be performed while the database is running. Theseinclude utilities to perform backup operations, manage log files, dynamicallyevolve database schema, add, delete and compress volumes on disk storage andrelated functions. These utilities provide multiple levels of administrativeaccess and application security. .

Version 7.0 of VOD includes the core object databasemanagement system, C++ and Java language interfaces (proprietary JVI andstandards based JDO), and XML for import and export of data into thedatabase. By bundling these components with VOD, we believe we areenhancing the solution that we are offering making it easier for customers todeploy applications requiring such components.

As part of the VODfamily, we also offer Fault Tolerant Server, Asynchronous Replication, WarmStandby, Online Reorganization, Versant Monitoring Console, Versant SQL, andHigh Availability Backup Solution as add-on options that a customer can use insituations requiring advanced capabilities.

·       *Versant Fault Tolerant Server*provides**forhighly reliable operations in mission-critical environments. This productprovides transparent failure recovery by connecting database clients to 

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synchronized copies of thedatabase stored on physically separate computers. If one of the databasesfails, due to operating system failure, hardware breakdown or any other form ofinterruption, the other database continues operation without applicationinterruption. When the failed database is restored, the two databasesautomatically resynchronize and resume operations without any interruption inapplication processing.

·       *Versant Monitoring Console*is an add-on tool for themonitoring of Versant Object Databases, designed following the standardmanaging console/remote agent paradigm. The remote agent resides on the Versantserver system, while the managing console is a graphical interface running on aVersant client system to display the ongoing activity of the monitoreddatabase.

·       *Versant Asynchronous Replication add-on module for Versant ObjectDatabase*supports both master-slave and peer-to-peer asynchronousreplication between multiple object servers. This can be used to replicate datato a distributed recovery site or to replicate data between multiple localobject servers for increased performance and reliability.

·       *Versant’s Warm Standby* allows customers to keep a secondarydatabase near the state of the production database for reporting and fastrestore requirements. This option is especially useful for customers with verylarge data sets.

·       *Versant’s Online Reorganization* allows the online compactionof production database data volumes for special categories of applications thatare performing heavy data deletions. This option allows customers to ensurecontinuous operations at required performance levels by eliminating performancedegradation due to fragmentation, a common problem for databases in thisapplication category.

·       *The Versant SQL (VSQL)* product provides JDBC/ODBC driverconnectivity, allowing the use of standard SQL enabled tooling to access TheVersant Object Database.  This isespecially useful for customers who use industry standard reporting tools suchas Crystal Reports and Microsoft Access.

·       *Versant’s High Availability Backup Solution* enables VOD touse the mirroring and backup features of other enterprise storage systems totake an online backup of very large data volumes within seconds, withoutimpacting transaction response times.

During our last threefiscal years, the vast majority of our revenues were driven by sales of VOD(and its predecessor, VDS), FastObjects and related maintenance and consultingservices.

*FastObjects*

FastObjects is an object database management systemdesigned to provide minimal administration and work natively with thecustomer’s product. The primary target application for our FastObjects productline is for use as an embedded data management system to be integrated in acustomer’s products. FastObjects is used in a vast range of applications,including medical devices, vending machines, telecom equipment, and defensesystems. The majority of FastObjects installations are now running under theMicrosoft Windows Operating System.

During fiscal 2006, wefocused most of our development resources on our flagship product line, VersantObject Database. In the future, we plan to offer a Microsoft .NET applicationprogram interface for VOD enabling our FastObjects.NET customers to migrate toVOD.

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***Services***

We derived almost one-half of our revenues fromservices in fiscal 2006. Our services include maintenance and supportprograms for our data management products, consulting services and customerspecific extensions to our products.

*MaintenanceServices.*   We provide maintenance and technicalsupport services for our products that are generally available at an annual feethat varies depending on the type and level of support the customer requires.Maintenance and support contracts, which typically have twelve-month terms, areoffered concurrently with the initial license of our product and entitle acustomer to telephone support, product upgrades, and documentation updates. Foradditional fees, customers may purchase a special support package that providesdedicated support engineers and telephone support available for 24 hours perday and seven days a week. Maintenance contracts are typically renewableannually and typically are paid for in advance for all products, but in someinstances, maintenance and support fees are paid in arrears. For the support ofolder versions of our products, we offer specific obsolescence support options.

*Professional Services.**  *We also provide a variety of training and consultingservices to assist customers in the design, development, training andmanagement of applications that are built based on our core products. Trainingservices are offered for a variety of Versant-specific and other object-relatedtechnologies and range from beginning to advanced levels. Consulting servicesare available for analysis and design assistance, mentoring and technicalinformation transfer, application coding, design reviews and performanceanalysis. In addition, we provide custom development services to customers thatrequest unique or proprietary product extensions.

***Sales and Marketing***

*SalesChannels.*   We market and sell our productsprincipally through our direct sales force and through value-added resellers,systems integrators, and distributors.

*DirectSales.**  *Ourdirect sales organization is based in our corporate offices in Fremont,California and Hamburg, Germany, and in some regional and home offices in theUS and Europe. The direct sales organization includes field salespersonnel, who are responsible for account management, and systems engineers,who answer technical questions and assist customers in running benchmarksagainst competitive products and in developing prototype applications.

*IndirectSales.**  *Part ofour sales strategy is to develop indirect distribution channels, such asvalue-added resellers and systems integrators. Systems integrators may includeour products with their own or those of other vendors, in order to provide acomplete solution to their customers. Under their agreements with Versant,value-added resellers and systems integrators are typically not subject to anyminimum purchase or resale requirements and can cease marketing our products atany time. Certain value-added resellers and systems integrators offerproducts they produced by themselves or other vendors, which in some cases may compete with our products.

*Marketing.**  *The primary objective of**ourmarketing efforts is to build increased visibility for Versant and its productsand to generate sales leads for our business. Our marketing programs includeour efforts at cultivating media and analyst relations, fostering valuableinvestor communications, speakers’ programs, online marketing,partner-marketing programs and participation in conferences and tradeshows. Ourproducts are typically marketed through (i) development licenses, whichentitle the customer to develop applications that use a Versant softwareproduct, and (ii) deployment licenses, which entitle the customer to selland market.

*SalesProcess.*   The cycle for a complete sale of ourproducts to new and large enterprise customers can often exceed nine months andmay extend to a year or beyond. For existing customers with successfullydeployed applications, sales cycles for new applications of our core productsare generally shorter. During 

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the sales cycle, meetingsinvolving both technical and management staff are conducted frequently at theprospective customer’s site and at our headquarters. As part of their productselection process, our prospective customers typically perform a detailedtechnical evaluation or benchmark of our object-based technologies, oftendirectly comparing them to competitive products. Upon completion of theevaluation, a customer that chooses our solution may purchase one or moredevelopment licenses depending upon the number of their programmers that willdevelop and build their customers’ application. Development licenses enable thecustomer to develop applications that use our software. Additionally, acustomer may purchase technical support, training courses and consultingservices. Our customers may also purchase deployment licenses enabling them todeploy applications developed under a development license. In some cases ourcustomers purchase deployment licenses at the same time they purchasedevelopment licenses. In other cases customers may instead defer their purchaseof deployment licenses and related maintenance until they complete theapplication development under their development license (a process that typicallytakes at least six months and can exceed one year).

*Shippingand Backlog.*   Our software may be eitherphysically or electronically delivered to the customer. If physicallydelivered, our software product is shipped from either our Fremont or Hamburgfacilities and is delivered to the customer upon receipt of an approved order anda signed license agreement. We typically do not have a material backlog ofunfilled license orders at any given time, and we do not consider backlog to bea meaningful indicator of our future performance.

*International Sales andMarketing.*   Our international sales are recordedby subsidiaries located in Germany and United Kingdom, which sell our productsthrough distributors and value-added resellers, as well as directly toend-users. For fiscal 2006, our international revenues derived from customersoutside North America made up approximately 63% of our total revenues, comparedto 66% for fiscal 2005 and 47% for fiscal 2004.

***Our Customers***

We categorize our customers into two broad groups,End-Users and Value Added Resellers (“VARs”). End Users are companies who useour products internally and do not redistribute our products outside of theircorporate organizations. VAR customers, on the other hand, include traditionalValue Added Resellers, Systems Integrators, OEMs and other vendors whoredistribute Versant products to third party customers, either individually oras part of an integrated product.

We license our data management products through twotypes of perpetual licenses—development licenses and deployment licenses.Development licenses, typically sold on a per seat basis, authorize a customerto develop an application program that uses our software product. Under adeployment license, a customer is permitted to deploy an application that ithas developed under a development license from us. End-Users generally purchasedeployment licenses based on the number of central processing units (CPUs)supporting the server that will run the application using our databasemanagement system. We offer deployment licenses, for certain applications,priced on a per user basis. Pricing of Versant Object Database and FastObjectsvaries according to several factors, including the number of CPUs/Cores perserver on which the applications run, and the number of users that are able toaccess the server at any particular time. Customers may elect tosimultaneously purchase development and deployment licenses for their projects,or instead may initially purchase only a development license and purchase adeployment license only when their applications developed on our software arecompleted.

VARs and distributorspurchase development licenses from us on a per seat basis and on terms similarto those of development licenses sold directly to End-Users. VARs areauthorized to sublicense deployment copies of our data management products,which are either bundled or embedded in the VARs’ applications, directly toEnd-Users. VARs are required to report the distribution of our software to usand are charged a royalty that is based either on the number of copies ofapplication software distributed or 

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computedas a percentage of the selling price charged by the VAR to its end-usercustomers. These royalties may be prepaid in full or paid upon deployment.

***Our Vertical Markets***

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

Our future performancewill depend in significant part on the increase in the use and sales of theVersant Object Database and FastObjects in technology, telecommunications,defense, healthcare, online gaming and financial market applications and thecontinued acceptance of our products within these industries.

***Competition***

Our software productscompete with companies offering object and relational database managementsystems. Our competitors, especially Oracle and Progress Software, have longeroperating histories, significantly greater financial, technical, marketing,service and other resources, significantly greater name recognition, broaderproduct offerings, larger and more established distribution channels and a largerinstalled base of customers. In addition, many of our competitors havewell-established relationships with our current and potential customers and mayoffer broader suites of products which may incentivize customers to purchasesuch competitors’ data management products. We may not be able to competesuccessfully against current or future competitors, and competitive pressurescould have a material adverse effect on the business, pricing, operatingresults and financial condition of the company.

***Research and Development***

Our research anddevelopment expenses consist primarily of personnel and related expenses,including payroll and employee benefits, expenses for facilities and paymentsmade to outside software development contractors. Currently our research anddevelopment activity is conducted primarily in our Hamburg, Germany and Pune,India facilities. In fiscal 2006, fiscal 2005 and fiscal 2004, our research anddevelopment expenses were $3.1 million, $3.9 million and $5.1 million,respectively. We anticipate that we will continue to invest significantresources in research and development activities, particularly in Germany andIndia, in the future to develop new products, advance the technology of ourexisting products and develop new business opportunities.

***Intellectual Property and Other Proprietary Rights***

We regard our products asproprietary. We attempt to protect our product technology by relying primarilyon a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect ourproprietary technology. For example, we license our software pursuant to signedlicense agreements and, to a lesser extent, “shrink-wrap” licenses displayed inevaluation downloads and in software installation screens, which impose certainrestrictions on the licensee’s ability to utilize our software. In addition, wetake steps to avoid disclosure of our trade secrets, such as requiring personswith access to our proprietary information to execute non-disclosureagreements, and we restrict access to our software source code. We seek toprotect our software, documentation and other written materials under tradesecret and copyright laws, which afford only limited protection. We wereawarded a United States patent (No. 5,822,759) for our proprietary cachesystem used within our product suites, which expires in 2015. We also havecertain trademarks and service marks.

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***Employees***

As of October 31, 2006, we and our subsidiarieshad a total of 76 full time employees, of whom 18 were based in the UnitedStates, 28 in Europe, and 30 in India. Of the total, 50 employees were engagedin engineering and technical services, 10 were engaged in sales and marketing,5 were engaged in the services organization, and the remaining 11 were engagedin general administration and finance. To the best of our knowledge, none ofour employees is represented by a labor union. We have not experienced anyorganized work stoppage to date and believe that our relationship with ouremployees is generally good.

Our future performancedepends mostly upon the continued service of our key technical, sales, andsenior management personnel. The loss of the services of one or more of our keyemployees could have a material adverse effect on our business, operatingresults and financial condition.

***Restructuring***

As part of our more recent restructuring efforts, weexecuted the following transactions to refocus the Company on its core objectdatabase management business:

In February 2006, we sold our WebSphereconsulting business in exchange for a one-time cash payment plus certaincontingent payments during a 24-month period following the close of thetransaction. As a result, we have reflected the results of operations of ourWebSphere consulting practice for fiscal 2006, fiscal 2005 and fiscal 2004 asdiscontinued operations. Therefore, reported revenues for these periods nolonger include any revenues from the WebSphere consulting practice. The resultsfrom the discontinued WebSphere operations, however, are reported as net incomefrom discontinued operations, net of income taxes. See Note 5 of our “Notes to Consolidated Financial Statements”****in Item 8 of thisreport for more information regarding this transaction.

In July 2005, we spunoff our former Versant Open Access.NET (or VOA.Net) assets to Vanatec GmbH(Vanatec), a privately held German company. Versant subsequently determinedthat the equity at risk in Vanatec was not sufficient to permit Vanatec tofinance its activities without additional subordinated**financialsupport from Versant. Therefore, we considered Vanatec a variable interestentity in accordance with FIN 46(R), *Consolidation of VariableInterest Entities* (As Amended). As a result, in accordance with FIN46(R), Vanatec’s operating results were included in Versant’s consolidatedfinancial statements from July 2005 through March 27, 2006. OnMarch 27, 2006, Versant sold its entire equity interest in Vanatec to athird party investor and entered into a joint ownership agreement with Vanatecwith respect to technology previously licensed to Vanatec. As a result of thissale of its interest in Vanatec, Versant is no longer required to consolidatethe operating results of Vanatec as a variable interest entity in its financialstatements.

***Investor Information***

We are subject to the informational requirements ofthe Securities Exchange Act of 1934, or the “Exchange Act” pursuant to which wefile our periodic reports on Forms 10-Q, 10-K, 8-K, proxy statements and other information with theSecurities and Exchange Commission, or “the SEC”. These reports, proxystatements and other information may be obtained by visiting the PublicReference Room of the SEC at 100 F Street, NE, Room 1580, Washington,DC 20549. Information on the operation of the SEC’s Public ReferenceRoom may be obtained by calling the SEC at 1(800) SEC-0330. Inaddition, the SEC maintains an Internet site (at http://www.sec.gov) thatcontains reports, proxy and information statements and other informationregarding issuers that file electronically.

Financial and otherinformation about Versant can also be accessed at our Investor Relationswebsite. The address of Versant’s website is: (http://www.versant.com). We makeavailable, free of charge, copies of our annual reports, annual reports onForms 10-K, quarterly reports on Forms 10-Q, current reports on 

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Form 8-Kand amendments to those reports, filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act, as soon asreasonably practicable after filing such materials with the SEC.

**Item 1A.**          RiskFactors.

*This annual report on Form 10-K  contains forward-looking statements regardingthe Company that involve risks and uncertainties, including, but not limitedto, those set forth below, that could cause our actual results of operations todiffer materially from those contemplated in the forward-looking statements.The matters set forth below should be carefully considered when evaluating ourbusiness and prospects.*

***Risks Related to Our Business***

***We are dependent ona limited number of products, especially Versant Object Database.***   Nearlyall of our license revenues to date have been derived from our Versant ObjectDatabase product and its predecessors. Consequently, if our ability to generaterevenues from Versant Object Database were negatively impacted, our business,cash flows and results of operations would be materially adversely affected.Many factors could negatively impact our ability to generate revenues fromVersant Object Database, including without limitation softness in the NorthAmerican market for enterprise software, consumer demand changes in theEuropean market for enterprise software, slowness in the general economy or inkey industries we serve, such as the technology, telecommunications and defenseindustries, the success of competitive products of other vendors, reduction inthe prices we can obtain for our products due to competitive factors, theadoption of new technologies or standards that make our productstechnologically obsolete and customer reluctance to invest in object-orientedtechnologies. Although we have taken steps to diversify our product linethrough our acquisition of Poet and its FastObjects data management product, westill expect that sales of Versant Object Database will continue to be verycritical to our revenues for the foreseeable future. Accordingly, anysignificant reduction in revenue levels from our Versant Object Databaseproduct can be expected to have a material negative impact on our business andresults of operation.

***Our quarterly revenue levels are not predictable.******  ***Our revenues have fluctuateddramatically on a quarterly basis, and we expect this trend to continue. Forexample, in fiscal 2006, our quarterly revenues fluctuated from a high of$4.6 million in both the first and fourth quarters of 2006 to a low of$3.8 million in both the second and third quarters of 2006; and in fiscal2005 our quarterly revenues fluctuated from a high of $5.3 million in thefirst quarter of fiscal 2005 to a low of $3.2 million in the secondquarter, $3.5 million in the third quarter of fiscal 2005 and$3.8 million in the fourth quarter of fiscal 2005. These quarterlyfluctuations result from a number of factors, including but not limited to thefollowing:

·       delaysby our customers (including customers who are resellers) in signingrevenue-bearing contracts that were expected to be entered into in a particularfiscal quarter and the timing of any significant sales;

·       thestatus of the market for enterprise software and general macroeconomic factorsthat impact information technology, or “IT”, capital purchasing decisions;

·       thelengthy sales cycle associated with our products;

·       theextent to which we do or do not complete tasks under consulting projects whichmust be completed in order for us to recognize certain revenues under suchcontracts;

·       customerand market perceptions of the value and currency of object-oriented softwaretechnology;

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·       uncertaintyregarding the timing and scope of customer deployment schedules of applicationsbased on Versant Object Database where revenues are contingent upon thecustomer’s deployment of our product;

·       failureby us to timely develop and launch successful new products;

·       fluctuationsin domestic and foreign demand for our products and services, particularly inthe telecommunications, technology and defense markets;

·       theimpact of new product introductions, both by us and by our competitors;

·       ourunwillingness to lower prices significantly to meet prices set by ourcompetitors or reductions of our prices to meet competition;

·       theeffect of publications of opinions about us and our competitors and theirproducts;

·       customerdeferrals of orders in anticipation of product enhancements or new productofferings by us or our competitors;

·       potentialcustomers’ unwillingness to invest in our products given our size and perceivedfinancial instability.

***We may not be ableto manage costs effectively given the unpredictability of our revenues.******  ***We expect to continue tomaintain a relatively high percentage of fixed expenses, and particularlyinasmuch as we have completed a restructuring to significantly reduce ouroperating expenses. We might be unable to further reduce certain fixed expensesto accommodate any revenue reductions. If forecasted revenue does notmaterialize, then our business, financial condition and results of operationswill be materially harmed.

***Our future revenuesare substantially dependent upon our installed customers continuing tolicense  Versant products and renewingmaintenance agreements for our products; our future professional services andmaintenance revenues are dependent on future sales of our software products.***   Wedepend heavily on our installed customer base for future revenues from licensesof additional products or upgrades of existing products and related maintenancerenewal fees. If our customers do not purchase additional products, upgradeexisting products or renew their maintenance agreements, this could materiallyadversely affect our business and future quarterly and annual operatingresults. The terms of our standard license arrangements provide for a one-timelicense fee and a prepayment of one year of software maintenance and supportfees. Our maintenance agreements are renewable annually at the option of thecustomer, and there are no minimum payment obligations or obligations tolicense additional software. Therefore, our current customers may not necessarilygenerate significant maintenance revenues in future periods if they choose notto renew our maintenance services. This risk may be increased in the case oflong-term customers who have not upgraded our products, which they license. Inaddition, our customers may choose not to purchase additional products,upgrades or professional services. Our professional services and maintenancerevenues are also dependent upon the continued use of our products by ourinstalled customer base. Consequently, any downturn in our software licenserevenues would likely have a corresponding negative impact on the growth of ourprofessional service revenues.

***Our customerconcentration increases the potential volatility of our operating results.***   Asignificant portion of our total revenues has been, and we believe willcontinue to be, derived from a limited number of orders placed by largeorganizations. For example, two customers each accounted for 7% and 8% of ourtotal revenues, respectively, for fiscal 2006; one customer accounted for 30%of our total revenues for the quarter ended October 31, 2006 and one ofour customers contributed 16% to our total revenues for the quarter ended October 31,2005. The timing of large orders and of their fulfillment has caused, and inthe future is likely to cause, material fluctuations in our operating results,particularly on a quarterly basis. In addition, our major customers tend tochange from year to year. The loss of any one or more of our major 

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customers, or ourinability to replace a customer making declining purchases with a new customerof comparable significance, could each have a material adverse effect on ourbusiness.

***Reduced demand forour products and services may prevent us from achieving targeted revenues andprofitability.******  ***Ourrevenues and our ability to achieve and sustain profitability depend on theoverall demand for the software products and services we offer. Reduced demandfor our product line may result from competition offered by alternativetechnologies or negative customer perception of our object-oriented technology.General economic conditions can also have a significant adverse effect on ourrevenues and results of operations. The demand for IT market infrastructure,the market sector that we serve, has not fully recovered since the economicslow down of the early 2000s. We cannot predict the impact of these or similarevents in the future, or of any related or unrelated military action, on ourcustomers or our business. We believe that, in light of these concerns, somebusinesses may continue to curtail or eliminate capital spending on IT. Inaddition, we have experienced continued hesitancy on the part of our existingand potential customers to commit to new products or services from us,particularly in our North American markets. If U.S. or global economicconditions take another downturn, it could impact our revenues and thus have amaterial adverse impact on our business, operating results and financialcondition.

***We have limitedworking capital and may experience difficulty in obtaining needed funding,which may limit our ability to effectively pursue our business strategies.***   AtOctober 31, 2006, we had approximately $8.2 million in cash and cashequivalents and working capital of approximately $6.2 million. Althoughour operations were profitable in fiscal 2006, to date, we have not achievedprofitability or generated positive cash flows on a sustained basis. Inresponse to this situation, in the fourth quarter of fiscal 2004 and the thirdquarter of fiscal 2005, we restructured our business operations tosignificantly reduce our operating expenses by streamlining our operatingprocesses. These restructuring efforts continued into the fourth quarter offiscal 2005 and were completed in the second quarter of fiscal 2006. Althoughwith such restructuring, we believe that our current cash, cash equivalents,and any net cash provided by operations will be sufficient to meet ouranticipated cash needs for working capital and capital expenditures for thenext twelve months, we may choose to make further cost reductions, and it ispossible that events may occur that could render our current working capitalreserves insufficient. Because our revenues are unpredictable and a significantportion of our expenses is fixed (and more difficult to reduce further givenprevious cost reductions), a reduction in our projected revenues orunanticipated requirements for cash outlays could deplete our limited financialresources and working capital. Impairment of our working capital would requireus to make expense reductions and/or to raise funds through borrowing or debtor equity financing. If we determined that we needed to raise additionalfunding to pursue our business strategy or otherwise, there can be no assurancethat any equity or debt funding will be available to us on favorable terms, ifat all. If we cannot secure adequate financing sources when required, then wewould need to further reduce our operating expenses, which we may be unable todo at a meaningful level given our historical restructuring activities, andwhich would restrict our ability to pursue our business objectives.

***We rely forrevenues on the technology, telecommunications and defense industries, andthese industries are characterized by complexity, intense competition andchanges in purchasing cycles.***   Historically,we have been highly dependent upon the telecommunications industry and, morerecently, we are becoming increasingly dependent upon the technology anddefense industries for sales of Versant Object Database. Our success in thesemarkets depends, to a large extent, on general economic conditions affectingthese industries, our ability to compete with alternative technology providers,our ability to develop products that can successfully interoperate in differentcomputing environments and whether our customers and potential customersbelieve we have the expertise and financial stability necessary to provideeffective solutions in these markets on an ongoing basis. If these conditions,among others, are not satisfied, we may not be successful in generatingadditional opportunities in these markets. Currently, companies in theseindustries are hesitant to commit to additional technology expenditures and thetelecommunications industry has in 

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particular experiencedsignificant economic difficulties and consolidation trends in recent years,which could jeopardize our ability to continue to derive revenues fromcustomers in that industry. The technology industry has also generallyexperienced volatility in recent years that may adversely affect demand for ourproducts and services from that industry, and the defense industry mayexperience new cycles of lower available technology budgets due to high levelsof U.S. defense spending for operations in Iraq and Afghanistan. In addition,the types of applications and commercial products for the technology,telecommunications and defense markets are continuing to develop and arerapidly changing, and these markets are characterized by an increasing number ofnew entrants whose products may compete with ours. As a result, we cannotpredict the future growth of (or whether there will be future growth in) thesemarkets, and demand for object-oriented databases applications in these marketsmay not develop or be sustainable. We also may not be successful in attaining asignificant share of these markets due to competition and other factors, suchas our limited size and working capital. Moreover, potential customers in thesemarkets generally develop sophisticated and complex applications that requiresubstantial consulting expertise to implement and optimize. There can be noassurance that we can hire and retain adequate personnel for this practice.

***We dependincreasingly on our international operations for our revenues as North Americanrevenues have declined.***   A large andincreasing portion of our revenues is derived from customers located outsideNorth America, and it is critical for us to maintain our internationalrevenues. Following our 2004 acquisition of Poet, which had a strong Europeanpresence, international revenues have represented a larger percentage of ourtotal revenues than it had historically, and consequently, we must conduct ouroperations internationally and maintain a significant presence in internationalmarkets. For fiscal 2006, our international revenues derived from customersoutside North America made up approximately 63% of our total revenues, comparedto 66% for fiscal 2005 and 47% for fiscal 2004. North American revenues were37% of our total revenues for fiscal 2006 and 34% of our total revenues forfiscal 2005, down from 53% of total revenues for fiscal 2004. North Americanrevenues were $6.2 million and $5.3 million for fiscal 2006 andfiscal 2005, respectively, down significantly from North American revenues of$9.3 million for fiscal 2004. We believe that lower revenues generatedfrom our North American operations for the past two fiscal years, compared torevenues generated from our international operations, are due largely tocautious purchasing behavior for the past few years as well as the impact ofchanges in our sales management and organization, which has to some degreeshifted more of our sales emphasis to European customers. During that period,European revenues grew significantly, primarily due to our merger with Poet, althoughrevenues from our core data management products also grew in this region. It ispossible that our North America revenues will continue to remain depressed infiscal 2007, making our international revenues even more critical to ouroperations and cash flows.

***International Operations pose unique risks.******  ***Our international operationsare subject to a number of unique risks in addition to the risks faced by ourdomestic operations. These risks include, but are not limited to the followingareas:

·       longerreceivable collection periods;

·       adversechanges in regulatory requirements;

·       dependenceon independent resellers;

·       fluctuationsin foreign exchange rates;

·       compliancewith multiple and conflicting regulations and technology standards in differentjurisdictions;

·       importand export restrictions, tariffs and other regulatory restrictions;

·       difficultiesin, and increased costs of, staffing and managing foreign operations;

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·       potentiallyadverse tax consequences arising from international operations and inter-companytransactions;

·       theburdens of complying with a variety of foreign laws, including more protectiveemployment laws in Germany;

·       theimpact of business cycles, economic and political instability and potentialhostilities outside the United States; and

·       limitedability to enforce agreements, intellectual property rights and other rights insome foreign countries.

In addition, in light of increasing global securityand terrorism, there may be additional risks of disruption to our internationalsales activities. Any prolonged disruption in the markets in which we derivesignificant revenues may potentially have a material adverse impact on ourrevenues and results of operations.

***In order to besuccessful, Versant must attract, retain and motivate key employees and failureto do so could seriously harm the Company.***   Inorder to effectively execute our business strategy, we must attract, retain andmotivate our executives and other key employees, including those in managerial,sales and technical positions. We reduced our workforce in connection with arestructuring of our operations in the fourth quarter of fiscal 2004 and in thethird quarter of fiscal 2005. These and other circumstances may adverselyaffect our ability to attract and retain key management. We must continue tomotivate employees and keep them focused on the achievement of our strategiesand goals. In addition, as a result of our merger with Poet in March of2004, we now employ a sizable German workforce subject to German law, whichgenerally provides greater financial protection to terminated employees thandoes United States law. Consequently, failure to retain our German employeesmay cause us to incur significant severance costs, which could adversely affectour operating results and financial condition. We also retain a significantnumber of employees in our offices in Pune, India. There is increasingcompetition for skilled employees in the Indian market, resulting in  a greater risk of employee turnover and lossof key trained personnel there, which could adversely impact our research anddevelopment and quality control activities.

***Our personnel,management team and operations are located in different countries and as aresult, we may experience difficulty in coordinating our activities andsuccessfully implementing Company goals.***   Followingour 2004 merger with Poet, we acquired significant operations and personnel inEurope, and now have approximately 28 employees based in Europe whoseactivities must be well coordinated with those of our U.S. workforce and otheremployees. In addition, we also perform a significant amount of engineeringwork in India through our wholly owned subsidiary located in Pune, India. Wecurrently employ about 30 employees in India, which represents approximately39% of our total workforce. As a result of the Poet merger and recentmanagement changes, our management team resides in both our U.S. headquartersin Fremont, California and our office in Hamburg, Germany. Our Chief ExecutiveOfficer resides in Hamburg, Germany and our Chief Financial Office resides inour Fremont, California office. The significant geographic dispersion of ourmanagement team and our workforce may make it more difficult for us tosuccessfully manage our long-term objectives, coordinate activity across theCompany, and integrate our operations and business plans.

***Our products have alengthy sales cycle.***   The sales cycle for ourVersant Object Database and FastObjects products varies substantially fromcustomer to customer. This sale cycle often exceeds nine months and cansometimes extend to a year or more, especially for sales to defense sectorcustomers. Due in part to the strategic nature of our products and theexpenditures associated with their purchase, potential customers are typicallycautious in making decisions to acquire our products. Influencing our customers’decision to license our products generally requires us to provide a significantlevel of education to prospective customers regarding the uses and benefits ofour products, and we frequently commit to 

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provide that educationwithout any charge or reimbursement. Generally, pre-sales support efforts, suchas assistance in performing benchmarking and application prototype development,are also conducted with no charge to customers. Because of the lengthy salescycle for our products and the relatively large average dollar size of ourindividual licenses, a lost or delayed sales transaction could potentially havea significant negative impact on our operating results for a particular fiscalperiod.

***We are subject tolitigation and the risk of future litigation.***   Weand certain of our present and former officers and directors were named asdefendants in four class action lawsuits filed in the United States DistrictCourt for the Northern District of California in 1998. The complaint in thosesuits alleged violations of Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, or the Exchange Act, and Securities andExchange Commission Rule 10b-5 promulgated under the Exchange Act,in connection with public statements about our financial performance. Althoughthis case was later dismissed, there can be no assurance that we will not besubject to similar litigation in the future. For example, during fiscal 2006,we settled a litigation that commenced in the last quarter of fiscal 2004 when wewere sued by Systems America, Inc., a privately held company, in an actionwhich alleged that, prior to our acquisition of Mokume Software, Inc. in November 2002,persons associated with Mokume Software misappropriated trade secrets andconfidential information of Systems America, unfairly competed with SystemsAmerica with respect to its customer relationships, and infringed SystemsAmerica’s trademarks and trade names. We are currently party to a litigation inwhich Rockwell Automation, one of our customers, is seeking indemnificationfrom us for similar claims asserted against it by Systems America, Inc. Litigationcan be expensive to defend, can consume significant amounts of management timeand can result in an adverse judgment or settlement that could have adverseeffects on our results of operations and financial condition.

***We will incurincreased costs as a result of recently enacted laws and regulations relatingto corporate governance matters and public disclosure.***   Recentlyand regulations affecting public companies, including the provisions of theSarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and bythe NASDAQ Stock Market and new accounting pronouncements, including newaccounting rules regarding the expensing of stock options, will increaseour costs to evaluate the implications of these laws, regulations and standardsand comply with their requirements. To maintain high standards of corporategovernance and public disclosure, we intend to invest resources to comply withevolving standards. We expect that this investment will result in increasedgeneral and administrative expenses in fiscal 2007 and 2008, and a diversion ofmanagement time and attention from strategic revenue generation and cost managementactivities. The impact of these events could also make it more difficult for usto attract and retain qualified persons to serve on our board of directors, onour board committees or as executive officers. We are taking steps to complywith applicable laws and regulations in accordance with the deadlines by whichcompliance is required, but we cannot predict or estimate the amount or timingof additional costs that we may incur to respond to their requirements andcannot be certain that we will be able to fully comply with the provisions of Section 404of the Sarbanes-Oxley Act regarding compliance with certain assessments andauditor attestations regarding internal control structure reporting.

***The requirement toaccount for stock options we grant as compensation expense reduce our netincome and our earnings per share, and may result in or increase losses.***   EffectiveNovember 1, 2005, we adopted the fair value recognition provisions of FASBStatement No. 123(R), Share-Based Payment, and Securities and ExchangeCommission Staff Accounting Bulletin No. 107 (“SAB 107”), using themodified-prospective transition method. SFAS 123(R) requires us to accountfor options awarded under our stock plans using a fair value-based model on theoption grant date and record it as a stock-based compensation expense. Expenseswe incur under SFAS 123(R) may significantly reduce our net income and ourearnings per share, and may result in or increase our losses. As a result ofadopting Statement 123(R), the Company’s net income before income taxes for thefiscal year ended October 31, 2006 included stock-based compensation of$236,000. See NOTE 3 of our “NOTES TOCONSOLIDATED FINANCIAL STATEMENTS” in Item 8 of this Annual Report on Form 10-K.

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***Adoption andapplication of accounting regulations and related interpretations and policiesregarding revenue recognition could cause us to defer recognition of revenue orrecognize lower revenues and profits.***   Althoughwe use standardized license agreements designed to meet current revenuerecognition criteria under generally accepted accounting principles, we mustoften negotiate and revise terms and conditions of these standardizedagreements, particularly in multi-element or multi-year transactions. As ourtransactions increase in complexity with the sale of larger, multi-product,multi-year licenses, negotiation of mutually acceptable terms and conditionscan extend the sales cycle and, in certain situations, may require us to deferrecognition of revenue on such licenses. We believe that we are in compliancewith Statement of Position 97-2, Software Revenue Recognition, asamended; however, these future, more complex, multi-element, multi-year licensetransactions, which may require additional accounting analysis to account forthem accurately, could lead to unanticipated changes in our current revenueaccounting practices and may contain terms affecting the timing of revenuerecognition.

***Charges to earnings resulting from the application ofthe purchase method of accounting for the merger with Poet and FastObjects mayadversely affect the market value of our common stock.***   Inaccordance with the U.S. generally accepted accounting principles, we accountfor the merger with Poet and FastObjects, Inc. using the purchase methodof accounting, which results in charges to earnings that could have a materialadverse effect on the market value of our common stock. Under the purchasemethod of accounting, we have allocated the total estimated purchase price ofPoet and FastObjects to net tangible assets and amortizable intangible assetsbased on their fair values as of the respective dates of the closing of theseacquisitions, and recorded the excess of the purchase price over those fairvalues as goodwill. We will incur additional depreciation and amortizationexpense over the useful lives of certain intangible assets acquired in connectionwith these acquisitions, which will extend into future fiscal years. Inaddition, to the extent the value of goodwill or intangible assets is impaired,we may be required to incur material charges relating to the impairment ofthose assets. Such amortization and potential impairment charges could have amaterial impact on our results of operations.

***Risks Related to Our Industry***

***Our products facesignificant competition.*****  **ForVersant Object Database and FastObjects products, we compete with othercompanies offering other database management systems. We face substantialcompetition from substantially larger and well-established relational databasemanagement companies including Oracle, Computer Associates, Sybase, IBM, andMicrosoft. We also face competition from object database companies includingProgress Software Corporation and Objectivity. Additionally, some prospectivecustomers might attempt to build specialized data storage capability themselvesusing their own internal engineering resources, sometimes starting with lowlevel operating system functionality, and other times utilizing lower leveldata storage routines that are commercially available, such as Oracle BerkeleyDB, a simplified database without query processing capability.

Many of our competitors have longer operatinghistories, significantly greater financial, technical, marketing, service andother resources, better name recognition, broader suites of product offerings,stronger sales and distribution channels and a much larger installed base ofcustomers than ours. In addition, many of our competitors have well-establishedrelationships with our current and potential customers. Our competitors may beable to devote greater resources to the development, promotion, and sale oftheir products. They may further have more direct access to corporatedecision-makers of key customers based on their previous relationships withcustomers. Our competitors may also be able to respond more quickly to new oremerging technologies and changes in customer requirements and may be able toobtain sales of products competitive to ours through package sales of a suiteof a variety of products that we do not offer. We may not be able to competesuccessfully against current or future competitors, and competitive pressurescould cause us to lose revenues or lower the prices for our products toincrease 

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sales, or take otherresponsive actions, any of which could have a material adverse effect on ourbusiness, operating results and financial condition.

***We depend onsuccessful technology development.***   Webelieve that significant research and development expenditures will continue tobe necessary for us to remain competitive. While we believe our research anddevelopment expenditures will improve our product lines, because of theuncertainty of software development projects, these expenditures will notnecessarily result in successful product introductions. Uncertainties affectingthe success of software development project introductions include technicaldifficulties, delays in introductions of new products, market conditions,competitive products, and consumer acceptance of new products and operatingsystems. In addition, if we are required to adopt cost-conservation measures,we may be compelled to reduce the amounts of our investment in research and developmentactivities, which could adversely affect our ability to maintain thecompetitiveness of our existing products, our ability to develop new products,and our future research and development capabilities. Recent reductions in ouroperating expenses could require us to limit our research and developmentexpenditures, which in turn could adversely affect our ability to continue totimely develop technologies and products necessary for us to remaincompetitive.

We also face certain challenges in integratingthird-party technology embedded in our products. These challenges include thetechnological challenges of integration, which may result in developmentdelays, and uncertainty regarding the economic terms of our relationship withthe third-party technology providers, which may result in delays of thecommercial release of new products. We expect that evolving industry standardswill affect our business. The principal risk is that this technology maystimulate the creation of a broader range of competitors, and some of themcould potentially be able to offer applications bundled with applicationservers. The opportunity is that we expect a very large number of applicationsto be built with programming interfaces that can readily use Versant productsto gain performance and other advantages.

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

***We must protect ourintellectual property.******  ***Despiteour efforts to protect our proprietary rights, unauthorized parties may attemptto copy aspects of our products, obtain or use information that we regard asproprietary or use or make copies of our products in violation of licenseagreements. Policing unauthorized use of our products is difficult andpotentially expensive. In addition, the laws of many jurisdictions do notprotect our proprietary rights to as great an extent as do the laws of theUnited States. Shrink-wrap licenses may be wholly or partially unenforceableunder the laws of certain jurisdictions, and copyright and trade secretprotection for software may be unavailable in certain foreign countries. Ourmeans of protecting our proprietary rights may not be adequate, and ourcompetitors may independently develop similar technology, which they could thenmarket and sell to our customers, which could have an adverse impact on ourrevenues.

***We may be subject to claims of intellectual propertyinfringement.***   We expect that developers ofobject-oriented technology will increasingly be subject to infringement claimsas the number of products, competitors and patents in our industry sectorgrows. For example, in 2004 we were served with a complaint filed by SystemsAmerica, Inc. alleging that we received misappropriated intellectualproperty from Mokume Software, Inc. when we acquired Mokume in November 2002,and that Mokume had interfered with certain business relationships of SystemsAmerica. While this action has since been settled, 

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we are currentlythe defendant in a suit filed by a customer, Rockwell Automation, who isseeking indemnity from Versant against a similar claim that Systems America hasasserted against Rockwell Automation in a separate lawsuit. Any claim of thistype, whether meritorious or not, could be time-consuming, could result insignificant litigation expenses, could cause product shipment delays andrequire us to enter into royalty or licensing agreements or pay amounts insettlement of the claims or pursuant to judgments. If any of our products ortechnologies were found to infringe third-party rights, royalty or licensingagreements to use such third-party rights might not be available on termsacceptable to us, or at all, and we might be enjoined from marketing aninfringing product or technology, each of which circumstances could have amaterial adverse effect on our business, operating results and financialcondition.

***Risks Related to our Stock***

***Our common stock islisted on the NASDAQ Capital Market.******  ***We do not currently meet thelisting requirements necessary for our common stock to be listed on the NASDAQGlobal Market System, formerly, the Nasdaq National Market (“NMS”). Effective October 1,2002, we transferred the listing of our common stock from the NMS to The NASDAQCapital Market (formerly the Nasdaq SmallCap Market). The continued listing ofour common stock on The NASDAQ Capital Market may be perceived as a negative byinvestors and may adversely affect the liquidity and trading price of our commonstock. We may be unable to re-list our common stock on The NASDAQ Global MarketSystem, or NGMS.

***We may engage in future acquisitions that dilute ourshareholders and cause us to incur debt or assume contingent liabilities.******  ***As part of our strategy, wemay review opportunities to buy other businesses or technologies that wouldcomplement our current products, expand the breadth of our markets or enhanceour technical capabilities, or that may otherwise offer us growth opportunities.In the event of any future acquisitions, any or all of the following couldpotentially occur:

·       payamounts of cash to acquire assets or businesses;

·       issuestock that would dilute current shareholders’ percentage ownership;

·       incurdebt; and/or

·       assumeliabilities.

Such acquisitions also involve numerous risks,including the following:

·       problemscombining the acquired operations, technologies or products or integration ofnew personnel;

·       theincurrence of substantial transaction costs to effect such acquisitions;

·       theincurrence of unanticipated costs in completing such acquisitions or ininheriting unforeseen liabilities and expenses of acquired businesses;

·       diversionof management’s attention from our core business;

·       adverseeffects on existing business relationships with suppliers and customers;

·       risksassociated with entering markets in which we have no or limited priorexperience; and

·       potentialloss of key employees of purchased organizations.

There can be no assurance that we will be able tosuccessfully integrate any acquired businesses, products or technologies thatwe might purchase in the future.

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***Our stock price is volatile.***   Ourrevenues, operating results and stock price have been and may continue to besubject to significant volatility, particularly on a quarterly basis. We havepreviously experienced revenues and earnings results that were significantlybelow levels expected by security analysts and investors, which have had animmediate and significant adverse effect on the trading price of our commonstock. This may occur again in the future. Additionally, as a significantportion of our revenues often occurs late in the quarter, we may not be awareof any revenues shortfall until late in the quarter, which, when announced, couldresult in an even more immediate and adverse effect on the trading price of ourcommon stock.

**Item 1B.**               UnresolvedStaff Comments.

None.

**Item 2.**                        Property.

Our principal administrative, sales and marketingoperations are located at leased office facilities at 6539 Dumbarton Circle,Fremont, California 94555. Our current lease for these facilities, whichexpires on June 30, 2007, is for approximately a 54,000 square foot officebuilding. However, we only occupy approximately 21,000 square feet of thisspace, and in the fourth quarter of fiscal 2004, we recorded a restructuringcharge to reflect this reduced space usage in the future periods.

Additionally, we alsolease office space for our international subsidiaries, generally undermulti-year operating lease agreements, in Hamburg, Germany, Pune, India, andthe United Kingdom. We did not renew the leased office facility in the UnitedKingdom, which terminated on October 24, 2006. We believe that all ofour current facilities are in reasonably good operating condition and will beadequate for our requirements for the next several years. Based on currentcommercial real estate market conditions, we believe that we will be able tolease comparable facilities in Germany or India if required, and in the U.S. toreplace or renew our Fremont, California lease that is expiring in June 2007.

**Item 3.**                        LegalProceedings.

We may from time to timebe subject to various legal proceedings in the ordinary course of business. Currently,we are not subject to any material legal proceedings required to be disclosedunder this Item 3.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

No matters were submitted to a vote of our securityholders during the fourth quarter of fiscal 2006.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.

***Price Range of Common Stock***

Ourcommon stock is listed on the Nasdaq Capital Market under the symbol “VSNT.” Our common stock commenced trading on the Nasdaq National Market on July 18,1996. From July 19, 1999 until March 7, 2000, our common stock wastraded on the Nasdaq SmallCap Market. From March 8, 2000 until September 30,2002, our common stock was traded on the Nasdaq National Market. Our commonstock has been traded on the Nasdaq Capital Market (formerly the NasdaqSmallCap Market) since October 1, 2002. We requested that listing of ourcommon stock be transferred to the Nasdaq Capital Market as of October 1,2002 since it then seemed unlikely that, in the near term, we would continue tobe able to satisfy the then-applicable listing criteria of the Nasdaq NationalMarket System. The following table lists the high and low intra-day prices ofour common stock reported on the Nasdaq Capital Market for the periodsindicated during the last two fiscal years. The prices shown below have beenadjusted to reflect the 1-for-10 reverse split of our common stockthat became effective on August 22, 2005.

| **Fiscal year ended October 31, 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| Fourth quarter                                                  |       | $          | 12.88      |     | $          | 5.92    |       |
| Third quarter                                                   |       | $          | 7.00       |     | $          | 6.02    |       |
| Second quarter                                                  |       | $          | 8.09       |     | $          | 4.98    |       |
| First quarter                                                   |       | $          | 6.41       |     | $          | 3.01    |       |

 

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

 

***Shareholders***

There were approximately 128holders of record of our common stock as of January 5, 2007. We believethat a significant number of beneficial owners of our common stock hold theirshares in street name. Based on information available to us, we believe thatthere are approximately 3,134 beneficial owners of our common stock.

***Dividend Policy***

We have neither declared nor paid any cash dividend onour common stock in the past. We intend to retain future earnings, if any, tofund development and growth of our business and, therefore, do not anticipatethat we will declare or pay cash dividends on our common stock in theforeseeable future.

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

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**Item 6.**                        SelectedFinancial Data

The selected historical financial data presented beloware derived from the consolidated financial statements of VersantCorporation. The selected consolidated financial data set forth below isqualified in its entirely by, and should be read in conjunction with, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andthe Consolidated Financial Statements of Versant and notes thereto includedelsewhere in this report.

Itshould also be noted that in fiscal 2004, we completed a merger with Poet on March 18,2004, which increased our revenues and operating expenses for part of fiscal2004 and substantially increased the number of outstanding shares of common stockat fiscal year-end for purposes of computing net loss per share in fiscal2004. We incurred restructuring charges of approximately $218,000,$638,000 and $3.3 million for fiscal 2006, 2005 and 2004, respectively,and charges of approximately $12.9 million and $1.0 million relatedto impairment of goodwill and intangible assets for fiscal 2005 and 2004,respectively. Each of the above has an impact on the comparability of theselected financial data presented in Item 6 of this report.

| ** **                                                                        | ** ** | **Fiscal Year Ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Consolidated  statements of operations data:**                                  | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                     |       |                                                  |       |   |   |   |   |   |   |   |   |
| License                                                                           |       | $                                                     | 8,469      |   | $ | 8,828 |   | $ | 9,686 |   | $ | 9,082 |   | $ | 10,106 |   |
| Maintenance                                                                       |       | 6,726                                                 |       | 6,305 |   | 6,783 |   | 6,076 |   | 5,300 |   |
| Professional  services                                                            |       | 1,550                                                 |       | 613 |   | 1,228 |   | 2,267 |   | 1,635 |   |
| Total revenues                                                                    |       | 16,745                                                |       | 15,746 |   | 17,697 |   | 17,425 |   | 17,041 |   |
| **Cost of  revenues:**                                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| License                                                                           |       | 313                                                   |       | 274 |   | 457 |   | 843 |   | 902 |   |
| Amortization of  intangible assets                                                |       | 315                                                   |       | 671 |   | 698 |   | 91 |   | — |   |
| Maintenance                                                                       |       | 1,442                                                 |       | 1,456 |   | 1,516 |   | 1,312 |   | 1,291 |   |
| Professional  services                                                            |       | 1,021                                                 |       | 870 |   | 1,059 |   | 1,945 |   | 2,128 |   |
| Total cost of  revenues                                                           |       | 3,091                                                 |       | 3,271 |   | 3,730 |   | 4,191 |   | 4,321 |   |
| Gross profit                                                                      |       | 13,654                                                |       | 12,475 |   | 13,967 |   | 13,234 |   | 12,720 |   |
| **Operating  expenses:**                                                          |       |                                                  |       |   |   |   |   |   |   |   |   |
| Sales and  marketing                                                              |       | 3,062                                                 |       | 5,803 |   | 8,004 |   | 7,703 |   | 7,854 |   |
| Research and  development                                                         |       | 3,147                                                 |       | 3,925 |   | 5,137 |   | 4,340 |   | 5,835 |   |
| General and  administrative                                                       |       | 3,712                                                 |       | 4,647 |   | 4,514 |   | 4,471 |   | 3,440 |   |
| Amortization of  goodwill                                                         |       | —                                                |       | — |   | — |   | — |   | 202 |   |
| Impairment of  goodwill                                                           |       | —                                                |       | 10,300 |   | 707 |   | — |   | — |   |
| Impairment of intangibles                                                         |       | —                                                |       | 2,613 |   | 317 |   | — |   | — |   |
| Restructuring                                                                     |       | 218                                                   |       | 638 |   | 3,271 |   | — |   | — |   |
| Total operating  expenses                                                         |       | 10,139                                                |       | 27,926 |   | 21,950 |   | 16,514 |   | 17,331 |   |
| Income (loss) from  operations                                                    |       | 3,515                                                 |       | (15,451 | ) | (7,983 | ) | (3,280 | ) | (4,611 | ) |
| Outside  shareholders’ income from VIE                                       |       | 138                                                   |       | 320 |   | — |   | — |   | — |   |
| Other income, net                                                                 |       | 208                                                   |       | 197 |   | 119 |   | 397 |   | 287 |   |
| Gain on disposal  of Variable Interest Entity                                     |       | 131                                                   |       | — |   | — |   | — |   | — |   |
| Income (loss) from  continuing operations before taxes                            |       | 3,992                                                 |       | (14,934 | ) | (7,864 | ) | (2,883 | ) | (4,324 | ) |
| Provision for  income taxes                                                       |       | 390                                                   |       | 37 |   | 88 |   | 74 |   | 68 |   |
| Net income (loss)  from continuing operations                                     |       | 3,602                                                 |       | (14,971 | ) | (7,952 | ) | (2,957 | ) | (4,392 | ) |
| Deemed dividend to  preferred shareholders                                        |       | —                                                |       | — |   | (2,422 | ) | — |   | — |   |
| Net income (loss)  from continuing operations attributable to common shareholders |       | 3,602                                                 |       | (14,971 | ) | (10,374 | ) | (2,957 | ) | (4,392 | ) |
| Net income (loss)  from discontinued operations, net of income taxes              |       | 231                                                   |       | 417 |   | (1,314 | ) | 568 |   | 1,002 |   |
| Gain (loss) from  sale of discontinued operations, net of income taxes            |       | 468                                                   |       | — |   | (309 | ) | — |   | — |   |
| Net income (loss)                                                                 |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (11,997 | ) | $ | (2,389 | ) | $ | (3,390 | ) |

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| **Basic income (loss) per share:**                                                |   |   |   |   |   |   |   |   |   |   |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net income (loss)  from continuing operations attributable to common shareholders |   | $      | 1.01   |   | $      | (4.23  | )      | $      | (3.33  | )      | $      | (2.17 | ) | $ | (3.58 | ) |
| Earnings (loss)  from discontinued operations, net of income tax                  |   | $      | 0.19   |   | $      | 0.12   |   | $      | (0.52  | )      | $      | 0.42 |   | $ | 0.82 |   |
| Net income (loss)  attributable to common shareholders                            |   | $      | 1.20   |   | $      | (4.11  | )      | $      | (3.85  | )      | $      | (1.75 | ) | $ | (2.76 | ) |
| **Diluted  income (loss) per share:**                                             |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)  from continuing operations attributable to common shareholders |   | $      | 1.01   |   | $      | (4.23  | )      | $      | (3.33  | )      | $      | (2.17 | ) | $ | (3.58 | ) |
| Earnings (loss)  from discontinued operations, net of income tax                  |   | $      | 0.19   |   | $      | 0.12   |   | $      | (0.52  | )      | $      | 0.42 |   | $ | 0.82 |   |
| Net income (loss)  attributable to common shareholders                            |   | $      | 1.20   |   | $      | (4.11  | )      | $      | (3.85  | )      | $      | (1.75 | ) | $ | (2.76 | ) |
| **Shares  used in per share calculation:**                                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                             |   | 3,577  |   | 3,539  |   | 3,117  |   | 1,368  |   | 1,227  |   |
| Diluted                                                                           |   | 3,584  |   | 3,539  |   | 3,117  |   | 1,368  |   | 1,227  |   |
| **Non-cash  stock-based compensation included in the above expenses:**            |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                                  |   | $      | 39     |   | $      | 27     |   | $      | — |   | $      | — |   | $ | — |   |
| Sales and  marketing                                                              |   | 41     |   | 12     |   | 25     |   | 5      |   | — |   |
| Research and  development                                                         |   | 79     |   | 44     |   | 25     |   | — |   | — |   |
| General and  administrative                                                       |   | 77     |   | 13     |   | 36     |   | 1,204  |   | — |   |
| Total                                                                             |   | $      | 236    |   | $      | 96     |   | $      | 86     |   | $      | 1,209 |   | $ | — |   |

 

| ** **                                         | ** ** | **As of October 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Consolidated balance sheet  data:**              | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and short-term investments |       | $                                    | 8,231      |   | $ | 3,958 |   | $ | 3,313 |   | $ | 2,991 |   | $ | 4,427 |   |
| Restricted cash                                    |       | —                               |       | — |   | 320 |   | 320 |   | — |   |
| Working capital                                    |       | 6,199                                |       | 870 |   | 1,311 |   | 602 |   | 2,326 |   |
| Total assets                                       |       | 20,261                               |       | 16,246 |   | 32,545 |   | 11,069 |   | 11,921 |   |
| Total long-term  liabilities                       |       | 770                                  |       | 897 |   | 1,400 |   | 392 |   | 901 |   |
| Total liabilities and  stockholder’ equity    |       | 20,261                               |       | 16,246 |   | 32,545 |   | 11,069 |   | 11,921 |   |
|                                                    |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*As indicated in the paragraph above in Item 1 of thisreport, this Form 10-K (including this Item 7) contains certainforward-looking statements within the meaning of the Securities Exchange Actand the Securities Act. In many cases you may identify these forward-lookingstatements by words such as “will,” “should,” “may,” “might,” “believes,” “anticipates,”“expects,” “intends,” “estimates” and similar expressions. Theseforward-looking statements include, among other things, projections of ourfuture financial performance and trends anticipated for our business. Wecaution investors that forward-looking statements are only predictions or estimatesbased upon our current expectations about future events. The forward-lookingstatements are not guarantees or assurances of future performance and aresubject to significant risks and uncertainties that are inherently difficult toassess and predict. Our actual results and performance may differ materiallyfrom the results and performance anticipated by any forward-looking statementsdue to these risks and uncertainties, some of which are discussed below in thisItem 1A under the heading  “Risk Factors.” Readers are urged to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission thatattempt to advise interested parties of the risks and factors that may affectour business.*

***Background and Overview***

We design, develop, marketand support high performance object database management systems and providerelated maintenance and professional services. Our products and servicesaddress the complex data management needs of enterprises and providers ofproducts requiring data management functions. 

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Ourproducts and services collectively comprise our single operating segment, whichwe call “Data Management”.

Our products are typicallyused by customers to manage data for business systems and enable these systemsto access and integrate data necessary for the customers’ data managementapplications. Our data management products and services offer customers theability to manage real-time, XML and other types of hierarchical andnavigational data. We believe that by using our data management solutions,customers cut their hardware costs, accelerate and simplify their development,significantly reduce administration costs and deliver products with asignificant competitive edge.

OurData Management business is currently comprised of the following key products:

·       *Versant Object Database,*previously VDS, a seventhgeneration object database management system that is used in high-performancelarge-scale real-time applications. Our former product, Versant enJin, has beenreplaced by Versant Object Database using Java Data Object (JDO) and the JavaPersistence API language interface. We also offer several optional ancillaryproducts for use with Versant Object Database to provide compatibility andadditional protection of stored data.

·       *FastObjects*, an object-oriented database management systemthat can be embedded as a high performance component into customers’applications and systems.

Our Versant ObjectDatabase product offerings are used primarily by larger organizations, such astechnology providers, telecommunications carriers, government defense agenciesand defense contractors, healthcare companies and companies in the financialservices and transportation industries, each of which have significantlarge-scale data management requirements. Versant JDO, a product that weintroduced in fiscal 2004, as part of the technology we acquired in June 2004from JDO Genie, has now been absorbed and integrated into the Versant productfamily and is no longer sold as standalone product. With the incorporation ofPoet’s FastObjects solution into our product line following our March 2004merger with Poet, we have expanded the scope of our solutions to also addressdata management needs of smaller business systems.

Our customers’ datamanagement needs can involve many business functions, ranging from managementof the use and sharing of a company’s internal enterprise data to theprocessing of externally originated information such as customer enrollment,billing and payment transaction data. Our solutions have also been used tosolve complex data management issues such as fraud detection, risk analysis andyield management.

In addition to our productofferings, to assist users in developing and deploying applications based onVersant Object Database and FastObjects, we offer a variety of services,including consulting, training and technical support services.

We license our productsand sell associated maintenance, training and consulting services to end-usersthrough our direct sales force and through value-added resellers, systemsintegrators and distributors.

Inaddition to these products and services, we resell related software developedby third parties. To date, substantially all of our revenues have been derivedfrom the following data management products and related services:

·       Salesof licenses for Versant Object Database and FastObjects;

·       Maintenanceand technical support services for our products;

·       Consultingservices (Versant and Poet consulting practice) and training services;

·       Nonrecurringengineering fees received in connection with providing services associated withVersant Object Database;

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

·       Reimbursements received forout-of-pocket expenses, which we incurred and are recorded as revenues in ourstatement of operations.

***Financial Highlights for Fiscal 2006***

·       Ournet revenues in fiscal 2006 were $16.7 million, an increase of $999,000(or 6%) from net revenues of $15.7 million in fiscal 2005. This increasewas primarily due to closing several significant transactions with existingcustomers of both our European and North American operations during fiscal2006. We depend heavily on our installed customer base for future revenues fromlicenses of additional products or upgrades of existing products and relatedmaintenance renewal fees.

·       Netincome for fiscal 2006 was $4.3 million compared to a net loss of$14.6 million in fiscal 2005. In fiscal 2005, we incurred impairmentcharges of $12.9 million related to goodwill and intangible assets andrestructuring charges of $638,000. In fiscal 2006, we incurred no impairmentcharges and incurred restructuring charges of $218,000.

·       Ourcombined sales and marketing, research and development and general andadministrative expenses were $9.9 million in fiscal 2006, a decrease of$4.5 million (or 31%) from $14.4 million in fiscal 2005, primarilydue to cost reductions associated with our restructuring activities initiatedin the third quarter of fiscal 2005 and completed in the second quarter offiscal 2006. These substantial cost reductions were a significant factor in ourachieving profitability in fiscal 2006.

·       Cash provided by operationsin fiscal 2006 was $3.3 million compared to $68,000 of cash provided byoperations in fiscal 2005, primarily due to higher net income as a result ofcost reductions related to the Company’s restructuring efforts. During fiscal2006, our cash and cash equivalents balance increased by $4.2 million to$8.2 million at October 31, 2006 compared to $4.0 million at October 31,2005.

***Fiscal 2006 and Beyond***

During fiscal 2006,our primary focus was on the following areas:

·       Continued execution of arestructuring plan begun in fiscal 2005 to substantially reduce our ongoingoperating expenses by consolidating our product lines and streamlining engineering,marketing, sales and administrative resources. The purpose of the restructuringwas to increase our ability to achieve net income and to refocus our businessback to our core object database product offerings.

·       In February 2006, wesold our WebSphere consulting business in exchange for a one-time cash paymentplus certain contingent earn-out payments during a 24 month period following theclose of the transaction. See Note 5 of Notes to Consolidated Financial Statementsin Item 8 of this report for more information.

We also focused our sales and marketing efforts on ourdata management products, Versant Object Database and FastObjects, and relatedmaintenance, consulting and training services. Versant Object Database, and itspredecessor VDS, were the key focus of our marketing efforts and the majorsource of our license revenues in fiscal 2006.

We expect to derive most of our revenues in fiscal2007 from Versant Object Database and FastObjects licenses and relatedservices.

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Like many other software companies, we do not operatewith a significant backlog of orders. Our license revenues, in particular, aredifficult to forecast. We believe that information technology spending,particularly in the U.S., has been relatively depressed over the recent yearsand customers manifest very conservative purchasing behavior. We expecthigher license and maintenance revenues and lower consulting revenues forfiscal 2007, which we expect to result in comparable total revenues to fiscal2006. The projected decrease in consulting revenues is primarily due to asignificant European consulting arrangement in fiscal 2006 not expected torepeat in fiscal 2007. We anticipate higher license and maintenance revenues infiscal 2007, as we have a higher level of dedicated resources and salespersonnel allocated to the telecommunications sector in fiscal 2007. As netincome for fiscal year 2006 contained a one-time gain of approximately$0.5 million from the sale of Versant’s WebSphere consulting business, webelieve that income from continuing operations before taxes provides a moremeaningful basis for comparing the Company’s performance in future periods. Wecurrently anticipate income from continuing operations before taxes of between$4.4 million and $4.6 million for fiscal year 2007, representinggrowth of 10% to 15% when compared to income from continuing operations beforetaxes of $4.0 million in fiscal year 2006.

We expect our sales andmarketing, research and development and general and administrative expenses infiscal 2007 to be substantially consistent compared to fiscal 2006.

**Critical AccountingPolicies and Estimates**

The preparation of ourconsolidated financial statements requires us to make estimates and judgmentsthat affect the reported amount of our assets and liabilities at the date ofthe financial statements and of our revenues and expenses during the reportingperiod. We base these estimates and judgments on information reasonablyavailable to us, such as our historical experience and trends and industry, economicand seasonal fluctuations, and on our own internal projections that we derivefrom that information. Although we believe our estimates to be reasonable underthe circumstances, there can be no assurances that such estimates will beaccurate given that the application of these accounting policies necessarilyinvolves the exercise of subjective judgment and the making of assumptionsregarding future uncertainties. We consider “critical” those accountingpolicies that require our most difficult, subjective or complex judgments, andthat are the most important to the portrayal of our financial condition andresults of operations. These critical accounting policies relate to revenuerecognition, goodwill and acquired intangible assets, allowance for doubtfulaccounts, stock-based compensation, restructuring charges, and income taxes.

***Revenue Recognition***

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

We use the residual method to recognize revenues whena license agreement includes one or more elements to be delivered at a futuredate. If there is an undelivered element under the license arrangement, wedefer revenues based on vendor-specific objective evidence, or “VSOE”, of thefair value of the undelivered element, as determined by the price charged whenthe element is sold separately. If VSOE of fair value does not exist for allundelivered elements of a transaction, we defer all revenues from thattransaction until sufficient evidence exists or all elements have beendelivered. Under the residual method, discounts are allocated only to thedelivered elements in a multiple element arrangement, with 

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any undelivered elementsbeing deferred based on the vendor-specific objective evidence of the value ofsuch undelivered elements. We typically do not offer discounts on futureundeveloped products.

Revenues fromsoftware license arrangements, including prepaid license fees, are recognizedwhen all of the following criteria are met:

·       Persuasiveevidence of an arrangement exists.

·       Deliveryhas occurred and there are no future deliverables except Post Contract Support(PCS).

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

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

If an acceptance period or other contingency exists,revenues are not recognized until customer acceptance or expiration of theacceptance period, or satisfaction of the contingency, as applicable. Ourlicense fees are non-cancelable and non-refundable, and we do not makeconcessions or grant refunds for any unused amount. Also, our customeragreements for prepaid deployment licenses do not make payment of our licensefees contingent upon the actual deployment of the software. Therefore, acustomer’s delay or acceleration in its deployment schedule does not impact ourrevenue recognition. Revenues from related PCS for all product lines areusually billed in advance of the service being provided and are deferred andrecognized on a straight-line basis over the term in which the PCS is to beperformed, which is generally twelve months. In some cases PCS revenues arepaid in arrears of the service being provided and are recognized as revenues atthe time the customer provides a report to us for deployments made during agiven time period. Training and consulting revenues are recognized when apurchase order is received, the services have been performed and collection isdeemed probable. Consulting services are billed on an hourly, daily or monthlyrate. Training classes are billed based on group or individual attendance.

We categorize our customers into two broad groups,End-Users and Value Added Resellers (VARs). End User customers are companieswho use our products internally and do not redistribute the product outside oftheir corporate organizations. VAR customers include traditional Value AddedResellers, Systems Integrators, OEMs and other vendors who redistribute ourproducts to their external third party customers, either individually or aspart of an integrated product.

We license our data management products through twotypes of perpetual licenses—development and test licenses and deploymentlicenses. Development and test licenses are typically sold on a per seat basisand authorize a customer to develop and test an application program that usesour software product. Prior to an End-User customer being able to deploy anapplication that it has developed under our development license, it mustpurchase deployment licenses based on the number of computers connected to theserver that will run the application using our database management system. Forcertain applications, we offer deployment licenses priced on a per user basis.Pricing of Versant Object Database and FastObjects licenses varies according toseveral factors, including the number of computer servers on which the 

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application runs and thenumber of users that are able to access the server at any one time. Customersmay elect to simultaneously purchase development and deployment licenses for anentire project. These development and deployment licenses may also provide forprepayment of a nonrefundable amount for future deployment*.*

VARs and distributors purchase development licensesfrom us on a per seat basis on terms similar to those of development licensessold directly to End-Users. VARs are authorized to sublicense deployment copiesof our data management products that are either bundled or embedded in the VAR’sapplications and sold directly to End-Users. VARs are required to report theirdistribution of our software and are charged a royalty that is based either onthe number of copies of our application software that are distributed orcomputed as a percentage of the selling price charged by the VARs to theirend-user customers. These royalties from VARs may be prepaid in full or paidupon deployment. Provided that all other conditions for revenue recognitionhave been met, revenues from arrangements with VARs are recognized, (i) asto prepaid license arrangements, when the prepaid licenses are sold to theVARs, and (ii) as to other license arrangements, at the time the VARprovides a royalty report to us for sales made by the VAR during a givenperiod.

Revenues from the resale of third-party products orservices are recorded at total contract value with the corresponding costincluded in the cost of sales when we act as a principal in these transactionsby assuming the risks and rewards of ownership (including the risk of loss forcollection, delivery or returns). When we do not assume the risks and rewardsof ownership, revenues from the resale of third-party products or services arerecorded at contract value net of the cost of sales.

In some instancesthat a customer requests engineering work for porting our products to anunsupported platform or customization of our software for specificfunctionality, or any other non-routine technical assignment, we recognizerevenues in accordance with SOP 81-1 Accounting Research Bulletin (“ARB”)No. 45 (As Amended), *Long-TermConstruction-Type Contracts*****anduse either time and material percentage of completion or completed contractmethods for recognizing revenues. We use the percentage of completion method ifwe can make reasonable and dependable estimates of labor costs and hoursrequired to complete the work in question. We periodically review theseestimates in connection with work performed and rates actually charged andrecognize any losses when identified. Progress to completion is determinedusing the cost-to-cost method, whereby cost incurred to date as a percentage oftotal estimated cost determines the percentage completed and revenuerecognized. When using the percentage of completion method, the followingconditions must exist:

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

·       Thecustomer is able to satisfy their obligations under the contract.

·       Versantis able to satisfy its obligations under the contract.

The completed contract method is used when reasonableor dependable estimates cannot be made. As a result, in such situations, wedefer all revenues until such time that the work is fully completed.

Management makessignificant judgments and estimates in connection with the determination of therevenue recognized in each accounting period. If we had made differentjudgments or utilized different estimates for any period, material differencesin the amount and timing of revenue recognized would have resulted.

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***Goodwill and Acquired Intangible Assets***

We account for purchases of acquired companies inaccordance with SFAS No. 141, *Business Combinations*and account for the related acquired intangible assets in accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*. Inaccordance with SFAS 141, we allocate the cost of the acquired companies to theidentifiable tangible and intangible assets acquired according to theirrespective fair values as of the date of completion of the acquisition, withthe remaining amount being classified as goodwill. Certain intangible assets,such as acquired technology, are amortized to expense over time, whilein-process research and development costs, or “IPR&D”, if any, are chargedto operations expenditures at the time of acquisition.

We test for anygoodwill impairment within our single Data Management operating segment. Allour goodwill has been aggregated from, and acquired in connection with, thefollowing acquisitions:

·       VersantEurope, acquired in 1997;

·       PoetHoldings, Inc., acquired in March 2004;

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

·       FastObjects, Inc.,acquired in July 2004.

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

As required by SFAS 142, we ceased amortizing goodwilleffective November 1, 2002. Prior to November 1, 2002, we amortizedgoodwill over five years using the straight-line method.

Identifiable intangibles are currently amortized overfive years in relation to the JDO Genie (PTY) Ltd acquisition, six years inrelation to the FastObjects, Inc. acquisition, and seven years in relationto our acquisition of Poet, using the straight-line method in each of thesecases.

In September 2006, weperformed an evaluation of our goodwill and intangible assets based on therequirements of SFAS 142 and SFAS 144. As a result of this impairment test andvaluation analysis, we determined that the value of our goodwill and intangibleassets had been fairly recorded in our financial statements, and therefore, noimpairment charges against our goodwill and intangible assets related to ourPoet and FastObjects acquisitions were recorded in fiscal 2006.

***Allowance for Doubtful Accounts***

We make judgments as toour ability to collect outstanding accounts receivable and provide an allowancefor a portion of our accounts receivable if collection becomes doubtful. Wealso make judgments about the creditworthiness of our customers, based onongoing credit evaluations and the aging profile of customers’ accountsreceivable, as well as the current economic trends that might impact the levelof credit losses in the future. Historically, our allowance for doubtful accountshas been sufficient to cover our 

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actualcredit losses. However, since we cannot predict changes in the financialstability of our customers, we cannot guarantee that our allowance willcontinue to be sufficient. If actual credit losses exceed the allowance that wehave established, it would increase our operating expenses and reduce ourreported net income. We evaluate and revise our bad debt allowance as part ofour quarter end process at each subsidiary and corporate level. Our managementassigns a risk factor and percentage of risk to each account receivable, thecollection of which is considered non-routine. Our allowance for doubtfulaccounts amounted to $62,000, or 2% of gross accounts receivable, at October 31,2006, and $114,000, or 4% of gross accounts receivable, at October 31,2005. The reduction in the allowance for doubtful accounts at October 31,2006 as compared to October 31, 2005, resulted from a continued favorablecollection history that we experienced during the past fiscal year.

***Stock-Based Compensation Expense***

In December 2004, FASB revised SFAS No. 123and issued SFAS No.123(R), *Share-Based Payment*,which requires companies to expense the estimated fair value of employee stockoptions and similar awards. In March 2005, the SEC staff issued StaffAccounting Bulletin No. 107, or “SAB 107”. SAB 107 creates a frameworkthat is premised on two overarching themes: (a) considerable judgment willbe required to successfully implement SFAS 123(R), specifically when valuingemployee stock options; and (b) reasonable individuals, acting in goodfaith, may conclude differently on the fair value of employee stock options. Wehave applied the principles of SAB 107 in conjunction with our adoption of SFAS123(R) in fiscal 2006.

We have exercised significant judgment and estimatesto determine the variables used in calculation of stock-based compensation.

We chose the closed-form model of Black-Scholes OptionPricing Model to arrive at stock option expense valuation. The Black-ScholesOption Pricing Model assumes that option exercises occur at the end of anoption’s expected life, and that expected volatility, expected dividends, andrisk-free interest rates are constant over the option’s term.

The expected life of an employee stock option is theperiod of time that it is expected to be outstanding. We use a historical modelto arrive at the expected life of our options, but we also take intoconsideration other factors that could possibly impact the future expected lifeof the options. We determined that the estimated expected life of the optionsgranted under our 2005 Equity Incentive Plan as of October 31, 2006 was 2.2 years. We believe that none of thevariables, such as the vesting period, expected volatility, blackout periodsand employee demographics have materially changed. Therefore, we have concludedthat the historical expected life represents fairly the expected future life ofthe options at this time.

The expected life for the options granted to the boardmembers under our 2005 Directors Stock Option Plan, or “Directors Plan”, whoare not full time employees of Versant, was 5.75 years as of October 31,2006. Versant used the *simplified method*allowed by SAB 107 to arrive at this calculation. Under the *simplified method*, the expected term is equal to vestingterm plus original contractual term divided by two.

We have further estimated that the expected life ofrights to purchase shares under our 2005 Employee Stock Purchase Plan, or “ESPP”,is six months, which is the duration of each purchase period in our plan.

Volatility is a measure of the amount by which afinancial variable, such as share price, has fluctuated (historical volatility)or is expected to fluctuate (expected volatility) during the expected life ofthe options. The Black-Scholes Option Pricing Model does not incorporate arange of expected volatilities over the option’s expected life. We use thehistorical volatility over the expected term of the options to estimate the 

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expected volatility. Wecalculate the standard deviation of price changes for the periods of fouryears, three years, two years, one and half years, one year and half a year.Then, we calculate historical volatility for the past four, three, two, one andhalf, one, and half-year periods. We, however, take into account other currentinformation available to determine that the expected volatility, derived basedon historical volatility, represents fairly the future volatility of our commonstock. At this time, we do not believe that there is any indication that futurevolatility will differ from historical volatility. We have estimated that ourvolatility is 88% as of October 31, 2006.

We use the U.S. Treasury Strip rates listed on thelast Thursday of every month on the *Wall Street Journal*to compute *risk-free interest rate.*

We have not distributed any dividends to our commonshareholders and do not expect to do so in the near future.

We estimate *forfeiturerates* at the time of grant and revise it in subsequent periods ifactual *forfeiture rates* differfrom those estimates. We apply the *forfeiture rate*tothe unvested portion of the option valuation and perform a true up for theamount of the valuation to be recorded if the actual *forfeiturerate*is different from the one applied in prior periods. The current*forfeiture rate* for the unvested portionof the option valuation recognized for the fourth quarter of fiscal 2006 is at20% for grants under the Equity Incentive Plan and 15% for grants under theDirector Plan. Since our current stock price has been trading in a stablerange, we assumed that all the participants in our ESPP would hold onto theircontributions to acquire their shares at the end of the period. Therefore, wehave not provided any *forfeiture provision*for our ESPP for the six month purchase period commencing June 1, 2006.

For further details,please see NOTE 3 of our “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**”**in Item 8 of this Annual Report on Form 10-K.

***Restructuring***

We have streamlined and restructured our operationsfrom time to time in the past. Our restructuring expenses and accruals requiresignificant estimates by management using the best information available at thetime. These estimates include: facility exit costs, such as demise and leasetermination costs; timing of future sublease occupancy; sublease income basedon expected future market conditions; and other fees associated with ourrestructuring expenses, such as brokerage fees.

We evaluate a number of factors to determine theappropriateness and reasonableness of our restructuring accruals on a regularbasis. Such factors include, but are not limited to, available market data,information from third party real estate brokers, and ongoing negotiations inorder to estimate the likelihood, timing, lease terms and rates to be realizedfrom potential subleases of restructured facilities held under operatingleases. In addition, our restructuring estimates for facilities could bematerially and adversely impacted by the financial condition of sub-lessees andchanges in their ability to meet their financial obligations throughout theterm of any sublease agreement. The impact of these estimated costs andsublease proceeds are significant factors in determining the appropriateness ofour restructuring accrual balance presented in our Consolidated Balance Sheetat October 31, 2006. Our actual expenses may differ significantly from ourestimates and as such, may require adjustments to our restructuring accruals,which will impact our operating results in future periods.

During the third quarter of fiscal 2005, we committedto and began implementing a restructuring program to realign our resources,substantially reduce our ongoing operating expenses and refocus our business onour Versant Object Database product. As a result, we recorded total restructuringcharges of $638,000 ($280,000 of which was related to severance costs) for thefiscal year ended October 31, 2005.

Versant also recorded total restructuring charges ofapproximately $134,000 and $84,000 for the three months ended January 31,2006 and April 30, 2006, respectively. With the completion of the sale ofthe 

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assets associated with ourWebSphere consulting practice, in the second quarter of fiscal 2006 we hadeffectively completed the restructuring plan we initiated in June 2005.

The total quarterly costsavings attributable to this restructuring plan, excluding the effect of theVOA.NET spin-off, was approximately $400,000 for the quarter ended October 31,2005, and was increased to approximately $550,000 for the quarter ended July 31,2006 and beyond. These cost savings are related to completed headcountreduction as well as reduced discretionary spending.

***Income Taxes***

We estimate our income taxes in each of thejurisdictions in which we operate and account for income taxes payable as partof the preparation of our consolidated financial statements. This processinvolves estimating our actual current tax expense as well as assessingtemporary differences resulting from differing treatment of items, such asdepreciation and amortization, for financial and tax reporting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin our consolidated balance sheet to the extent deemed realizable. We thenassess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and the extent we believe that recovery is not likely. Weestablish a valuation allowance against our net deferred tax assets to theextent such assets are not deemed to be realizable. If we establish a valuationallowance or increase it in a given period, then we must increase the taxprovision in our statement of operations.

Significant management judgment is required indetermining any valuation allowance recorded against our net deferred taxassets. Due to uncertainties related to our ability to utilize our deferred taxassets, we have established full valuation allowances at October 31, 2005and October 31, 2006 for our deferred tax assets.

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**Results ofOperations**

The acquisitions of Poet, the JDO Genie assets andFastObjects, Inc. became effective on March 18, 2004, June 30,2004 and July 6, 2004, respectively. Therefore, our consolidatedstatements of operations for fiscal 2004 incorporated the results from theeffective dates of these respective acquisitions.

Thefollowing table sets forth the historical results of operations for Versant forour three fiscal years ended October 31, 2006, 2005 and 2004, expressed asa percentage of total revenues.

| ** **                                                                         | ** ** | **Percentage of Revenues**                  | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Fiscal year ended October 31,** | ** ** |
| ** **                                                                         | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**                                                                      |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| License                                                                            |       |                                                  | 51         | % |   |   | 56 | % |   |   | 55 | % |   |
| Maintenance                                                                        |       |                                                  | 40         |   |   |   | 40 |   |   |   | 38 |   |   |
| Professional services                                                              |       |                                                  | 9          |   |   |   | 4 |   |   |   | 7 |   |   |
| Total revenues                                                                     |       |                                                  | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
| **Cost of  revenues:**                                                             |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| License                                                                            |       |                                                  | 2          |   |   |   | 2 |   |   |   | 3 |   |   |
| Amortization of intangible assets                                                  |       |                                                  | 2          |   |   |   | 4 |   |   |   | 4 |   |   |
| Maintenance                                                                        |       |                                                  | 8          |   |   |   | 9 |   |   |   | 8 |   |   |
| Professional services                                                              |       |                                                  | 6          |   |   |   | 6 |   |   |   | 6 |   |   |
| Total cost of revenues                                                             |       |                                                  | 18         | % |   |   | 21 | % |   |   | 21 | % |   |
| Gross profit                                                                       |       |                                                  | 82         | % |   |   | 79 | % |   |   | 79 | % |   |
| **Operating  expenses:**                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                |       |                                                  | 18         |   |   |   | 37 |   |   |   | 45 |   |   |
| Research and development                                                           |       |                                                  | 18         |   |   |   | 25 |   |   |   | 29 |   |   |
| General and administrative                                                         |       |                                                  | 22         |   |   |   | 29 |   |   |   | 26 |   |   |
| Amortization of goodwill                                                           |       |                                                  | 0          |   |   |   | 0 |   |   |   | 0 |   |   |
| Impairment of goodwill                                                             |       |                                                  | 0          |   |   |   | 65 |   |   |   | 4 |   |   |
| Impairment of intangibles                                                          |       |                                                  | 0          |   |   |   | 17 |   |   |   | 2 |   |   |
| Restructuring                                                                      |       |                                                  | 1          |   |   |   | 4 |   |   |   | 18 |   |   |
| Total operating expenses                                                           |       |                                                  | 59         | % |   |   | 177 | % |   |   | 124 | % |   |
| Income (loss) from operations                                                      |       |                                                  | 23         | % |   |   | -98 | % |   |   | -45 | % |   |
| Outside shareholders’ income from VIE                                         |       |                                                  | 1          |   |   |   | 2 |   |   |   | 0 |   |   |
| Other income, net                                                                  |       |                                                  | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Gain on disposal of Variable Interest Entity                                       |       |                                                  | 1          |   |   |   | 0 |   |   |   | 0 |   |   |
| Income (loss) from continuing operations before  taxes                             |       |                                                  | 26         |   |   |   | -95 |   |   |   | -44 |   |   |
| Provision for income taxes                                                         |       |                                                  | 2          |   |   |   | 1 |   |   |   | 1 |   |   |
| Net income (loss) from continuing operations                                       |       |                                                  | 24         | % |   |   | -96 | % |   |   | -45 | % |   |
| Deemed dividend to preferred shareholders                                          |       |                                                  | 0          |   |   |   | 0 |   |   |   | -14 |   |   |
| Net income (loss) from continuing operations  attributable to  common shareholders |       |                                                  | 24         | % |   |   | -96 | % |   |   | -59 | % |   |
| Net income (loss) from discontinued operations, net  of income taxes               |       |                                                  | 1          |   |   |   | 3 |   |   |   | -7 |   |   |
| Gain (loss) from sale of discontinued operations,  net of income taxes             |       |                                                  | 3          |   |   |   | 0 |   |   |   | -2 |   |   |
| Net income (loss)                                                                  |       |                                                  | 28         | % |   |   | -93 | % |   |   | -68 | % |   |

 

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**Revenues**

***Total Revenues:***   Thefollowing table summarizes total revenues (in thousands, except percentages)for fiscal 2006, 2005 and 2004:

| ** **     | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **     | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| Total revenues |       | $                                                     | 16,745     |                         | $          | 15,746                       |       | $                                      | 17,697     |                                   |       | $ | 999 |   |   |   | 6 | % |   |   | $ | (1,951 | ) |   |   | -11 | % |   |
|                |            |                                                       |            |                              |            |                              |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total revenues are comprised of license fees,maintenance, training, consulting, technical and other support services.Fluctuations in our total revenues can be attributed to changes in product andcustomer mix, general trends in information technology spending, changes ingeographic mix, and the corresponding impact of changes in foreign exchangerates. Further, product life cycles impact revenues periodically as oldcontracts expire and new products are released.

Our total revenues increased $999,000 (or 6%) infiscal 2006 compared to fiscal 2005, and our total revenues decreased$1,951,000 (or 11%) in fiscal 2005 compared to fiscal 2004.

The inherently unpredictable business cycle of anenterprise software company, together with the cautious consumer behavior inthe macro-economic environment, make discernment of continued and meaningfulbusiness trends more difficult. In terms of license revenues, we are stillexperiencing extremely cautious behaviors in IT purchasing in North America:lengthy sales cycles and customers’ preference for licensing our software on an“as needed” basis, versus the historical practice of prepaying license fees inadvance of usage, are factors adversely affecting our license revenues. Thistrend is more apparent in the telecommunications and technology industries. We,however, expect higher license and maintenance revenues and lower consultingrevenues for fiscal 2007, resulting in comparable total revenues to fiscal 2006.The projected decrease in consulting revenues is primarily due to a significantEuropean consulting arrangement in fiscal 2006 not expected to repeat in fiscal2007. We anticipate higher license and maintenance revenues in fiscal 2007, aswe have a higher level of dedicated resources and sales personnel allocated tothe telecommunications sector in fiscal 2007.

***Revenues by Category:****  *The following table summarizes our revenues bycategory (in thousands, except percentages) in fiscal 2006, 2005 and 2004:

| ** **                              | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                              | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total  revenues by category:**        | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| License revenues                        |       | $                                                     | 8,469      |                         | $          | 8,828                        |       | $                                      | 9,686      |                                   |       | $ | (359 | ) |   |   | -4 | % |   |   | $ | (858 | ) |   |   | -9% | ** ** |   |
| Maintenance  revenues                   |       | 6,726                                                 |       | 6,305                        |       | 6,783                        |       |                                   | 421        |                                   |       |   | 7 | % |   |   | (478 | ) |   |   | -7% | ** ** |   |
| Professional  services revenues         |       | 1,550                                                 |       | 613                          |       | 1,228                        |       |                                   | 937        |                                   |       |   | 153 | % |   |   | (615 | ) |   |   | -50% | ** ** |   |
| Total                                   |       | $                                                     | 16,745     |                         | $          | 15,746                       |       | $                                      | 17,697     |                                   |       | $ | 999 |   |   |   | 6 | % |   |   | $ | (1,951 | ) |   |   | -11% | ** ** |   |
| **Percentage of revenues by category:** |       |                                                  |       |                         |       |                         |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| License revenues                        |       | 51                                                    | %          | 56                           | %          | 55                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Maintenance  revenues                   |       | 40                                                    | %          | 40                           | %          | 38                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Professional  services revenues         |       | 9                                                     | %          | 4                            | %          | 7                            | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Total                                   |       | 100                                                   | %          | 100                          | %          | 100                          | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |

 

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*Fiscal 2006 Compared to Fiscal 2005*

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

License revenues were $8.5 million (or 51% oftotal revenues) in fiscal 2006, a decline of $359,000 (or 4%) from$8.8 million (or 56% of total revenues) reported in fiscal 2005. In theEuropean region, there was a $700,000 decrease in license revenues in fiscal2006 compared to fiscal 2005, primarily due to a significant follow-on orderfrom a European telecommunications company during the three months ended January 31,2005 not repeated in fiscal 2006. This decline was partially offset by a$315,000 increase in license revenues from our North American region, largelyas a result of a significant license transaction closed in the fourth quarterof fiscal 2006.

*Maintenancerevenues:*   Maintenance and technical supportrevenues include revenues derived from maintenance agreements, under which weprovide customers with internet and telephone access to support personnel andsoftware upgrades, dedicated technical assistance and emergency responsesupport options.

Maintenance revenues were $6.7 million (or 40% oftotal revenues) in fiscal 2006, an increase of $421,000 (or 7%) from$6.3 million (or 40% of total revenues) reported in fiscal 2005. Europeanmaintenance revenues increased $310,000 in fiscal 2006, primarily as a resultof three larger maintenance contracts, an increase in extended supportagreements (i.e., for customers using older Versant software not supportedthrough standard support agreements) that have a higher selling price, and to alesser extent, back maintenance revenues. Additionally, there was an increaseof $111,000 in maintenance revenues from our North American operations,primarily as a result of an increase in extended support agreements.

*Professionalservices revenues:**  *Professionalservices revenues consist of revenues from consulting, training and technicalsupport as well as billable travel expenses incurred by our professionalservices organization.

Professional servicesrevenues were $1.6 million (or 9% of total revenues) in fiscal 2006, anincrease of $937,000 (or 153%) from $613,000 (or 4% of total revenues) reportedin fiscal 2005. This increase was mainly due to two significantpercentage-of-completion consulting arrangements with two European customersduring fiscal 2006.

*Fiscal 2005 Compared to Fiscal 2004*

*Licenserevenues:**  *Licenserevenues declined $858,000 (or 9%) in fiscal 2005 compared to fiscal 2004. Thisdecline was largely attributable to a $2.7 million decline in licenserevenues in our North American region as a result of adverse market conditionsand softness of demand for our Versant Object Database line of business.Further, due to our restructuring, we had organizational changes in our salesdepartment and new management team that was not fully established until thefourth quarter of fiscal 2005, which resulted in delays in closure and, in somecases, failure to close certain license contracts. The decline was partiallyoffset by a $1.8 million increase in license revenues from our Europeanregion as a result of a significant follow through order from a European telecommunicationscompany during the first quarter of fiscal 2005, overall strong demand for ourproducts in Europe, and the presence of an established sales force in ourEuropean region.

*Maintenancerevenues:**  *Ourmaintenance revenues decreased approximately $478,000 (or 7%) in fiscal 2005compared to fiscal 2004. The decrease was primarily due to a decline of$1.1 million in maintenance revenues in our North American region as aresult of termination of a few major maintenance agreements for approximately $650,000towards the end of the fourth quarter of fiscal 2004, and the impact of theelimination of product lines of approximately $450,000. The decrease waspartially offset by an increase of $600,000 in maintenance revenues from ourEuropean region due to increased license revenues, the addition of Poet’smaintenance and support contracts, and the impact of a favorable 

35

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foreign currency exchangegain of $106,000. Growth in maintenance revenues is highly dependent on ourability to generate additional license revenues as well as retaining ourcustomer base.

*Professionalservices revenues:**  *Ourprofessional services revenues decreased approximately $615,000 (or 50%) infiscal 2005 compared to fiscal 2004. The decline was primarily due to anoverall decline of the backlog of our new professional services contracts inour North American region due to economic conditions.

***Revenues by Geographic areas:***   Thefollowing table summarizes total revenues by geographic area (in thousands,except percentages) in fiscal 2006, 2005 and 2004:

| ** **                                      | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                      | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total revenues by geographic  area:**         | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| North America                                   |       | $                                                     | 6,175      |                         | $          | 5,306                        |       | $                                      | 9,278      |                                   |       | $ | 869 | ** ** |   |   | 16 | % |   |   | $ | (3,972 | ) |   |   | -43 | % |   |
| Europe                                          |       | 10,138                                                |       | 10,087                       |       | 7,690                        |       |                                   | 51         | ** **                             |       |   | 1 | % |   |   | 2,397 |   |   |   | 31 | % |   |
| Asia                                            |       | 432                                                   |       | 353                          |       | 729                          |       |                                   | 79         | ** **                             |       |   | 22 | % |   |   | (376 | ) |   |   | -52 | % |   |
| Total                                           |       | $                                                     | 16,745     |                         | $          | 15,746                       |       | $                                      | 17,697     |                                   |       | $ | 999 | ** ** |   |   | 6 | % |   |   | $ | (1,951 | ) |   |   | -11 | % |   |
| **Percentage  of revenues by geographic area:** |       |                                                  |       |                         |       |                         |       |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| North America                                   |       | 37                                                    | %          | 34                           | %          | 53                           | %          |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Europe                                          |       | 60                                                    | %          | 64                           | %          | 43                           | %          |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Asia                                            |       | 3                                                     | %          | 2                            | %          | 4                            | %          |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                           |       | 100                                                   | %          | 100                          | %          | 100                          | %          |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Total revenues increased $999,000 (or 6%) in fiscal2006 compared to fiscal 2005. The increase in revenues is primarily due to anincrease of $869,000 in our North America region revenues as a result ofclosing a significant license transaction during the fourth quarter of fiscal2006 in the U.S. Additionally, there was an increase of $130,000 in revenuesfrom our European and Asian regions.

International revenues represented approximately 63%and 66% of our total revenues in fiscal 2006 and fiscal 2005, respectively,compared to 47% in fiscal 2004.

The high percentageof international revenues for both fiscal 2006 and fiscal 2005 is mainly due tothe following:

·       Strongerdemand for our products in Europe.

·       Changeof management and reduction in sales personnel in our U.S. operations.

·       Discontinuationof U.S. WebSphere consulting practice.

·       Integrationof the Poet products in Europe due to our 2004 Poet merger.

*Revenuesfrom North America:*   The $869,000 (or 16%)increase in North American revenues in fiscal 2006 compared to fiscal 2005 wasmainly due to the closing of a significant transaction with a US customertotaling $1.2 million in license revenues during the fourth quarter offiscal 2006.

*Revenues fromEurope:*   Revenues from Europe for fiscal 2006were at a level consistent with fiscal 2005 European revenues, with a $51,000(or 1%) increase in European revenues in fiscal 2006 compared to fiscal 2005.

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*Fiscal 2005 Compared to Fiscal 2004*

Total revenues decreased $2.0 million (or 11%) infiscal 2005 compared to fiscal 2004. The decrease in revenues was primarily dueto a decline of $4.0 million (or 43%) in our North American regionrevenues offset by an increase of $2.4 million (or 31%) in the revenues ofour European region. The revenue decline in North America was due to weak marketconditions in this region. Further, due to our restructuring, we had anorganizational change in our sales department and the new management team wasnot fully established until the fourth quarter of fiscal 2005, which resultedin delays and losses in closure of some of our revenue contracts.

In fiscal 2005, international revenues representedapproximately 66% of our total revenues compared to 47% in fiscal 2004. Theincrease in international revenues, as a percentage of our total revenues infiscal 2005 over fiscal 2004, partially reflects the fact that Poet’soperations, which represents a major component of our European revenues, wasincluded in the entire period in fiscal 2005, but was only partially includedin fiscal 2004 from March 18, 2004. Further, we have a more establishedsales force in Europe and operate in a more favorable market condition there.

*Revenuesfrom North America:*   The $4.0 million(or 43%) decline in North American revenues in fiscal 2005 compared to fiscal2004 occurred across all three categories of revenues in this region. Weattribute this outcome more to cautious purchasing behavior in the regionrather than a discernable trend that customers are moving away from usingVersant’s technology. Lower license revenues in North America were mainly dueto softness of demand for our Versant Object Database product line and the lackof execution of any major contract. Lower maintenance revenues in North Americawere due to a decline of new license revenues and termination of some majormaintenance contracts. Lower professional services revenues in North Americawere primarily due to completion of several long-term consulting engagementsthat were not renewed or replaced during the fiscal year.

*Revenuesfrom Europe:*   The $2.4 million (or 31%)increase in European revenues in fiscal 2005 compared to fiscal 2004 wasprimarily due to a significant follow-on order from a Europeantelecommunications company for $1.8 million received during the threemonths ended January 31, 2005, existence of an overall strong demand forour products in Europe, a well established sales force in our European region,and the impact of favorable foreign currency exchange rates of $359,000.

***Revenues by Industry:****  *The following table summarizes our revenues byindustry (in thousands, except percentages) in fiscal 2006, 2005 and 2004:

| ** **                              | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                              | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Total  revenues by industry:**        | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Technology                              |       | $                                                     | 5,679      |                         | $          | 3,130                        |       | $                                      | 3,774      |                                   |       | $ | 2,549 |   |   |   | 81 | % |   |   | $ | (644 | ) |   |   | -17 | % |   |
| Telecommunications                      |       | 4,508                                                 |       | 4,084                        |       | 4,575                        |       |                                   | 424        |                                   |       |   | 10 | % |   |   | (491 | ) |   |   | -11 | % |   |
| Defense                                 |       | 1,871                                                 |       | 1,353                        |       | 3,202                        |       |                                   | 518        |                                   |       |   | 38 | % |   |   | (1,849 | ) |   |   | -58 | % |   |
| Other                                   |       | 4,687                                                 |       | 7,179                        |       | 6,146                        |       |                                   | (2,492     | )                                      |       |   | -35 | % |   |   | 1,033 |   |   |   | 17 | % |   |
| Total                                   |       | $                                                     | 16,745     |                         | $          | 15,746                       |       | $                                      | 17,697     |                                   |       | $ | 999 |   |   |   | 6 | % |   |   | $ | (1,951 | ) |   |   | -11 | % |   |
| **Percentage of revenues by industry:** |       |                                                  |       |                         |       |                         |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Technology                              |       | 34                                                    | %          | 20                           | %          | 21                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Telecommunications                      |       | 27                                                    | %          | 26                           | %          | 26                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Defense                                 |       | 11                                                    | %          | 9                            | %          | 18                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                   |       | 28                                                    | %          | 45                           | %          | 35                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | 100                                                   | %          | 100                          | %          | 100                          | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

37

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*Fiscal 2006 Compared to Fiscal 2005*

The technology industry has been one of our majorrevenue sources. The incorporation of Versant products into the applicationofferings of independent software vendors, or “ISVs”, such as PeopleSoft (sinceacquired by Oracle) and Borland as well as increasing sales of the ISV’sproducts has generated most of the license revenues in this industry. Ourproducts are used by the technology industry mainly for demand consensusforecasts, collaborative planning and requirements definition. Our revenues inthe technology industry increased $2.5 million (or 81%) in fiscal 2006compared to fiscal 2005. This increase was mainly due to revenues from severalEuropean technology customers. In fiscal 2006, our European operation was ableto close several deals in this sector that were delayed from fiscal 2005. Wealso had a significant percentage-of-completion consulting agreement with atechnology company in Europe that contributed to this increase.

The telecommunications industry continues to be a verysignificant vertical market industry for us. We market our products to thetelecommunications industry in strategic distributed applications such asnetwork modeling and management, fault diagnosis, fraud prevention, serviceactivation and assurance, and customer billing. Our revenues from thetelecommunications industry increased $424,000 (or 10%) in fiscal 2006 comparedto fiscal 2005; this increase was primarily a result of a significant licensecontract from a European telecommunications company in the third quarter offiscal 2006 for approximately $590,000.

Defense industry revenuesincreased $518,000 (or 38%) in fiscal 2006 compared to fiscal 2005 mainly dueto a major percentage-of-completion consulting agreement with a Europeancustomer during fiscal 2006.

*Fiscal 2005 Compared to Fiscal 2004*

Our revenues in the technology industry decreased$644,000 (or 17%) in fiscal 2005 compared to fiscal 2004. This was primarilydue to a decline in our North American professional services revenues.

Our revenues from the telecommunications industrydeclined $491,000 (or 11%) in fiscal 2005 compared to fiscal 2004, primarilydue to a continued weak demand for our products in the telecommunicationsindustry.

Defense industry revenuesdeclined $1.8 million (or 58%) in fiscal 2005 compared to fiscal 2004,mainly due to a decline in demand for our products in the defense industry andthe absence of any major defense industry contracts as a result of economicconditions and changes in management of our sale organization.

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**Cost of Revenues**

***Cost of Revenues:***   Thefollowing table summarizes the cost of revenues (in thousands, exceptpercentages) in fiscal 2006, 2005 and 2004: 

| ** **                             | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                             | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| Total revenues                         |       | $                                                     | 16,745     |                         | $          | 15,746                       |       | $                                      | 17,697     |                                   |       | $ | 999 |   |   |   | 6 | % |   |   | $ | (1,951 | ) |   |   | -11 | % |   |
| Cost of license  revenues              |       | 313                                                   |       | 274                          |       | 457                          |       |                                   | 39         |                                   |       |   | 14 | % |   |   | (183 | ) |   |   | -40 | % |   |
| Cost of  maintenace revenues           |       | 1,442                                                 |       | 1,456                        |       | 1,516                        |       |                                   | (14        | )                                      |       |   | -1 | % |   |   | (60 | ) |   |   | -4 | % |   |
| Cost of  professional service revenues |       | 1,021                                                 |       | 870                          |       | 1,059                        |       |                                   | 151        |                                   |       |   | 17 | % |   |   | (189 | ) |   |   | -18 | % |   |
| Amortization of  intangibles           |       | 315                                                   |       | 671                          |       | 698                          |       |                                   | (356       | )                                      |       |   | -53 | % |   |   | (27 | ) |   |   | -4 | % |   |
| Total cost of revenues                 |       | $                                                     | 3,091      |                         | $          | 3,271                        |       | $                                      | 3,730      |                                   |       | $ | (180 | ) |   |   | -6 | % |   |   | $ | (459 | ) |   |   | -12 | % |   |
| Gross margin                           |       | $                                                     | 13,654     |                         | $          | 12,475                       |       | $                                      | 13,967     |                                   |       | $ | 1,179 |   |   |   | 9 | % |   |   | $ | (1,492 | ) |   |   | -11 | % |   |
| Gross margin percentage                |       | 82                                                    | %          | 79                           | %          | 79                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

Cost of revenues was $3.1 million (or 18% oftotal revenues) in fiscal 2006, a decline of $180,000 (or 6%) from the cost ofrevenues of $3.3 million (or 21% of total revenues) reported in fiscal2005. This decline included unfavorable foreign currency fluctuations ofapproximately $79,000.

Cost of revenues was $3.3 million (or 21% oftotal revenues) in fiscal 2005, a decrease of $459,000 (or 12%) from the costof revenues of $3.7 million (or 21% of total revenues) reported in fiscal2004.

Gross margin percentages (cost of revenues as a percentageof total revenues) were slightly improved at 82% in fiscal 2006, and relativelyflat at 79% in 2005 and 2004.

*Costof license revenues:**  *Costof license revenues consists primarily of royalties and costs of third partyproducts, which we resell to our customers, as well as product media andshipping and packaging costs.

Thefollowing table summarizes the cost of license revenues (in thousands, exceptpercentages) in fiscal 2006, 2005 and 2004:

| ** **        | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **        | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **License**       | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues          |       | $                                                     | 8,469      |                         | $          | 8,828                        |       | $                                      | 9,686      |                                   |       | $ | (359 | ) |   |   | -4 | % |   |   | $ | (858 | ) |   |   | -9 | % |   |
| Cost              |       | 313                                                   |       | 274                          |       | 457                          |       |                                   | 39         |                                   |       |   | 14 | % |   |   | (183 | ) |   |   | -40 | % |   |
| Margin            |       | $                                                     | 8,156      |                         | $          | 8,554                        |       | $                                      | 9,229      |                                   |       | $ | (398 | ) |   |   | -5 | % |   |   | $ | (675 | ) |   |   | -7 | % |   |
| Margin percentage |       | 96                                                    | %          | 97                           | %          | 95                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Cost of license revenues was $313,000 (or 4% oflicense revenues) in fiscal 2006, and increased $39,000 (or 14%) from the costof license revenues of $274,000 (or 3% of license revenues) in fiscal2005. The increase was primarily due to an increase in product media andpackaging costs, as well as warranty reserves offset by a decrease in costsassociated with one discontinued product line in our European 

39

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operations ofapproximately $79,000. Additionally, there was a decrease of $44,000 in cost ofthird party products in our North American operation.

License margin decreasedby 1% in fiscal 2006 compared to fiscal 2005 due to the slight increase in costof license revenues in fiscal 2006.

*Fiscal 2005 Compared to Fiscal 2004*

Cost of license revenues was $274,000 (or 3% oflicense revenues) in fiscal 2005, and decreased $183,000 (or 40%) from the costof license revenues of $457,000 (or 5% of license revenues) in fiscal2004. The decrease was primarily due to a $250,000 decline in the cost oflicense revenues in our North American region related to a reduction in royaltyexpenses associated with the termination of a contract with one of our thirdparty vendors for licenses that we no longer embed in our standard product line.The termination of this royalty contract resulted in a reduction of royaltyexpenditures of approximately $100,000 per quarter. This decrease was partiallyoffset by an increase of $69,000 in our European region related to royalty expensesfor third party products that we embed in our standard product line in Europe.

License margin improved by 2% in fiscal 2005 comparedto fiscal 2004 due to the fact that our revenue mix included fewer revenuesfrom the sale of third party products, which have lower margins.

*Costof maintenance revenues:**  *Costof maintenance revenues consists primarily of customer support personnel andrelated expenses, including payroll, employee benefits and allocated overhead.

Thefollowing table summarizes the cost of maintenance revenues (in thousands,except percentages) in fiscal 2006, 2005 and 2004:

| ** **        | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **        | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Maintenance**   | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues          |       | $                                                     | 6,726      |                         | $          | 6,305                        |       | $                                      | 6,783      |                                   |       | $ | 421 |   |   |   | 7 | % |   |   | $ | (478 | ) |   |   | -7 | % |   |
| Cost              |       | 1,442                                                 |       | 1,456                        |       | 1,516                        |       |                                   | (14        | )                                      |       |   | -1 | % |   |   | (60 | ) |   |   | -4 | % |   |
| Margin            |       | $                                                     | 5,284      |                         | $          | 4,849                        |       | $                                      | 5,267      |                                   |       | $ | 435 |   |   |   | 9 | % |   |   | $ | (418 | ) |   |   | -8 | % |   |
| Margin percentage |       | 79                                                    | %          | 77                           | %          | 78                           | %          |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Cost of maintenance revenues was $1.4 million (or21% of maintenance revenues) in fiscal 2006, representing a decline of $14,000(or 1%) from the cost of cost of maintenance revenues of $ 1.5 million (or23% of maintenance revenues) reported in fiscal 2005. The overall cost ofmaintenance revenues remained relatively consistent in these two years. Thedecline in absolute dollars of $14,000 was mainly due to a headcount reductionof one employee (resulting in a reduction in salary and related expenses of$34,000 in our U.S. operations) as a result of fiscal 2005 restructuringactivities, offset by an increase of approximately $20,000 in traveling andrelated expenses in our European operations as a result of increasedmaintenance revenues in that region.

Maintenance marginsimproved by 2% in fiscal 2006 compared to fiscal 2005, because of improvedutilization of our maintenance resources with increased maintenance revenuesduring fiscal 2006.

*Fiscal 2005 Compared to Fiscal 2004*

Cost of maintenance revenues was $1.5 million (or23% of maintenance revenues) in fiscal 2005, and declined $60,000 (or 4%) fromthe cost of maintenance revenues of $1.5 million (or 22% ofmaintenance revenues) in fiscal 2004. The decrease in absolute dollars wasprimarily due to a $195,000 decline in the 

40

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cost of maintenancerevenues in our North American region related to reduction in headcount ofthree employees and their associated salary and benefits expenses andfacilities allocation costs. This decrease in our North American region waspartially offset by a $140,000 increase in expenses in our European region, asthe result of the Poet acquisition and our decision to maintain a technicalsupport presence in Europe to accommodate the requirements for technicalservices from our European customer base subsequent to the Poet merger.

Maintenance margins declined by 1% in fiscal 2005compared to fiscal 2004, as the reduction in maintenance revenues outpaced thereduction in certain fixed costs during the period.

*Costof professional services revenues:**  *Cost of professional services consists of salaries,bonuses, third party consulting fees and other costs associated with supportingour professional services organization.

Thefollowing table summarizes the cost of professional services revenues (inthousands, except percentages) in fiscal 2006, 2005 and 2004:

| ** **                 | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                 | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Professional  services** | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                   |       | $                                                     | 1,550      |                         | $          | 613                          |       | $                                      | 1,228      |                                   |       | $ | 937 | ** ** |   |   | 153 | % |   |   | $ | (615 | ) |   |   | -50 | % |   |
| Cost                       |       | 1,021                                                 |       | 870                          |       | 1,059                        |       |                                   | 151        | ** **                             |       |   | 17 | % |   |   | (189 | ) |   |   | -18 | % |   |
| Margin                     |       | $                                                     | 529        |                         | $          | (257                         | )          | $                                      | 169        |                                   |       | $ | 786 | ** ** |   |   | 306 | % |   |   | $ | (426 | ) |   |   | -252 | % |   |
| Margin percentage          |       | 34                                                    | %          | -42                          | %          | 14                           | %          |                                   |       | ** **                             |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Cost of professional services revenues was$1.0 million (or 66% of professional services revenues) in fiscal 2006,and increased $151,000 (or 17%) over the cost of professional services revenuesof $870,000 (or 142% of professional services revenues) in fiscal 2005.This was primarily due to increases in salary and consultant compensation as aresult of transferring resources from engineering to professional servicesafter full utilization of professional services personnel in our Europeanregion pursuant to our percentage-of-completion consulting engagements withcertain European customers.

In Europe, there is a typical one-year warrantyrequirement for all our products and services. Prior to our merger with Poet inMarch 2004, Poet Holdings, Inc. provided for a reserve for suchwarranties that could be in excess of its regular maintenance programs. We havecontinued to maintain a reserve of approximately $8,000 related to theFastObjects products in Europe as of October 31, 2006. Pursuant to ourconsulting percentage-of-completion engagements with certain Europeancustomers, we have recorded additional warranty reserves of $128,000 for fiscal2006.

The professional servicesmargin improved by 76% in fiscal 2006 compared to fiscal 2005 due to betterutilization of our professional personnel. The negative margin in professionalservices for fiscal 2005 was due to under-utilization of one full-time employeededicated to professional services as a result of delays related to a majorconsulting project during fiscal 2005.

*Fiscal 2005 Compared to Fiscal 2004*

Cost of professional services revenues was $870,000(or 142% of professional services revenues) in fiscal 2005, and declined$189,000 (or 18%) from cost of professional services revenuesof $1.1 million (or 86% of professional services revenues) in fiscal2004. This was primarily due to a decline of $260,000 in our North Americanregion related to a headcount reduction of one employee and the associatedsalary, benefits and facility allocation cost. The decline was partially offsetby an increase of $72,000 in our European region due to increased servicerevenues in that region.

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The professional services margin declined by 56% infiscal 2005 compared to fiscal 2004 due to lower utilization rates of ourprofessional personnel. The negative margin in professional services for fiscal2005 was due to under-utilization of one full-time employee dedicated toprofessional services as a result of delays related to a major consultingproject during fiscal 2005.

*Amortizationof Intangible Assets:*   The amortization ofintangible assets in fiscal 2006 consists of the amortization of intangible assetsacquired in the 2004 acquisitions of Poet Holdings, Inc., FastObjects, Inc.and JDO Genie technology.

Thefollowing table summarizes the amortization of intangible assets (in thousands,except percentages) in fiscal 2006, 2005 and 2004:  

| ** **                                   | ** ** | **Fiscal Year ended** | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **October 31,**            | ** ** | **Increase (Decrease)**           | ** ** | **Increase (Decrease)**           | ** ** |
| ** **                                   | ** ** | **2006**                        | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| Mokume  Software, Inc.                  |       | $                               | —     |                                   | $          | —                                 |       | $ | 72 |   |   | $ | — |   |   |   | — |   |   |   | $ | (72 | ) |   |   | -100 | % |   |
| Poet  Holdings, Inc.                    |       | 189                             |       | 507                                    |       | 571                                    |       |   | (318 | ) |   |   | -63 | % |   |   | (64 | ) |   |   | -11 | % |   |
| JDO Genies (PTY),  LTD.                      |       | 110                             |       | 112                                    |       | 35                                     |       |   | (2 | ) |   |   | -2 | % |   |   | 77 |   |   |   | 220 | % |   |
| FastObjects, Inc.                       |       | 16                              |       | 52                                     |       | 20                                     |       |   | (36 | ) |   |   | -69 | % |   |   | 32 |   |   |   | 160 | % |   |
| Total amortization of  purchased intangibles |       | $                               | 315        |                                   | $          | 671                                    |       | $ | 698 |   |   | $ | (356 | ) |   |   | -53 | % |   |   | $ | (27 | ) |   |   | -4 | % |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Amortization of intangible assets was $315,000 (or 4%of license revenues) in fiscal 2006, and decreased $356,000 (or 53%) fromamortization of intangible assets of $ 671,000 (or 8% of license revenues) infiscal 2005. The decline was due to several write-offs of our previouslyamortized intangible assets for $2.6 million in fiscal 2005.

We expect to incurapproximately $79,000 per quarter for amortization of intangible assets infiscal 2007.

*Fiscal 2005 Compared to Fiscal 2004*

The amortization of intangible assets in fiscal 2005consists of the amortization of intangible assets acquired in the 2004acquisitions of Poet Holdings, Inc., FastObjects, Inc. and JDO Genietechnology.

Amortization of intangibleassets was $671,000 (or 4% of total revenues) in fiscal 2005 as comparedto $698,000 (or 4% of total revenues) in fiscal 2004. The decline inabsolute dollars of $27,000 in fiscal 2005 compared to fiscal 2004 was due toseveral write offs of our intangible assets, which occurred in late fiscal2005, eliminating associated amortization of these written-off assets.

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**Operating Expenses**

***Operating Expenses.****  *The following table summarizes our operating expenses(in thousands, except percentages) for fiscal 2006, 2005 and 2004:

| ** **                              | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Fiscal Year ended October 31,** | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                              | ** ** | **2006**                                              | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **In Dollars**                    | ** ** | **Percentage**                         | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Operating expenses**                  | ** ** | ** **                                            | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** |                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Sales and  marketing                    |       | $                                                     | 3,062      |                         | $          | 5,803                        |       | $                                      | 8,004      |                                   | $          | (2,741 | ) |   | -47 | % |   |   | $ | (2,201 | ) |   |   | -27 | % |   |
| Research and  development               |       | 3,147                                                 |       | 3,925                        |       | 5,137                        |       | (778                                   | )          |                                   | -20        | % |   |   | (1,212 | ) |   |   | -24 | % |   |
| General and  administrative             |       | 3,712                                                 |       | 4,647                        |       | 4,514                        |       | (935                                   | )          |                                   | -20        | % |   |   | 133 |   |   |   | 3 | % |   |
| Impairment of  goodwill and intangibles |       | —                                                |       | 12,913                       |       | 1,024                        |       | (12,913                                | )          |                                   | -100       | % |   |   | 11,889 |   |   |   | 1161 | % |   |
| Restructuring                           |       | 218                                                   |       | 638                          |       | 3,271                        |       | (420                                   | )          |                                   | -66        | % |   |   | (2,633 | ) |   |   | -80 | % |   |
| Total                                   |       | $                                                     | 10,139     |                         | $          | 27,926                       |       | $                                      | 21,950     |                                   | $          | (17,787 | ) |   | -64 | % |   |   | $ | 5,976 |   |   |   | 27 | % |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Total operating expenses were $10.1 million (or61% of total revenues) in fiscal 2006. Our total operating expenses in fiscal2006 represented a decline of $4.9 million (or 32%) from $15 millionof total operating expenses (after excluding $12.9 million of write-offsfor impairment of goodwill and intangible assets in fiscal 2005), reported forfiscal 2005. This decline included unfavorable foreign currency exchangefluctuations of $68,000. The most significant portion of this decline in ouroperating expenses was a reduction in our sales and marketing expenses byapproximately $2.7 million as part of our restructuring efforts, followed bya $935,000 reduction in our general and administrative expenses and a $778,000reduction in research and development expenses, discussed further below.

*Salesand Marketing:**  *Salesand marketing expenses consist primarily of personnel and related expenses,commissions earned by sales personnel, trade shows, travel and other marketingcommunication costs, such as advertising and other marketing programs.

Sales and marketing expenses were $3.1 million(or 18% of total revenues) in fiscal 2006, a decrease of $2.7 million (or47%), compared to $5.8 million (or 37% of total revenues) in fiscal 2005.The decrease was primarily due to headcount reductions of six personnel in ourU.S. sales operations (resulting in a reduction of salary, commission, employeeseverance payments and other payroll related expenses totaling$1.1 million) and headcount reductions of five personnel in Europeanoperations (resulting in a reduction of salary, commission, employee severancepayments and other payroll related expenses totaling $489,000). Additionally,the sales activities and marketing programs were reduced in both the U.S. andEuropean operations resulting in a reduction of expenses of approximately$939,000. Headcount reductions were the result of our fiscal 2005 restructuringactivities to better align our costs with current revenue levels.

We expect sales and marketing expenses in fiscal 2007to be generally consistent with our sales and marketing expense levels infiscal 2006, and that sales and marketing expense will continue to represent aconsiderable percentage of our total operating expenditures in the future.

*Researchand Development:**  *Researchand development expenses consist primarily of personnel and related expenses,including payroll and employee benefits, expenses for facilities and paymentsmade to outside software development contractors.

Research and development expenses were$3.1 million (or 19% of revenues) for fiscal 2006, a decrease of $778,000(or 20%), compared to $3.9 million (or 25% of revenues) in fiscal 2005.The decrease 

43

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was mainly due toheadcount reductions of three personnel in our U.S. operations (resulting in areduction of salary and payroll related expenses, as well as severance paymentstotaling $355,000) and a decline in temporary help and outside consultantexpenses (resulting in a reduction of $402,000). These reductions wereprimarily due to our fiscal 2005 restructuring activities.

We anticipate that we will continue to investsignificant resources in research and development activities in the future todevelop new products, advance the technology of our existing products anddevelop new business opportunities. We expect our research and developmentexpenses in fiscal 2007 to be generally consistent with our research anddevelopment expenses levels in fiscal 2006.

*Generaland Administrative:**  *Generaland administrative expenses consist primarily of personnel and related expensesand general operating expenses.

General and administrative expenses were$3.7 million (or 22% of total revenues) in fiscal 2006, a decrease of$935,000 (or 20%), compared to $4.6 million (or 30% of total revenues) infiscal 2005. The decrease was mainly due to headcount reductions of threepersonnel in U.S. operations (resulting in a reduction of salary and payrollrelated expenses totaling $99,000) and a reduction in temporary help andoutside consultant expenses (resulting in a reduction of $97,000) as the resultour fiscal 2005 restructuring activities. Legal expenses declined by $677,000and were primarily a result of an insurance reimbursement for certain legalcosts of $241,000, a reduction of $185,000 in legal expenses related to a legalsettlement, and a reduction of $251,000 in overall legal costs due to lesscomplex regulatory issues during fiscal 2006. Additionally, accounting and SECfiling related expenses declined by $297,000 due to more streamlined operationsand procedures. These declines were offset by an increase of approximately$279,000 in salary and traveling expenses in our European operationsattributable to our CEO as a result of a reorganization in management.

We expect our general andadministrative expenses to increase moderately for fiscal 2007 due to costsassociated with implementation of Section 404 of the Sarbanes-Oxley of2002 and the absence of any reimbursement for legal costs in fiscal 2007, andlegal fees and potential costs associated with a pending litigation in which acustomer, Rockwell Automation, is seeking indemnity from a third-party claimasserted against Rockwell Automation by Systems America, Inc.

*Fiscal 2005 Compared to Fiscal 2004*

Operating expenses were $28.0 million (or 177% oftotal revenues) in fiscal 2005, an increase of $6.0 million (or 27%),compared to $22.0 million (or 124% of total revenues) in fiscal2004. This increase included $12.9 million of non-cash changes forimpairment of goodwill and intangible assets and restructuring charges of$638,000 in fiscal 2005, compared to $1.0 million of non-cash charges forimpairment of goodwill and intangible assets, and restructuring charges of$3.3 million in fiscal 2004. This increase also included $187,000 offoreign currency exchange losses. These increases were countered by significantreductions in our sales and marketing expenses and research and developmentexpenses in fiscal 2005 as compared to fiscal 2004, which were implemented aspart of our restructuring efforts.

*Salesand Marketing:**  *Salesand marketing expenses were $5.8 million (or 37% of total revenues) infiscal 2005, a decrease of $2.2 million (or 27%), compared to$8.0 million (or 45% of total revenues) in fiscal 2004. The decrease wasmainly due to a decline of $1.4 million in the costs of our North Americansales organization as a result of headcount reductions of seven employees andtheir related salaries, benefits, commissions, traveling expenses andfacilities allocation costs, as well as a decline of $180,000 in consulting expensesin our North American marketing organization as a result of reduced activitiesin various marketing programs. In addition, there was a decline of $600,000 insales and marketing expenses in our European region, due primarily to a declinein salaries, benefits, commissions and traveling expenses in our European saleorganization related to a headcount reduction of nine sales employees.

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*Researchand Development:**  *Researchand development expenses were $3.9 million (or 25% of revenues) in fiscal2005, a decrease of $1.2 million (or 24%), compared to $5.1 million(or 29% of revenues) in fiscal 2004. The decrease was primarily due to areduction of $1.6 million in expenses for our North American research anddevelopment operations related to a headcount reduction of twelve employees andtheir related salaries and benefits as part of our restructuring in the fourthquarter of fiscal 2004. These cost reductions were partially offset by anincrease of $314,000 in our European operational costs for an additional sixemployees who joined Versant pursuant to the Poet acquisition and their relatedsalary and benefit expenses. We also experienced an increase of $74,000 in ourIndian operations for an additional headcount of nine employees for theirrelated salary and benefits.

*Generaland Administrative:**  *Generaland administrative expenses were $4.6 million (or 30% of total revenues)in fiscal 2005, an increase of $133,000 (or 3%), compared to $4.5 million(or 26% of total revenues) in fiscal 2004. This increase was due to an $820,000increase in North American expenses for professional services fees which wereprimarily associated with accounting and legal services for SEC compliance,offset by a decline of $473,000 in North American region expenses related tothe headcount reduction of four employees and their associated salary, benefitsand facility allocation costs. These costs were further offset by a decline of$200,000 in our European operational expenses related to the headcountreduction of six employees and their associated salaries and benefits due toconsolidation of Versant Europe operations with Poet.

***OutsideShareholders’ Loss from Variable Interest Entity or “VIE”***

| ** **                                  | ** ** | **Fiscal Year ended ** | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **October 31,**                  | ** ** | **Increase (Decrease)**           | ** ** | **Increase (Decrease)**           | ** ** |
| ** **                                  | ** ** | **2006**                              | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| Outside  shareholders’ income from VIE |       | $                                     | 138        |                                   | $          | 320                                    |       |   | $ | — |   |   |   | $ | (182 | ) |   |   | -57 | % |   |   | $ | 320 |   |   |   | — |   |   |
|                                             |            |                                       |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the three months ended July 31, 2005, aspart of our restructuring plan, we spun-off the assets of our VOA.Net productto Vanatec, and we committed to the capital contribution of an additional212,500 euros (or $260,000) to Vanatec, which we fully contributed onNovember 3, 2005. We determined that equity at risk in Vanatec wasnot sufficient to permit it to finance its activities without additionalsubordinated financial support; therefore, we considered Vanatec a variableinterest entity in accordance with FIN 46(R), *Consolidationof Variable Interest Entities* (As Amended).

Vanatec’s results were included in our consolidatedfinancial statements for the three month periods ended July 31, 2005,October 31, 2005 and January 31, 2006 and through March 27,2006. During the three months ended January 31, 2006, we absorbed ourshare of Vanatec’s losses up to the point that it exceeded variable interestliability; and subsequent to that we absorbed 100% of the losses that Vanatechad incurred for an additional amount of $35,000 for the three months endedJanuary 31, 2006.

On March 27, 2006, wesold our 19.6% interest in Vanatec to a third party investor for €4,900and entered into a joint ownership agreement with Vanatec with respect tocertain technology we had previously licensed to Vanatec. According to thisagreement, Vanatec is obligated to pay Versant a running royalty interest at arate of six percent of its net proceeds, but no less than €30per copy of licenses it grants of the co-owned technology, for a period of fiveyears following the effective date of this agreement. Further, at any time duringthe royalty period, Vanatec has the right to exercise a buyout for its royaltyobligations by making a one-time payment to Versant of €450,000.As a result of Versant’s sale of its interest in Vanatec and this agreement,Versant determined that it was no longer the primary beneficiary of Vanatec,and thus, was no longer required to consolidate Vanatec’s operating results. Wecontinued to absorb 100% of Vanatec’s losses for an additional amount of$70,000 for the period between February 1, 2006 and March 27, 2006.We are no longer required to consolidate the operating results of Vanatec as ofMarch 28, 2006.

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***Other Income, Net***

Other income, net primarily represents the foreigncurrency gain or loss as a result of settling transactions denominated incurrencies other than our functional currency. It also represents the interestexpense due to our financing activities offset by interest income earned forour cash and cash equivalents.

Thefollowing table summarizes our other income, net (in thousands, exceptpercentages) in fiscal 2006, 2005 and 2004:

| ** **                      | ** ** | **Fiscal Year ended ** | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **October 31,**                  | ** ** | **Increase (Decrease)**           | ** ** | **Increase (Decrease)**           | ** ** |
| ** **                      | ** ** | **2006**                              | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Other income (expense), net** | ** ** | ** **                            | ** ** | ** **                             | ** ** | ** **                             | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest income                 |       | $                                     | 154        |                                   | $          | 63                                     |       | $ | 77 |   |   | $ | 91 |   |   |   | 144 | % |   |   | $ | (14 | ) |   |   | -18 | % |   |
| Interest expense                |       | (6                                    | )          | (26                                    | )          | (3                                     | )          |   | 20 |   |   |   | -77 | % |   |   | (23 | ) |   |   | 767 | % |   |
| Foreign exchange  gain (loss)   |       | 6                                     |       | 132                                    |       | (47                                    | )          |   | (126 | ) |   |   | -95 | % |   |   | 179 |   |   |   | 381 | % |   |
| Other income  (expense)         |       | 54                                    |       | 28                                     |       | 57                                     |       |   | 26 |   |   |   | 93 | % |   |   | (29 | ) |   |   | -51 | % |   |
| Effect of  accounting change    |       | —                                |       | —                                 |       | 35                                     |       |   | — |   |   |   | — |   |   |   | (35 | ) |   |   | -100 | % |   |
| Total                           |       | $                                     | 208        |                                   | $          | 197                                    |       | $ | 119 |   |   | $ | 11 |   |   |   | 6 | % |   |   | $ | 78 |   |   |   | 66 | % |   |

 

*Fiscal 2006 Compared to Fiscal 2005*

Other income, net was$208,000 (or 1% of revenues) in fiscal 2006 compared to $197,000 (or 1% ofrevenues) in fiscal 2005. The increase in absolute dollars of $11,000 waslargely due to an increase in interest income of $91,000 from our Europeanoperations due to higher cash balances and higher interest rates, which wasoffset by foreign exchange rate fluctuations between fiscal 2006 and fiscal2005 of approximately $126,000.

*Fiscal 2005 Compared to Fiscal 2004*

Other income, net was $197,000(or 1% of revenues) in fiscal 2005, compared to $119,000 (or 1% of revenues) infiscal 2004. The increase in absolute dollars of $78,000 was due primarily toforeign exchange fluctuations of $179,000 as a result of a stronger localcurrencies compared to the U.S. dollar, offset by decreases in interest income,effect of accounting change and other income for approximately $101,000.

***Gain on Disposal of VIE***

As discussed above, we areno longer required to consolidate the operating results of Vanatec as of March 28,2006; therefore, we recorded a gain of $131,000 related to the deconsolidationof Vanatec in our consolidated statement of operations during the three monthsended April 30, 2006. This amount is comprised of the reversal of theexcess losses that we had absorbed previously for $105,000, the considerationthat we received from a third party investor in lieu of our interest at Vanatecof $6,000, the transfer of property and equipment for $17,000; othercomprehensive income for $6,000; and offset by foreign currency losses of$3,000.

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***Provision for Income Taxes***

Provisionfor income taxes primarily consists of corporate income taxes for oursubsidiaries in Germany and U.K. and, to a lesser extent, foreign withholdingtaxes and state income and franchise taxes in the U.S. The following tablesummarizes our provision for income taxes (in thousands, except percentages) infiscal 2006, 2005 and 2004:

| ** **                          | ** ** | **Fiscal Year ended ** | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **October 31,**                  | ** ** | **Increase (Decrease)**           | ** ** | **Increase (Decrease)**           | ** ** |
| ** **                          | ** ** | **2006**                              | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| **Provision  for income taxes**     | ** ** | ** **                            | ** ** |                                   | ** ** | ** **                             |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Foreign  withholding taxes          |       | $                                     | 7          |                                   |       | $                                      | 24         | ** ** |   |   | $ | 88 | ** ** |   |   | $ | (17 | ) |   |   | -71 | % |   |   | $ | (64 | ) |   |   | -73 | % |   |
| Provision for  income taxes Germany |       | 210                                   |       |                                   | —     | ** **                             |       |   | — | ** ** |   |   | 210 |   |   |   | 100 | % |   |   | — |   |   |   | — |   |   |
| Provision for  income taxes UK      |       | 126                                   |       |                                   | —     | ** **                             |       |   | — | ** ** |   |   | 126 |   |   |   | 100 | % |   |   | — |   |   |   | — |   |   |
| Provision for  income taxes India   |       | 15                                    |       |                                   | —     | ** **                             |       |   | — | ** ** |   |   | 15 |   |   |   | 100 | % |   |   | — |   |   |   | — |   |   |
| US state and  franchise taxes       |       | 32                                    |       |                                   | 13         | ** **                             |       |   | — | ** ** |   |   | 19 |   |   |   | 146 | % |   |   | 13 |   |   |   | 100 | % |   |
| Total                               |       | $                                     | 390        |                                   |       | $                                      | 37         | ** ** |   |   | $ | 88 | ** ** |   |   | $ | 353 |   |   |   | 954 | % |   |   | $ | (51 | ) |   |   | -58 | % |   |

 

Although we have not exhausted our net operating taxloss carry forwards in Germany, the German tax code provides for certain annualstatutory limitations related to the use of tax loss carry forward amounts. Theprovision for income taxes in Germany of approximately $210,000 for fiscal 2006is attributable to the taxable income related to our German operations that isin excess of the allowable utilization of the tax loss carry forwards, andtherefore, subject to corporate taxes. Furthermore, we fully utilized our taxloss carry forwards in the U.K. during fiscal 2006. The U.K. provision forincome taxes of $126,000 reflects the net taxable income subject to U.K. taxesafter utilization of the available tax loss carry forward.

We incurred foreign withholding tax and statefranchise tax of approximately $39,000, $37,000, and $88,000 in fiscal 2006,2005 and 2004, respectively, which we have included in our income taxprovision.

At October 31, 2006, we had federal and state netoperating loss carry forwards of $82.5 million and $22.6 million,respectively, and federal and state tax credit carry forwards of$2.2 million and $1.3 million, respectively. The federal tax creditcarry forwards expire on various dates through 2025, if not utilized. The statetax credit can be carried forward indefinitely. Additionally, at October 31,2006, we had German net operating tax loss carry forwards of approximately $40.2 million.The German net operating tax loss carry forwards can be carried forwardindefinitely. Due to our history of operating losses, we believe that there issufficient uncertainty regarding the realizability of these carry forwards and,therefore, a valuation allowance of approximately $48.2 million has beenrecorded against our net deferred tax assets. We will continue to assess therealizability of the tax benefit available based on actual and forecastedoperating results.

Due to “change in ownership” provisions of theInternal Revenue Code of 1986, the availability of net operating loss and taxcarry forwards to offset federal taxable income in future periods is subject toan annual limitation.

A portion of deferred taxassets relating to net operating losses, pertains to net operating loss carryforwards resulting from tax deductions upon the exercise of employee stockoptions of approximately $1.6 million. When recognized, the tax benefit ofthese loss carry forwards will be accounted for as a credit to additionalpaid-in capital rather than a reduction of income tax expense.

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***Income (loss) From Discontinued Operations, Net ofIncome Taxes:***

In February 2006, we sold our WebSphere consultingbusiness in exchange for a one-time cash payment plus certain contingentpayments during a 24-month period following the close of the transaction.Additionally, in September 2004, we sold all the stock of Poet GmbH, anindirect Versant subsidiary that owned the assets and employed the personnel ofour Catalog Solutions Business (the “Catalog Business”) to a privately heldGerman company. As a result, we have reflected the results of operations of theWebSphere consulting practice for fiscal 2006, fiscal 2005, and fiscal 2004 andthe results of operations of the Catalog Business for fiscal 2004 asdiscontinued operations. Therefore, reported revenues for these periods nolonger include any revenues from the WebSphere consulting practice and the CatalogBusiness. The results from the discontinued WebSphere and Catalog Businessoperations, however, are reported as income (loss) from discontinuedoperations, net of income taxes.

Thefollowing table summarizes our income (loss) from discontinued operations, netof income taxes (in thousands, except percentages) in fiscal 2006, 2005 and2004:

| ** **                                                       | ** ** | **Fiscal Year ended ** | ** ** | **Fiscal 2006 vs 2005** | ** ** | **Fiscal 2005 vs 2004** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                       | ** ** | **October 31,**                  | ** ** | **Increase (Decrease)**           | ** ** | **Increase (Decrease)**           | ** ** |
| ** **                                                       | ** ** | **2006**                              | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** | **In Dollars** | ** ** | **Percentage** | ** ** |
| Income (loss)  from discontinued operations, net of income taxes |       | $                                     | 231        |                                   | $          | 417                                    |       | $ | (1,314 | ) |   | $ | (186 | ) |   |   | -45 | % |   |   | $ | 1,731 |   |   |   | 132 | % |   |
|                                                                  |            |                                       |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fiscal 2006 Compared to Fiscal 2005*

Income from discontinued operations, net was $231,000in fiscal 2006 compared to $417,000 in fiscal 2005. The $231,000 income fromdiscontinued operations in fiscal 2006 primarily represents royalty paymentsfor Websphere during fiscal 2006. The $417,000 income from discontinuedoperations in fiscal 2005 primarily represents Websphere’s net income forfiscal 2005.

*Fiscal 2005 Compared to Fiscal 2004*

Income from discontinuedoperations, net was $417,000 in fiscal 2005 compared to loss from discontinuedoperations of $1.3 million in fiscal 2004. The $1.3 million loss fromdiscontinued operations in fiscal 2004 primarily represents the net loss of$1.6 million from our Catalog Business offset by Websphere’s net income of$332,000 for fiscal 2004.

**Liquidity andCapital Resources**

***Cash and Cash Equivalents***

In fiscal 2006 we financed our operations and met ourcapital expenditure requirements through cash flows from operations.

As of October 31, 2006, $7.0 million of our$8.2 million in cash and cash equivalents at that date was held in foreignfinancial institutions, of which $3.9 million was held in foreigncurrencies.

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Thefollowing table summarizes our cash balances held in foreign currencies andtheir equivalent U.S. dollar amounts (in thousands): 

| ** **                    | ** ** | **As of October 31, 2006** | ** **        |
|-------------------------------|------------|------------------------------------------------|-------------------|
| ** **                    | ** ** | **Local Currency**                        | ** **        | **U.S. Dollar** | ** ** |
| **Cash in foreign currency:** |       |                                           |              |   |   |   |   |   |   |
| Euro                          |       |                                           | €            | 2,907 |   |   |   | $ | 3,699 |   |   |
| British Pound                 |       |                                           | £            | 106 |   |   |   | 200 |   |   |
| India Rupee                   | * *   | * *                                       | *Rs.*  1,137 |   |   |   | 25 |   |   |
| Total                         |       |                                           |              |   |   |   | $ | 3,924 |   |   |

 

We transact business in various foreign currenciesand, accordingly, we are subject to exposure from adverse movements in foreigncurrency exchange rates. To date, the effect of changes in foreign currencyexchange rates on our net operating results has not beensignificant. Operating expenses incurred by our foreign subsidiaries aredenominated primarily in local currencies. We currently do not usefinancial instruments to hedge these operating expenses. We intend toassess the need to utilize financial instruments to hedge currency exposures onan ongoing basis during fiscal 2007.

Our exposure to foreign exchange risk is related tothe magnitude of foreign net profits and losses denominated in euros andPound Sterling, as well as our net position of monetary assets andmonetary liabilities in those foreign currencies. These exposures have thepotential to produce either gains or losses within our consolidated results.Our European operations, however, in some instances act as a natural hedgesince both operating expenses as well as revenues are denominated in localcurrencies. In these instances, although an unfavorable change in the exchangerate of euros or Pound Sterling against the U.S. dollar will result inlower revenues when translated into U.S. dollars, the operating expenditureswill be lower as well. Additionally, since most of our cash resides outside theUnited States, we have maintained approximately 46% of our cash balance inEurope in the form of U.S. dollars to neutralize the impact of any foreigncurrency fluctuations.

In relation to our cash balances held overseas, therewere no European Union foreign exchange restrictions on repatriating ouroverseas-held cash to the United States. However, we may be subject to incometax withholding in the source countries and to U.S. federal and state incometaxes if the cash payment or transfer from our subsidiaries to the U.S. parentwere to be classified as a dividend. Other payments made by our Europeanoverseas subsidiaries in the ordinary course of business (e.g. payment ofroyalties or interest from the subsidiaries to the U.S. parent) were generallynot subject to income tax withholding due to tax treaties.

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

We believe that, with ourcurrent cost structure, we can reasonably expect to operate at a positive cashflow level in fiscal 2007.

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**Cash Flow providedby (used in) Operating Activities**

Thistable aggregates certain line items from our cash flow statements for thefollowing fiscal years to present the key items affecting our operating activities(in thousands):

| ** **                                                  | ** ** | **Fiscal Year ended October 31,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  cash provided (used) by operating activities:**      |       |                                                  |       |   |   |   |   |
| Net income (loss)                                           |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (9,575 | ) |
| Loss (gain) from the disposal of assets                     |       | (599                                                  | )          | — |   | 309 |   |
| Earnings (losses) from discontinued operations              |       | (231                                                  | )          | (417 | ) | 1,955 |   |
| Non-cash adjustments                                        |       | 674                                                   |       | 13,734 |   | 3,019 |   |
| Accounts receivable                                         |       | (260                                                  | )          | 2,690 |   | (93 | ) |
| Prepaid expense and other assets                            |       | 194                                                   |       | 726 |   | 237 |   |
| Accounts payable, accrued liabilities and other liabilities |       | (1,342                                                | )          | (1,988 | ) | 1,402 |   |
| Deferred revenues                                           |       | 673                                                   |       | (40 | ) | (1,780 | ) |
| Deferred rents                                              |       | (137                                                  | )          | (83 | ) | (42 | ) |
| Total                                                       |       | $                                                     | 3,273      |   | $ | 68 |   | $ | (4,568 | ) |

 

The main source of ouroperating cash flows is cash collections from customers who have purchased ourproducts and services. Our primary uses of cash in operating activities are forpersonnel related expenditures and facilities costs.

*Fiscal 2006*

We generated $3.3 million of cash flows fromoperations in fiscal 2006. This was primarily derived from $4.3 million innet income and was partially offset by $806,000 cash used, as a result ofreduction in accounts payables, accrued liabilities and other liabilities.

Non-cash adjustments were $674,000, as reflected inour cash flow statement in fiscal 2006, which were primarily depreciation andamortization expenses of $518,000 and stock based compensation expenses of$236,000. Non-cash adjustments may increase or decrease in the future and, as aresult, this might positively or negatively impact our future operating results,but they will not have a direct impact on our cash flows.

The timing of payments to our vendors for accountspayable and collections from our customers for accounts receivable will impactour cash flows from operating activities. We typically pay our vendors andservice providers in accordance with their invoice terms and conditions. Ourstandard payment terms for our invoices are usually between 30 and 60 days net.

We measure the effectiveness of our collection effortsby an analysis of our accounts receivable and our days sales outstanding, or “DSO”.We calculate DSO by taking the ending accounts receivable balances (net of baddebt allowance) divided by the average daily sales amount. Average daily salesamount is calculated by dividing the total quarterly revenue recognized net ofchanges in deferred revenues divided by 91.25 days. Collection of accountsreceivable and related DSO could fluctuate in the future periods, due to timingand amount of our revenues and the effectiveness of our collection efforts. OurDSOs were 56 days, 45 days and 78 days for the three months ended October 31,2006, October 31, 2005 and October 31, 2004, respectively.

Our working capital was $6.2 million as of October 31,2006 compared to $870,000 as of October 31, 2005.

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The change inassets and liabilities of $872,000 in fiscal 2006 was due to the following:

·       Deferredrevenues increased by $673,000 during fiscal 2006. European deferred revenues increased$580,000 due primarily to a significant long-term maintenance agreement with a Europeancustomer, and an increase of $93,000 in U.S. deferred revenues as a result ofextended support maintenance agreements.

·       Accountspayable and other accrued liabilities declined $1.3 million primarily dueto a decrease in liabilities related to discontinuation of WebSphere consultingof $322,000, a decrease in restructuring accrual due to facility-relatedpayments of $672,000 made against the accrual, a decrease of $339,000 due tolower legal expenses liabilities and accruals, and a decrease of $262,000 inmarketing, accounting and other general liabilities and accruals due tostreamlining procedures and improved cost control. These decreases werepartially offset by an increase of $346,000 related to income tax liabilitiesaccrual in our European region due to statutory limitation on the net operatingloss utilization in Germany and exhaustion of our net operating loss carryforward in the United Kingdom.

·       Accounts receivableincreased by $260,000 primarily due to a net $512,000 increase from our U.S operationsas a result of a significant customer receivable in the fourth quarter of thefiscal 2006, and this increase was partially offset by a decrease of $235,000in our U.K. operations.

*Fiscal 2005*

We generated $68,000 of cash flows from operations infiscal 2005. This was primarily due to a $2.7 million reduction inaccounts receivables as a result of improved collections procedures andimproved days sales outstanding, or DSO, and was partially offset by$2.1 million cash used, as a result of reduction in accounts payables,accrued liabilities and other liabilities.

Non-cash adjustments were $13.7 million, asreflected in our cash flow statement in fiscal 2005, which were primarily dueto a $12.9 million impairment of goodwill and intangible assets, recordedat the end of the third quarter of fiscal 2005.

The change inassets and liabilities of $1.3 million in fiscal 2005 was due to thefollowing:

·       Reductionsin prepaid and other assets of $406,000, of which $223,000 was for the refundof a deposit related to the disposition of the Catalog Solutions Business.

·       Reductionsin accounts payable and other accrued liabilities of $2.1 million wereprimarily due to $1.4 million of payments made against ourrestructuring accrual, of which $504,000 was employee related and $926,000 wasfacilities related including adjustments of $122,000 against our restructuringaccrual due to the new sub-leasing agreement in our UK office. The remainingreduction of $725,000 was primarily due to payout for consulting, commissionand bonus payables of $149,000 in the U.S. in line with lower revenue levels;the reduction of acquisition accruals of $335,000 in the U.S. due to the payout of the remaining JDO purchase price; the reduction of customer depositaccount of $200,000 in U.S. and payout of consulting accrual of $178,000 in U.Sas result of decreased third party consultants expenses.

·       Decrease of$2.7 million in accounts receivable was primarily due to a decrease inrevenues and also better collection procedures that resulted in a decline inour DSO in fiscal 2005.

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*Fiscal 2004*

We used$4.6 million cash in operating activities in fiscal 2004, which wascomprised of the following:

·       Approximately$24.3 million of cash expenses, mainly employee related, an increase of$1.9 million over cash expenses paid in operating activities in fiscal 2003,primarily due to  addition of Poet’semployees since March 18, 2004, plus

·       Approximately$700,000 of restructuring expenses paid in fiscal 2004, offset by

·       Approximately $20.1 millioncash collected from our customers.

**Cash Flow providedby (used in) Investing Activities**

Our primary uses of cashin investing activities have typically been for the purchases of property andequipment (mostly information technology related equipment). However, infiscal 2004 and 2003, we made a number of acquisitions (Poet, FastObjects, Inc.and the JDO Genie technology) and incurred significant costs in connection withsuch acquisitions. Additionally, in fiscal 2006, we sold our WebSphere consultingpractice and our interests in Vanatec, the proceeds from which are reflected ininvesting activities. And in fiscal 2004, we sold our catalog solutionsbusiness for cash, the proceeds from which are reflected in investingactivities.

*Fiscal 2006*

In fiscal 2006, netcash provided by investing activities was approximately $385,000, comprised ofthe following:

·       Cashinflows from the proceeds of sale of our WebSphere practice and interests ofVanatec for approximately $506,000, offset by

·       Cashused in purchases of property and equipment of $144,000 and cash generated fromsales of property and equipment of $23,000.

We anticipate an increasein purchases of property and equipment in fiscal 2007, including costs relatedto the replacement of older server equipment and other computer relatedequipment in both Germany and the U.S., and capital expenditures related to newcorporate headquarters in the U.S., as the current building lease expires on June 30,2007.

*Fiscal 2005*

In fiscal 2005, netcash used in investing activities was approximately $47,000, comprised of thefollowing:

·       Cashused in purchases of property and equipment of $20,000 and cash generated fromsales of property and equipment of $32,000, and

·       $59,000 related toacquisition of a 19.6% of interest in Vanatec, a privately held company to whomwe spun-out our VOA.Net assets.

*Fiscal 2004*

In fiscal 2004, netcash provided by investing activities was approximately $6.4 million,comprised of the following:

·       Cashinflows from the acquisition of Poet (net of transaction costs) and the sale ofour catalog business for approximately $7.2 million, offset by

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·       Investing outflowsrepresenting the net acquisition costs of FastObjects Inc. and the JDO Genie technologyfor approximately $500,000 and purchases of property and equipment forapproximately $262,000.

**Cash Flow providedby (used in) Financing Activities**

*Fiscal 2006*

Our main source of cash from financing activities wasproceeds from sale of common stock under our employee stock option and stockpurchase plans and, in the periods that we had a receivable line of credit inplace, periodic draw-downs on the credit line that were typically repaid withina month.

In fiscal 2006,$140,000 cash was provided by financing activities comprised of the following:

·       Cashinflows of $192,000 due to proceeds from the sale of common stock under ourstock option and employee stock purchase plans, and

·       Cashpayments of $39,000 for the repayment of the borrowing under our line ofcredit.

·       Principalpayments of $13,000 under capital lease obligations.

Our future liquidity andcapital resources could be impacted by the exercise of outstanding common stockoptions and the cash proceeds we receive upon exercise of these securities.Further, as of October 31, 2006 we had approximately 193,000 sharesavailable to issue under our current equity incentive and director plans. Thetiming of the issuance, the duration of their vesting provision and the grantprice will all impact the timing of any proceeds. Accordingly, we cannot estimatethe amount of such proceeds at this time.

*Fiscal 2005*

Our main source of cash from financing activities wasproceeds from sale of common stock under our employee stock option and stockpurchase plans and, in the periods that we had a receivable line of credit inplace, periodic draw-downs on the credit line that were typically repaid withina month.

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

·       Cashinflows of $334,000 due to proceeds from the sale of common stock under ourstock option and employee stock purchase plans, and

·       Cash inflows of $50,000 dueto proceeds from the borrowing from the line of credit during the fourthquarter of fiscal 2005. On June 21, 2005, Versant and a bank entered intoa Loan and Security Agreement, a Streamline Facility Agreement and anIntellectual Property Security Agreement, collectively, the “Loan Agreements”.Under the terms of these Loan Agreements, we may borrow up to a maximum of$3.0 million from the bank at****any one timeunder a revolving secured accounts receivable-based line of credit. This lineof credit permits Versant to obtain short-term loan advances from the bankequal to 80% of the face amount of specific eligible accounts receivable ofVersant. The interest rate on each advance will be either 4.0% or 4.5% abovethe bank’s prime rate. As noted below, this credit facility expires in June 2007and we do not currently expect to renew it.

*Fiscal 2004*

On September 3, 2004, our receivables basedcredit line for $5.0 million with a financial institution expired and weelected not to renew the facility at that time due to our very low historicusage of this credit line. The last time we borrowed under this line wasin October 2003 for $500,000, and this amount was repaid within a month.

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Our primary uses of cash in financing activities weretypically for the repayments under our receivables credit line that, asmentioned above, expired in September 2004.

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

·       Repaymentof the amount drawn-down on the receivables credit line for $500,000 in October 2003,offset by 

·       The proceeds for the saleof common stock for $468,000, under our stock option and employee stockpurchase plans.

***Commitments and Contingencies***

Our principal commitments as of October 31, 2006consisted of obligations under operating leases for facilities and equipment.

In November 1996, we entered into a ten-yearoperating lease agreement for our corporate headquarters in Fremont, Californiathat commenced on July 1, 1997 and expires on June 30, 2007. Theterms of the lease provide for certain increases in rental payments during thelease term. Rental expense under this agreement, including contractual rentincreases, is recognized on a straight-line basis. We also lease field officespace in Europe and India, generally under multi-year operating leaseagreements. Consolidated rent expense in fiscal years ended October 31,2006, October 31, 2005 and October 31, 2004, were approximately$877,000, $1.0 million, and $1.7 million, respectively.

Wehave recorded approximately $591,000 of our commitments on our October 31,2006 Balance Sheet. Our annual minimum commitments as of October 31, 2006under non-cancelable operating leases, not recorded on the October 31,2006 balance sheet, are as follows:

| ** **                           | ** ** | **Rental** | ** ** | **Equipment** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                           | ** ** | **Lease**  | ** ** | **Leases**    | ** ** | **Total**  | ** ** |
| Fiscal year ending  October 31, |       |       |       |          |       |       |       |   |   |
| 2007                                 |       | 1,054      |       |          | 60         |       |       | 1,114 |   |
| 2008                                 |       | 93         |       |          | 43         |       |       | 136 |   |
| 2009                                 |       | —     |       |          | 34         |       |       | 34 |   |
| 2010                                 |       | —     |       |          | 16         |       |       | 16 |   |
| Thereafter                           |       | —     |       |          | 22         |       |       | 22 |   |
| Total                                |       | $          | 1,147      |          |       | $          | 175        |   |   | $ | 1,322 |   |
|                                      |            |            |            |               |            |            |            |  |  |  |  |  |

 

On June 21, 2005, we entered into a Loan andSecurity Agreement with a financial institution, a Streamline FacilityAgreement and an Intellectual Property Security Agreement, or collectively, the“Loan Agreements”. Under the terms of these Loan Agreements, we may borrow upto a maximum of $3.0 million from the bank at any one time under arevolving secured accounts receivable-based line of credit. This line of creditpermits us to obtain short-term loan advances from the financial institutionequal to 80% of the face amount of our specific eligible accounts receivable.The interest rate on each advance will be either 4.0% or 4.5% above the bank’sprime rate. Our obligations to the financial institution under the LoanAgreements are secured by a first security interest in all of our assets,including our equipment, cash and intellectual property. The credit facilityprovided by the Loan Agreements will expire by June 21, 2007, and we donot expect to renew this facility or enter into another credit facility infiscal 2007.

We believe that our existing cash and cash equivalentsand cash to be generated from operations will be sufficient to finance ouroperations during the next twelve months. However, if we fail to generateadequate cash flows from operations in the future, due to an unexpected declinein our revenues, or due to a sustained increase in cash expenditures in excessof the revenues generated; then our cash balances may not be sufficient to fundour continuing operations without obtaining additional debt or equityfinancing. 

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Additional cash may alsobe needed to acquire or invest in complementary businesses or products or toobtain the right to use complementary technologies, and we expect that, in theevent of such an acquisition or investment, if significant, it will benecessary for us to seek additional debt or equity financing.

If we are required to obtain additional financing forour working capital, there can be no assurance that such financing will beavailable to us on reasonable financial or other terms, or at all. The pricesat which new investors might be willing to purchase our securities may be lowerthan the market value or the trading price of our common stock. The sale ofadditional equity or convertible debt securities could also result in dilutionto our shareholders, which could be substantial and may involve the issuance ofpreferred securities that would have liquidation preferences that entitleholders of the preferred securities to receive certain amounts before holdersof our common stock in connection with an acquisition or business combinationinvolving Versant or a liquidation of Versant. New investors may also seekagreements giving them additional voting control or seats on our board ofdirectors.

Further, if our common stock were ever delisted fromtrading on the NASDAQ Capital Market, our ability to obtain financing throughsales of our stock would be materially impaired. Even if we were able to obtainadditional debt or equity financing, the terms of any such financing mightsignificantly restrict our business activities and in some circumstances, mightrequire us to obtain the approval of our shareholders, which could delay orprevent consummation of the financing transaction.

In order to be able tocomply with the NASDAQ Capital Market’s continued listing requirementsregarding the minimum bid price of our common stock, at our annual meeting ofshareholders held on August 22, 2005, our shareholders approved anamendment of our articles of incorporation to effect a 1-for-10reverse split of our outstanding common stock, and to reduce the number ofauthorized shares of our common stock, Series A preferred stock andundesignated preferred stock in proportion to the ratio of the reverse split.Subsequent to the reverse split, on September 8, 2005, we received noticefrom NASDAQ market that we regained compliance with NASDAQ’s minimum bid pricerequirement.

***Recent Accounting Pronouncements***

In May 2005, the Financial Accounting StandardsBoard issued SFAS 154, *Accounting Changes andError Corrections*. This new standard replaces APB Opinion 20, *Accounting Changes* and SFAS 3, *ReportingAccounting Changes in Interim Financial Statements*. Among otherchanges, SFAS 154 requires that a voluntary change in accounting principle beapplied retrospectively with all prior period financial statements presented onthe new accounting principle, unless it is impracticable to do so. SFAS 154also provides that a change in method of depreciating or amortizing along-lived non-financial asset be accounted for as a change in estimate(prospectively) that was effected by a change in accounting principle, and thatcorrections of previously issued financial statements should be termed a *restatement*. The new standard is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. Adoption of this standard is not expected to have a material impact onthe Company’s financial position or results of operations.

In November 2005, the Financial AccountingStandards Board issued FSP No. FAS 123(R)-3, “TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards”. This FSP provides a practical transition election related to accountingfor the tax effects of share-based payment awards to employees, as analternative to the transition guidance for the APIC pool in paragraph 81of Statement 123(R). The guidance in this FSP is effective after November 10,2005 as posted in the FASB website. The Company may take up to one year fromthe later of adoption of SFAS 123(R) or the effective date of thisFSP to evaluate its available transition alternatives and make its one-timeelection. The Company will evaluate this guidance, but does not expect amaterial impact on its results of operations or financial position.

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In June 2006, the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*—an interpretation of FASB Statement No. 109(FIN 48). FIN 48 seeks to reduce the significant diversity in practiceassociated with financial statement recognition and measurement in accountingfor income taxes. In recognition that a period of six to nine months would beneeded to initially apply FIN 48, the effective date of FIN 48 is the firstfiscal year beginning after December 15, 2006, with early adoptionencouraged. The Company is currently in the process of evaluating the impactthat the adoption of FIN 48 will have on its financial position, results ofoperations and cash flows.

In September 2006, the FASB issuedStatement 157,*Fair Value Measurements,*(FAS 157). This statement clarifies the definition of fairvalue, the methods used to measure fair value, and requires expanded financialstatement disclosures about fair value measurements for assets and liabilities.FAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The new guidance will be effective forus on November 1, 2008 and we are currently assessing the impact on ourfinancial statements.

In September 2006, the SEC’s Office of the ChiefAccountant and Divisions of Corporation Finance and Investment Managementreleased Staff Accounting Bulletin No. 108 (SAB 108), whichprovides interpretive guidance on how registrants should quantifyfinancial-statement misstatements. Currently, the two methods most commonlyused by preparers and auditors to quantify misstatements are the “rollover”method (which focuses primarily on the income statement impact ofmisstatements) and the “iron curtain” method (which focuses primarily on thebalance sheet impact of misstatements). Under SAB 108, registrants will berequired to consider both the rollover and iron curtain methods (i.e., a dualapproach) when evaluating the materiality of financial statement errors.Registrants will need to revisit their prior materiality assessments andconsider them using both the rollover and iron curtain methods.

SAB 108 is effectivefor annual financial statements in the first fiscal year ending after November 15,2006, therefore for us, the year ended October 31, 2007. The SAB providestransition accounting and disclosure guidance for situations in which aregistrant concludes that a material error(s) existed in prior-period financialstatements under the dual approach. Specifically, registrants will be permittedto restate prior period financial statements or recognize the cumulative effectof initially applying SAB 108 through an adjustment to beginning retainedearnings in the year of adoption. We believe SAB 108 will not have amaterial impact on our annual financial statements.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk.

***Foreign currencyhedging instruments.******  ***We transact business in variousforeign currencies and, accordingly, we are subject to exposure from adversemovements in foreign currency exchange rates. To date, the effect of changes inforeign currency exchange rates on revenue and operating expenses has not beenmaterial***.***Operatingexpenses incurred by our foreign subsidiaries are denominated primarily inlocal currencies. We currently do not use financial instruments to hedge theseoperating expenses. We intend to assess the need to utilize financialinstruments to hedge currency exposures on an ongoing basis during fiscal 2007.

Our exposure to foreign exchange risk is related tothe magnitude of foreign net profits and losses denominated in euros andPound Sterling, as well as our net position of monetary assets andmonetary liabilities in those foreign currencies. These exposures have thepotential to produce either gains or losses within our consolidated results.Our European operations, however, in some instances act as a natural hedgesince both operating expenses as well as revenues are denominated in localcurrencies. In these instances, although an unfavorable change in the exchangerate of euros or Pound Sterling against the U.S. dollar will result inlower revenues when translated into U.S. dollars, the operating expenditureswill be lower as well. Additionally, since most of our cash resides outside theUnited States, we have maintained 

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approximately 46% of ourcash balance in Europe in the form of U.S. dollars to neutralize the impact ofany foreign currency fluctuations.

We do not use derivative financial instruments forspeculative trading purposes.

***Interest rate risk.******  ***Our cashequivalents primarily consist of money market accounts; therefore, we do notbelieve that our interest rate risk is significant at this time.

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**Item 8.**                        FinancialStatements and Supplementary Data.

**VERSANT CORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND OTHER INFORMATION**

| Report of Independent  Registered Public Accounting Firm                                        |   | 60     |   |
|-------------------------------------------------------------------------------------------------|--------|--------|--------|
| Consolidated  Balance Sheets as of October 31, 2006 and 2005                               |   | 61     |   |
| Consolidated Statements of Operations for the Years  Ended October 31, 2006, 2005 and 2004 |   | 62     |   |
| Consolidated Statements of Stockholders’ Equity                                            |   | 63     |   |
| Consolidated Statements of Cash Flows for the Years  Ended October 31, 2006, 2005 and 2004 |   | 64     |   |
| Notes to Consolidated Financial Statements:                                                     |   |   |   |
| Note 1—The Company and Basis of Presentation                                               |   | 65     |   |
| Note 2—Summary of Significant Accounting Policies                                          |   | 66     |   |
| Note 3—Stock Based Compensation                                                            |   | 76     |   |
| Note 4—Acquisitions                                                                        |   | 80     |   |
| Note 5—Discontinued Operations                                                             |   | 81     |   |
| Note 6—Restructuring                                                                       |   | 83     |   |
| Note 7—Consolidation of Variable Interest Entity                                           |   | 85     |   |
| Note 8—Lease Obligation and Other Commitments                                              |   | 86     |   |
| Note 9—Line of Credit                                                                      |   | 86     |   |
| Note 10—Shareholders’ Equity and Loss Per Share                                       |   | 87     |   |
| Note 11—Income Taxes                                                                       |   | 88     |   |
| Note 12—Employee and Director Benefit Plans                                                |   | 89     |   |
| Note 13—Forfeiture of Common Stocks                                                        |   | 93     |   |
| Note 14—Related Party Transactions                                                         |   | 93     |   |
| Note 15—Valuation and Qualifying Accounts and Reserves                                     |   | 93     |   |
| Note 16—Quarterly Information                                                              |   | 94     |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and Shareholdersof Versant Corporation

We have audited the accompanying consolidated balancesheets of Versant Corporation and subsidiaries (the “Company”) as of October 31,2006 and 2005 and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three years in the periodended October 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Versant Corporation and subsidiaries as of October 31,2006 and 2005, and the consolidated results of their operations and theirconsolidated cash flows for each of the three years in the period ended October 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.

Asdiscussed in Note 3 to the consolidated financial statements, the Company hasadopted Financial Accounting Standards Board Statement No. 123(R),Share-Based Payments (SFAS 123R) in 2006.
| /s/ Grant Thornton LLP    |   |   |
|---------------------------|--------|--------|
| December 8, 2006     |
| San Francisco, California |

 

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**VERSANT CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**(in thousands)

| ** **                                                                                                                                           | ** ** | **As of October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                           |       |                                 |       |   |   |
| **Current assets:**                                                                                                                                  |       |                                 |       |   |   |
| Cash and cash equivalents                                                                                                                            |       | $                                    | 8,231      |   | $ | 3,958 |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of $62 and $114 at October 31, 2006 and  October 31, 2005, respectively |       | 2,885                                |       | 2,529 |   |
| Other current assets                                                                                                                                 |       | 782                                  |       | 744 |   |
| Total current assets                                                                                                                                 |       | 11,898                               |       | 7,231 |   |
| Property and equipment, net                                                                                                                          |       | 385                                  |       | 489 |   |
| Goodwill                                                                                                                                             |       | 6,720                                |       | 6,720 |   |
| Intangible assets,  net                                                                                                                              |       | 1,196                                |       | 1,512 |   |
| Other assets                                                                                                                                         |       | 62                                   |       | 294 |   |
| Total assets                                                                                                                                         |       | $                                    | 20,261     |   | $ | 16,246 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                       |       |                                 |       |   |   |
| **Current  liabilities:**                                                                                                                            |       |                                 |       |   |   |
| Accounts payable                                                                                                                                     |       | $                                    | 154        |   | $ | 779 |   |
| Accrued liabilities                                                                                                                                  |       | 2,363                                |       | 2,667 |   |
| Deferred revenues                                                                                                                                    |       | 3,083                                |       | 2,779 |   |
| Deferred rent                                                                                                                                        |       | 99                                   |       | 136 |   |
| Total current liabilities                                                                                                                            |       | 5,699                                |       | 6,361 |   |
| Long-term restructuring accrual                                                                                                                      |       | —                               |       | 448 |   |
| Deferred revenues                                                                                                                                    |       | 742                                  |       | 184 |   |
| Long-term capital  lease obligations                                                                                                                 |       | 28                                   |       | 30 |   |
| Deferred rent                                                                                                                                        |       | —                               |       | 98 |   |
| Variable interest  entity liability                                                                                                                  |       | —                               |       | 137 |   |
| Total liabilities                                                                                                                                    |       | 6,469                                |       | 7,258 |   |
| **Stockholders’  equity:**                                                                                                                      | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Common stock, no par value                                                                                                                           |       | 95,089                               |       | 94,755 |   |
| Deferred stock-based compensation                                                                                                                    |       | —                               |       | (44 | ) |
| Other comprehensive income, net                                                                                                                      |       | 521                                  |       | 396 |   |
| Accumulated deficit                                                                                                                                  |       | (81,818                              | )          | (86,119 | ) |
| Total stockholders’ equity                                                                                                                      |       | 13,792                               |       | 8,988 |   |
| Total liabilities and stockholders’ equity                                                                                                      |       | $                                    | 20,261     |   | $ | 16,246 |   |

 

See accompanying notes to consolidated financial statements.

60

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**VERSANT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**(in thousands, except forper share amounts)

| ** **                                                                        | ** ** | **Fiscal Year Ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**                                                                     |       |                                                  |       |   |   |   |   |
| License                                                                           |       | $                                                     | 8,469      |   | $ | 8,828 |   | $ | 9,686 |   |
| Maintenance                                                                       |       | 6,726                                                 |       | 6,305 |   | 6,783 |   |
| Professional services                                                             |       | 1,550                                                 |       | 613 |   | 1,228 |   |
| Total revenues                                                                    |       | 16,745                                                |       | 15,746 |   | 17,697 |   |
| **Cost of  revenues:**                                                            |       |                                                  |       |   |   |   |   |
| License                                                                           |       | 313                                                   |       | 274 |   | 457 |   |
| Amortization of intangible assets                                                 |       | 315                                                   |       | 671 |   | 698 |   |
| Maintenance                                                                       |       | 1,442                                                 |       | 1,456 |   | 1,516 |   |
| Professional services                                                             |       | 1,021                                                 |       | 870 |   | 1,059 |   |
| Total cost of revenues                                                            |       | 3,091                                                 |       | 3,271 |   | 3,730 |   |
| Gross profit                                                                      |       | 13,654                                                |       | 12,475 |   | 13,967 |   |
| **Operating  expenses:**                                                          |       |                                                  |       |   |   |   |   |
| Sales and marketing                                                               |       | 3,062                                                 |       | 5,803 |   | 8,004 |   |
| Research and development                                                          |       | 3,147                                                 |       | 3,925 |   | 5,137 |   |
| General and administrative                                                        |       | 3,712                                                 |       | 4,647 |   | 4,514 |   |
| Impairment of goodwill                                                            |       | —                                                |       | 10,300 |   | 707 |   |
| Impairment of intangibles                                                         |       | —                                                |       | 2,613 |   | 317 |   |
| Restructuring                                                                     |       | 218                                                   |       | 638 |   | 3,271 |   |
| Total operating expenses                                                          |       | 10,139                                                |       | 27,926 |   | 21,950 |   |
| Income (loss) from operations                                                     |       | 3,515                                                 |       | (15,451 | ) | (7,983 | ) |
| Outside shareholders’ income from VIE                                        |       | 138                                                   |       | 320 |   | — |   |
| Other income, net                                                                 |       | 208                                                   |       | 197 |   | 119 |   |
| Gain on disposal of Variable Interest Entity                                      |       | 131                                                   |       | — |   | — |   |
| Income (loss) from continuing operations before taxes                             |       | 3,992                                                 |       | (14,934 | ) | (7,864 | ) |
| Provision for income taxes                                                        |       | 390                                                   |       | 37 |   | 88 |   |
| Net income (loss) from continuing operations                                      |       | 3,602                                                 |       | (14,971 | ) | (7,952 | ) |
| Deemed dividend to preferred shareholders                                         |       | —                                                |       | — |   | (2,422 | ) |
| Net income (loss) from continuing operations  attributable to common shareholders |       | 3,602                                                 |       | (14,971 | ) | (10,374 | ) |
| Net income (loss) from discontinued operations, net  of income taxes              |       | 231                                                   |       | 417 |   | (1,314 | ) |
| Gain (loss) from sale of discontinued operations, net  of income taxes            |       | 468                                                   |       | — |   | (309 | ) |
| Net income (loss)                                                                 |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (11,997 | ) |
| **Basic  income (loss) per share:**                                               |       |                                                  |       |   |   |   |   |
| Net income (loss) from continuing operations  attributable to common shareholders |       | $                                                | 1.01       |   | $  | (4.23 | ) | $  | (3.33 | ) |
| Earnings (loss) from discontinued operations, net of  income tax                  |       | $                                                     | 0.19       |   | $ | 0.12 |   | $ | (0.52 | ) |
| Net income (loss) attributable to common shareholders                             |       | $                                                     | 1.20       |   | $ | (4.11 | ) | $ | (3.85 | ) |
| **Diluted  income (loss) per share:**                                             |       |                                                  |       |   |   |   |   |
| Net income (loss) from continuing operations  attributable to common shareholders |       | $                                                | 1.01       |   | $  | (4.23 | ) | $  | (3.33 | ) |
| Earnings (loss) from discontinued operations, net of  income tax                  |       | $                                                     | 0.19       |   | $ | 0.12 |   | $ | (0.52 | ) |
| Net income (loss) attributable to common shareholders                             |       | $                                                     | 1.20       |   | $ | (4.11 | ) | $ | (3.85 | ) |
| **Shares  used in per share calculation:**                                        |       |                                                  |       |   |   |   |   |
| Basic                                                                             |       | 3,577                                                 |       | 3,539 |   | 3,117 |   |
| Diluted                                                                           |       | 3,584                                                 |       | 3,539 |   | 3,117 |   |
| **Non-cash  stock-based compensation included in the above expenses:**            |       |                                                  |       |   |   |   |   |
| Cost of revenues                                                                  |       | $                                                     | 39         |   | $ | 27 |   | $ | — |   |
| Sales and marketing                                                               |       | 41                                                    |       | 12 |   | 25 |   |
| Research and development                                                          |       | 79                                                    |       | 44 |   | 25 |   |
| General and administrative                                                        |       | 77                                                    |       | 13 |   | 36 |   |
| Total                                                                             |       | $                                                     | 236        |   | $ | 96 |   | $ | 86 |   |

 

See accompanying notes to consolidated financial statements.

61

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**VERSANT CORPORATION AND SUBSIDIARIESSTATEMENTS OF SHAREHOLDERS’ EQUITY**(in thousands, except forshare amount)

| ** **                                                                                                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **   | ** **    | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated**   | ** ** | ** ** | ** ** | ** **             | ** **  |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|--------------|---------------|-----------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|------------------------|-------------|
| ** **                                                                                                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **   | ** **    | ** **      | ** ** | ** **        | ** ** | ** **             | ** ** | **Other**         | ** ** | **Total**  | ** ** | **Total**              | ** **  |
| ** **                                                                                                     | ** ** | **Convertible Preferred** | ** ** | **Common** | ** ** | **Deferred** | ** **    | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                                     | ** ** | **Shares**                     | ** ** | **Amount** | ** ** | **Shares**   | ** **    | **Amount**      | ** ** | **Compensation**  | ** ** | **Deficit**            | ** ** | **Income**        | ** ** | **Equity** | ** ** | **Income (loss)** | ** **  |
| **Balance  at October 31, 2003**                                                                          |       | 1,313,743                      |       | $          | 7,772      |         | 1,464,764     |            | $          | 55,096            |       |                   | $          | —            |       |       |       | $                      | (59,568     | ) |   |   | $ | 22 |   |   |   | $ | 3,322 |   |   |   |   |   |   |
| ESPP                                                                                                           |       | —                         |       | —     |       | 29,927       |          | 198             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 198 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                     |       | —                         |       | —     |       | 28,394       |          | 270             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 270 |   |   |   |   |   |   |
| Conversion of  preferred stock to common                                                                       |       | (1,313,743                     | )          | (7,772 )   |       | 394,123      |          | 7,772           |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| Inducement to  preferred stock holders relating to conversion  of preferred stock and modification of warrants |       | —                         |       | —     |       | —       |          | 2,422           |       |              | —     |                   |       |              | (2,422     | )          |       |                   | —      |   |   |   | — |   |   |   | (2,422 | ) |   |
| Issurance of  common stock and options in connection with Poet acquisition                                     |       | —                         |       | —     |       | 1,552,534    |          | 28,330          |       |              | (299       | )                      |       |              | —     |       |       |                   | —      |   |   |   | 28,031 |   |   |   |   |   |   |
| Amortization of  unearned stock based compensation                                                             |       | —                         |       | —     |       | —       |          | —          |       |              | 86         |                   |       |              | —     |       |       |                   | —      |   |   |   | 86 |   |   |   |   |   |   |
| Cancellation of  unvested Poet stock options                                                                   |       | —                         |       | —     |       | —       |          | (67)            |       |              | 67         |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| Net loss before  deemed dividend                                                                               |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | (9,575     | )          |       |                   | —      |   |   |   | (9,575 | ) |   |   | (9,575 | ) |   |
| Foregn currency  translation adjustments                                                                       |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | 547         |   |   |   | 547 |   |   |   | 547 |   |   |
| Total  comprehensive loss                                                                                      |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| **Balance  at October 31, 2004**                                                                          | ** ** | **—**                     | ** ** | **$**      | **—** | ** **   | **3,469,742** | ** **      | **$**      | **94,021**        | ** ** | ** **             | **$**      | **(146**          | **)**      | ** ** | ** ** | **$**                  | **(71,565** | **)** | ** ** | ** ** | **$** | **569** |   | ** ** | ** ** | **$** | **22,879** |   | ** ** | ** ** | **$** | **(11,450** | **)** | ** ** |
| ESPP                                                                                                           |       | —                         |       | —     |       | 15,985       |          | 73              |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 73 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                     |       | —                         |       | —     |       | 52,137       |          | 267             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 267 |   |   |   |   |   |   |
| Reverse split  adjustments                                                                                     |       | —                         |       | —     |       | (42          | )             | —          |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| Issurance of  common stock in connection with purchase of JDO assets                                           |       | —                         |       | —     |       | 23,015       |          | 400             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 400 |   |   |   |   |   |   |
| Amortization of  unearned stock based compensation                                                             |       | —                         |       | —     |       | —       |          | —          |       |              | 96         |                   |       |              | —     |       |       |                   | —      |   |   |   | 96 |   |   |   |   |   |   |
| Cancellation of  unvested Poet stock options                                                                   |       | —                         |       | —     |       | —       |          | (6)             |       |              | 6          |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| Net loss                                                                                                       |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | (14,554    | )          |       |                   | —      |   |   |   | (14,554 | ) |   |   | (14,554 | ) |   |
| Foregn currency  translation adjustments                                                                       |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | (173        | ) |   |   | (173 | ) |   |   | (173 | ) |   |
| Total  comprehensive loss                                                                                      |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   | — |   |   |
| **Balance  at October 31, 2005**                                                                          | ** ** | **—**                     | ** ** | **$**      | **—** | ** **   | **3,560,837** | ** **      | **$**      | **94,755**        | ** ** | ** **             | **$**      | **(44**           | **)**      | ** ** | ** ** | **$**                  | **(86,119** | **)** | ** ** | ** ** | **$** | **396** |   | ** ** | ** ** | **$** | **8,988** |   | ** ** | ** ** | **$** | **(14,727** | **)** | ** ** |
| ESPP                                                                                                           |       | —                         |       | —     |       | 19,630       |          | 64              |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 64 |   |   |   |   |   |   |
| Exercise of stock  options                                                                                     |       | —                         |       | —     |       | 25,499       |          | 128             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 128 |   |   |   |   |   |   |
| Forfeiture of  common stock - Mokume Cancellation                                                              |       | —                         |       | —     |       | (8,998       | )             | (50)            |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | (50 | ) |   |   |   |   |   |
| Non-cash stock  based compesnation expenses                                                                    |       | —                         |       | —     |       | —       |          | 192             |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | 192 |   |   |   |   |   |   |
| Adjustment from  deferred compensation to APIC                                                                 |       | —                         |       | —     |       | —       |          | —          |       |              | 44         |                   |       |              | —     |       |       |                   | —      |   |   |   | 44 |   |   |   |   |   |   |
| Net income                                                                                                     |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | 4,301      |       |       |                   | —      |   |   |   | 4,301 |   |   |   | 4,301 |   |   |
| Foregn currency  translation adjustments                                                                       |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | 125         |   |   |   | 125 |   |   |   | 125 |   |   |
| Total  comprehensive loss                                                                                      |       | —                         |       | —     |       | —       |          | —          |       |              | —     |                   |       |              | —     |       |       |                   | —      |   |   |   | — |   |   |   |   |   |   |
| **Balance  at October 31, 2006**                                                                          | ** ** | **—**                     | ** ** | **$**      | **—** | ** **   | **3,596,968** | ** **      | **$**      | **95,089**        | ** ** | ** **             | **$**      | **—**        | ** ** | ** ** | ** ** | **$**                  | **(81,818** | **)** | ** ** | ** ** | **$** | **521** |   | ** ** | ** ** | **$** | **13,792** |   | ** ** | ** ** | **$** | **4,426** | ** ** | ** ** |

 

See accompanying notes to consolidated financial statements.

62

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**VERSANT CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                          | ** ** | **Fiscal Year Ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                                          |       |                                                  |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (9,575 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities: |       |                                                  |       |   |   |   |   |
| Gain from sale of  discontinued operations, net of income taxes                                     |       | (468                                                  | )          | — |   | — |   |
| Gain on disposal  of Variable Interest Entity                                                       |       | (131                                                  | )          | — |   | — |   |
| Loss on sale of  Catalog business                                                                   |       | —                                                |       | — |   | 309 |   |
| Earnings (losses)  from discontinued operations                                                     |       | (231                                                  | )          | (417 | ) | 1,955 |   |
| Depreciation and  amortization                                                                      |       | 203                                                   |       | 305 |   | 1,557 |   |
| Amortization of  intangible assets                                                                  |       | 315                                                   |       | 671 |   | — |   |
| Stock-based  compensation                                                                           |       | 236                                                   |       | 96 |   | 86 |   |
| Write off of property  and equipment                                                                |       | 25                                                    |       | — |   | 65 |   |
| Write off of  leasehold improvements in conjunction with restructuring                              |       | —                                                |       | — |   | 200 |   |
| Impairment of  goodwill and intangibles                                                             |       | —                                                |       | 12,913 |   | 1,024 |   |
| Non-cash operating  expenses related to cancellation of common stock                                |       | (50                                                   | )          | — |   | — |   |
| Provision  (recovery) of bad debt allowance                                                         |       | (55                                                   | )          | (251 | ) | 87 |   |
| Changes in current assets and liabilities:                                                          |       |                                                  |       |   |   |   |   |
| Restricted cash                                                                                     |       | —                                                |       | 320 |   | — |   |
| Accounts  receivable                                                                                |       | (260                                                  | )          | 2,690 |   | (93 | ) |
| Prepaid expenses  and other assets                                                                  |       | 194                                                   |       | 406 |   | 237 |   |
| Accounts payable                                                                                    |       | (557                                                  | )          | (65 | ) | (305 | ) |
| Accrued  liabilities and other liabilities                                                          |       | (785                                                  | )          | (1,923 | ) | 1,707 |   |
| Deferred revenues                                                                                   |       | 673                                                   |       | (40 | ) | (1,780 | ) |
| Deferred rent                                                                                       |       | (137                                                  | )          | (83 | ) | (42 | ) |
| Net cash provided  by (used in) operating activities                                                |       | 3,273                                                 |       | 68 |   | (4,568 | ) |
| **Cash flows from investing activities:**                                                           |       |                                                  |       |   |   |   |   |
| Proceeds from sale  of Websphere                                                                    |       | 500                                                   |       | — |   | — |   |
| Proceeds from sale  of Vanatec                                                                      |       | 6                                                     |       | — |   | — |   |
| Proceeds from sale  of Catalog Business                                                             |       | —                                                |       | — |   | 1,223 |   |
| Cash acquired in  Poet acquisition, net of transaction costs                                        |       | —                                                |       | — |   | 5,931 |   |
| Investment in  Vanatec                                                                              |       | —                                                |       | (59 | ) | — |   |
| Proceeds from sale  of property and equipment                                                       |       | 23                                                    |       | 32 |   | — |   |
| Purchase of JDO  Genie (PTY) Ltd.                                                                   |       | —                                                |       | — |   | (200 | ) |
| Purchase of  FastObjects, Inc.                                                                 |       | —                                                |       | — |   | (301 | ) |
| Purchases of  property and equipment                                                                |       | (144                                                  | )          | (20 | ) | (262 | ) |
| Net cash provided  by (used in) investing activities                                                |       | 385                                                   |       | (47 | ) | 6,391 |   |
| **Cash flows from financing activities:**                                                           |       |                                                  |       |   |   |   |   |
| Proceeds from sale  of common stock, net                                                            |       | 192                                                   |       | 334 |   | 468 |   |
| Principal payments  under capital lease obligations                                                 |       | (13                                                   | )          | (6 | ) | — |   |
| Proceeds (net payments)  under short-term note and bank loan                                        |       | (39                                                   | )          | 50 |   | (500 | ) |
| Net cash provided  by (used in) financing activities                                                |       | 140                                                   |       | 378 |   | (32 | ) |
| Effect of foreign  exchange rate changes on cash and cash equivalents                               |       | 244                                                   |       | (171 | ) | 486 |   |
| Net increase in cash and cash equivalents  from operating, investing and financing activities       |       | 4,042                                                 |       | 228 |   | 2,277 |   |
| Net increase  (decrease) in cash and cash equivalents from discontinued operation                   |       | 231                                                   |       | 417 |   | (1,955 | ) |
| Cash and cash  equivalents at beginning of period                                                   |       | 3,958                                                 |       | 3,313 |   | 2,991 |   |
| **Cash and  cash equivalents at end of period**                                                     |       | $                                                     | 8,231      |   | $ | 3,958 |   | $ | 3,313 |   |
| **Supplemental  disclosures of cash flows information:**                                            |       |                                                  |       |   |   |   |   |
| Cash paid for:                                                                                      |       |                                                  |       |   |   |   |   |
| Interest                                                                                            |       | $                                                     | 6          |   | $ | 26 |   | $ | 3 |   |
| Foreign, federal, foreign  withholding and state income taxes                                       |       | $                                                     | 54         |   | $ | 37 |   | $ | 88 |   |
| **Supplemental  schedule of noncash investing and financing activities:**                           |       |                                                  |       |   |   |   |   |
| Conversion of  preferred shares to common stocks                                                    |       | $                                                     | —     |   | $ | — |   | $ | 7,772 |   |
| Deemed dividend to  preferred shareholders                                                          |       | $                                                     | —     |   | $ | — |   | $ | 2,422 |   |
| Common stock  issued in conjunction with purchase of JDO Genie (PTY) Ltd.                           |       | $                                                     | —     |   | $ | 400 |   | $ | — |   |
| Common stock  issued in conjunction with Poet acquisition                                           |       | $                                                     | —     |   | $ | — |   | $ | 25,928 |   |
| Options issued in  conjunction with Poet acquisition, net of intrinsic value of unvested options    |       | $                                                     | —     |   | $ | — |   | $ | 2,103 |   |
| Mokume common  stock Cancellation                                                                   |       | $                                                     | (50        | ) | $ | — |   | $ | — |   |
| Non cash stock  compensation expenses                                                               |       | $                                                     | 236        |   | $ | 96 |   | $ | 86 |   |

 

See accompanying notes to consolidated financial statements

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**VERSANT CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSOctober 31, 2006**

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

Versant Corporation (with its subsidiaries,collectively referred to in this report as “Versant” or “the Company”) wasincorporated in California in August 1988. Versant is a leading providerof object-oriented data management software that forms a critical component ofthe infrastructure of enterprise computing.  The Company designs, develops, markets andsupports object-oriented database management system products to solve complexdata management and data integration problems of enterprises. Versant alsoprovides related product support, training and consulting services to assistusers in development and deployment of software applications based on itsproducts. The Company operates its business within a single operating segmentreferred to as Data Management. Versant’s principal executive offices arelocated in Fremont, California. Versant has international operations inGermany, the United Kingdom and India and markets its software products andrelated maintenance services directly through telesales and field salesorganizations in North America and Germany and indirectly through distributorsand resellers worldwide.

Versant is subject to the risks associated withsimilar companies in a comparable stage of development. These risks include,but are not limited to the following: dependence on a key product, fluctuationsof operating results, seasonality, lengthy sales cycles for its products,product concentration, dependence on the continued customer acceptance ofobject database technology, competition, a limited customer base, dependence onkey individuals, dependence on international operations, foreign currency exchangerate fluctuations and the Company’s ability to adequately finance its ongoingoperations.

The Company generated net income of $4.3 millionin fiscal 2006, and net losses of $14.6 million and $12 million infiscal 2005 and 2004, respectively. Management anticipates funding futureoperations from its current cash resources and its future cash flows fromoperations. However, if the Company’s financial results fall short ofprojections, additional debt or equity may be required to finance operations,and the Company may need to implement further cost reductions. No assurancescan be given that these efforts will be successful, if required.

In July 2005, Versant, through its subsidiaryVersant GmbH, entered into certain agreements to effect a spin-off of tangibleassets, technology rights and contracts related to its Versant Open Access .NET(“VOA.NET”) business to Vanatec GmbH (a then newly formed privately held Germanbased company). As a result, in accordance with FIN 46(R), Vanatec’s operatingresults were included in Versant’s consolidated financial statements from July 2005through March 27, 2006. On March 27, 2006, Versant sold its entireequity interest in Vanatec to a third party investor and entered into a jointownership agreement with Vanatec with respect to technology it had previouslylicensed to Vanatec (see Note 7 for a more detailed description of the Vanatectransaction). As a result of this sale of its interest in Vanatec, as of March 28,2006, Versant is no longer required to consolidate the operating results ofVanatec.

In February 2006, Versant completed the sale ofthe assets associated with its WebSphere® consulting practice to SimaSolutions, a newly formed privately held U.S. based corporation. Versant’sWebSphere consulting practice provided consulting and training services toend-users of IBM’s WebSphere® application server software. As a result of thistransaction, Versant has ceased conducting its WebSphere consulting practice.In connection with this transaction, twelve employees of Versant, who formerlyworked in Versant’s WebSphere consulting practice, left Versant to join SimaSolutions.

At fiscal year end 2006,Versant had a total of 76 employees.

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**NOTE 2.**   SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

***Principles of Consolidation***

The consolidated financial statements include 100% ofthe assets, liabilities, revenues, expenses and cash flows of Versant and allentities in which Versant has a controlling voting interest (subsidiaries) and,from July 2005 through March 27, 2006, the variable interest entity(VIE) required to be consolidated in accordance with U.S. generallyaccepted accounting principles (see Note 7). Intercompany accounts andtransactions between consolidated companies have been eliminated inconsolidation.

The financial position andoperating results of foreign operations are consolidated using the localcurrency as their functional currency. Local currency assets and liabilitiesare translated at the rates of exchange on the balance sheet date, and localcurrency revenues and expenses are translated at average rates of exchangeduring the period. Resulting translation gains or losses are included in theaccompanying consolidated statement of shareholders’ equity as a component ofaccumulated other comprehensive income, net.

***Use of Estimates***

The preparation offinancial statements, in conformity with accounting principles generallyaccepted in the United States of America (GAAP), requires management to makeestimates and assumptions, which affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.

***Cash and Cash Equivalents***

Cash and cash equivalentsinclude all highly liquid investments with an original maturity of three monthsor less at the time of purchase. The Company’s cash and other cash equivalentsat October 31, 2006 and October 31, 2005 consisted of deposits inbanks and money market funds. As of October 31, 2006 and 2005 cashbalances held in foreign financial institutions were $7.0 million and$2.9 million, respectively.

***Concentration of Credit Risk***

The Company’s financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash and cash equivalents and trade accountsreceivable. The Company maintains its cash and cash equivalents with highquality financial institutions and invests in highly rated short-termsecurities. The Company maintains an allowance for doubtful accounts resultingfrom the inability of our customers to make required payments. The allowancewas $62,000 and $114,000 at October 31, 2006 and October 31, 2005,respectively. The amount of the Company’s allowance is based on historical experienceand an analysis of the current accounts receivable balances. Credit losses todate have been within management’s expectations. However, actual results coulddiffer from such estimates. As of October 31, 2006 and October 31,2005, there was one customer each year, the balance of whose accounts exceeded10% of aggregate accounts receivable.

***Property and Equipment***

Property and equipment are stated at cost lessaccumulated depreciation, computed using the straight-line method based on theestimated useful lives of the assets, generally ranging from three to fiveyears. Depreciation commences upon placing the asset in service. Capital leasesare recorded at the lesser of the fair value of the leased asset at theinception of the lease or the present value of the minimum lease payments as ofthe beginning of the lease term. Leased assets are amortized on a straight-linebasis over the estimated useful life of the asset or the lease term. Leaseholdimprovements are amortized over the 

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shorter of the useful lifeor the remaining lease term. The Company reviews its property and equipment forimpairment periodically or whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.

Thefollowing table summarizes the breakdown of the Company’s property andequipment as of October 31, 2006 and October 31, 2005 (in thousands):

| ** **                                       | ** ** | **As of October 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| Computer  equipment                              |       | $                                    | 4,723      |   | $ | 4,295 |   |
| Furniture and  fixtures                          |       | 1,825                                |       | 2,084 |   |
| Software                                         |       | 1,479                                |       | 1,446 |   |
| Leasehold  improvements                          |       | 155                                  |       | 1,198 |   |
| Capital leases  and others                       |       | 87                                   |       | 81 |   |
|                                             |       | 8,269                                |       | 9,104 |   |
| Less: accumulated  depreciation and amortization |       | (7,884                               | )          | (8,615 | ) |
|                                             |       | $                                    | 385        |   | $ | 489 |   |

 

Total depreciation expensefor fiscal 2006, fiscal 2005 and fiscal 2004 were $203,000, $305,000, and$1.6 million, respectively.

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

Goodwill represents the excess of the purchase priceover the fair value of net assets acquired in business combinations. In July 2001,the Financial Accounting Standards Board (FASB) approved the issuance ofStatement of Financial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*. SFASNo. 142 provides guidance on how to account for goodwill and certainintangible assets after an acquisition is completed.**As required by SFAS 142, Versant ceased amortizing itsgoodwill effective November 1, 2002. Prior to November 1, 2002, theCompany amortized goodwill over five years using the straight-line method.

Goodwill is subject to an annual impairment test. Versantuses the market approach to assess the fair value of its goodwill andintangible assets, which is then compared to the carrying value of those assetsto test for impairment. The total fair value of Versant’s assets is estimatedby summing the fair value of Versant’s equity (as indicated by Versant publiclytraded share price and shares outstanding plus a control premium), debt andcurrent liabilities. Under this approach, if the estimated fair value ofVersant’s assets is greater than the carrying value of these assets, then thereis no apparent goodwill impairment. If the estimated fair value of Versantassets is less than the carrying value of these assets, then Versant allocatesthe reporting unit’s estimated fair value to its assets and liabilities asthough the reporting unit had just been acquired in a business combination. Theimpairment loss is the amount, if any, by which the implied fair value ofgoodwill is less than that reporting unit’s goodwill carrying amount and wouldbe recorded in earnings during the period of such impairment.

As the result of the aforementioned impairment test onAugust 25, 2004, Versant determined that the carrying value of goodwillacquired through its acquisition of Mokume Software Inc., in November 2002had been fully impaired. Consequently, during the three months ended July 31,2004, the Company recorded a charge of approximately $707,000 related to thewrite-off of remaining Mokume goodwill.

Further, due to a decline in the trading price ofVersant’s common stock and revised revenue projections in fiscal 2005, mostnotably for the FastObjects product line, the Company prepared an updatedvaluation with regard to its goodwill as of July 31, 2005. The affectedgoodwill was acquired by Versant as a result of its merger with Poet in March 2004,its acquisition of technology assets from JDO Genie (PTY) Limited in June 2004,and its acquisition of FastObjects, Inc. in July 2004. Consequently,for 

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the quarter ended July 31,2005, the Company recorded an impairment charge of $10.3 million relatedto the write down of its goodwill.

There were no goodwill impairment charges recordedduring the year ended October 31, 2006.

For the purpose oftesting for goodwill impairment in its single Data Management operatingsegment, Versant has aggregated the goodwill for the following acquisitions:

·       VersantEurope, acquired in 1997;

·       Poet,acquired on March 18, 2004;

·       Technologyof JDO Genie, acquired on June 30, 2004; and

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

Thegoodwill balances as of October 31, 2006 and October 31, 2005, are asfollows (in thousands):

| ** **               | ** ** | **As of October 31, 2006** | ** ** | **As of October 31, 2005** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **               | ** ** | **Gross**                                      | ** ** | ** **                                     | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **               | ** ** | **Carrying**                                   | ** ** | **Accumulated**                                | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **               | ** ** | **Amount**                                     | ** ** | **Amortization**                               | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Goodwill:                |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Versant Europe and India |       |                                           | $          | 3,277                                          |       |   |   | $ | 3,036 |   |   |   | $ | 241 |   |   |   | $ | 3,277 |   |   |   | $ | 3,036 |   |   |   | $ | 241 |   |   |
| Poet Holdings, Inc. |       |                                           | 5,752      |                                           |       |   | — |   |   |   | 5,752 |   |   |   | 5,752 |   |   |   | — |   |   |   | 5,752 |   |   |
| FastObjects, Inc.   |       |                                           | 677        |                                           |       |   | — |   |   |   | 677 |   |   |   | 677 |   |   |   | — |   |   |   | 677 |   |   |
| JDO Genie (PTY), LTD.    |       |                                           | 50         |                                           |       |   | — |   |   |   | 50 |   |   |   | 50 |   |   |   | — |   |   |   | 50 |   |   |
| Total                    |       |                                           | $          | 9,756                                          |       |   |   | $ | 3,036 |   |   |   | $ | 6,720 |   |   |   | $ | 9,756 |   |   |   | $ | 3,036 |   |   |   | $ | 6,720 |   |   |

 

Versant evaluates its long-lived assets, includingintangible assets other than goodwill, for impairment in accordance with theprovisions of SFAS No. 144 *Accountingfor the Impairment or Disposal of Long-Lived Assets* (SFAS 144). SFAS144 requires that long-lived assets and intangible assets other than goodwillbe evaluated for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable. Therecoverability test compares the carrying amount of the asset or asset group tothe expected undiscounted net cash flows to be generated by these assets. Ifthe carrying amount of the asset or asset group is less than the expectedundiscounted net cash flows to be generated by these assets, an impairment lossis recorded in earnings during the period of such impairment and is calculatedas the excess of the carrying amount of the asset or asset group over itsestimated fair value.

Identifiable intangibles are currently amortized overfive years in relation to the acquisition of technology of JDO Genie (PTY) Ltd,six years in relation to the FastObjects, Inc. acquisition and seven yearsin relation to the merger with Poet, using the straight-line method in each ofthese cases. Intangible assets consist of acquired technology and customerrelationships.

Versant tests and evaluates its intangible assets forimpairment whenever indicators of potential impairment are identified. As aresult, on August 25, 2004, the Company determined that the carrying valueof intangible assets acquired through its acquisition of Mokume Software Inc.in November 2002 had been fully impaired. Consequently, for the quarterended July 31, 2004, the Company recorded a charge of approximately$317,000 related to the write-off of remaining Mokume intangible assets.

Versant performed tests and valuations on itsintangible assets on July 31, 2005. As a result, the Company recorded acharge of $2.6 million related to the write down of intangible assets, ofwhich $2.4 million was recorded as impairment of Poet intangible assetsand $232,000 was recorded as impairment of FastObjects, Inc. intangibleassets.

There were no impairments of long-lived assets duringthe year ended October 31, 2006.

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TheCompany’s intangible assets’ balances as of October 31, 2006 and October 31,2005 are as follows (in thousands):

| ** **                                                | ** ** | **As of October 31, 2006** | ** ** | **As of October 31, 2005** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                | ** ** | **Gross**                                      | ** ** | ** **                                     | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                                | ** ** | **Carrying**                                   | ** ** | **Accumulated**                                | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                                                | ** ** | **Amount**                                     | ** ** | **Amortization**                               | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Intangible  assets:**                                   |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Poet Holdings, Inc. (Amortized over 7 yrs) |       |                                           | $          | 1,919                                          |       |   |   | $ | 1,076 |   |   |   | $ | 843 |   |   |   | $ | 1,919 |   |   |   | $ | 887 |   |   |   | $ | 1,032 |   |   |
| JDO Genie (PTY), LTD. (Amortized over 5 yrs)    |       |                                           | 550        |                                           |       |   | 257 |   |   |   | 293 |   |   |   | 550 |   |   |   | 146 |   |   |   | 404 |   |   |
| FastObjects, Inc. (Amortized over 6 yrs)   |       |                                           | 148        |                                           |       |   | 88 |   |   |   | 60 |   |   |   | 148 |   |   |   | 72 |   |   |   | 76 |   |   |
| Total                                                     |       |                                           | $          | 2,617                                          |       |   |   | $ | 1,421 |   |   |   | $ | 1,196 |   |   |   | $ | 2,617 |   |   |   | $ | 1,105 |   |   |   | $ | 1,512 |   |   |

 

Theprojected amortization of intangible assets is as follows (in thousands):

| ** **                           | ** ** | **Amortization** | ** ** |
|--------------------------------------|------------|------------------|------------|
| Fiscal year  ending October 31, |       |             |       |   |   |
| 2007                                 |       |             | 315        |   |   |
| 2008                                 |       |             | 315        |   |   |
| 2009                                 |       |             | 279        |   |   |
| 2010                                 |       |             | 200        |   |   |
| Thereafter                           |       |             | 87         |   |   |
| Total                                |       |             | $          | 1,196 |   |   |
|                                      |            |                  |            |  |  |  |

 

***RevenueRecognition***

Versant recognizes revenues in accordance with theprovisions of Statement of Position (SOP) 97-2, *Software Revenue Recognition,* SOP 98-9,Modification of SOP 97-2*, SoftwareRevenue Recognition with Respect to Certain Transactions,*and SOP 81-1,*Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts*. Revenuesconsist mainly of revenues earned under software license agreements, maintenancesupport agreements (otherwise known as post-contract customer support, “PCS”),and agreements for consulting and training activities.

Versant uses the residual method to recognize revenueswhen a license agreement includes one or more elements to be delivered at afuture date.  If there is an undeliveredelement under the license arrangement, Versant defers revenues based onvendor-specific objective evidence, or VSOE, of the fair value of theundelivered elements, as determined by the price charged when the element issold separately. If VSOE of fair value does not exist for all undeliveredelements of a transaction, the Company defers all revenues from thattransaction until sufficient evidence exists or all elements have beendelivered. Under the residual method, discounts are allocated only to thedelivered elements in a multiple element arrangement, with any undeliveredelements being deferred based on the VSOE of the value of such undeliveredelements. Versant typically does not offer discounts on future undevelopedproducts.

Revenues fromsoftware license arrangements, including prepaid license fees, are recognizedwhen all of the following criteria are met:

·       Persuasive evidence of anarrangement exists.

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

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·       Fee is fixed anddeterminable. If we cannot conclude that a fee is fixed and determinable, thenassuming all other criteria have been met, revenues are recognized as paymentsbecome due in accordance with paragraph 29 of SOP 97-2;

·       Collection is probable.Probability of collection is assessed using the following customer information:credit service reports, bank and trade references, public filings, and/orcurrent financial statements. Prior payment experience is reviewed on allexisting customers. Payment terms in excess of our standard payment terms of 30-90days net are granted on an exception basis, typically in situations wherecustomers elect to purchase development and deployment licenses simultaneouslyfor an entire project and are attempting to align their payments with theirdeployment schedules. Extended payment terms are only granted to customers witha proven ability to pay at the time the order is received, and with priorapproval of our senior management. In accordance with paragraph 27 of SOP 97-2,the Company has an established history of collection, without concessions, onlonger-term receivables. The Company typically does not grant extendedpayment terms beyond 90 days.

If an acceptance period or other contingency exists,revenues are not recognized until customer acceptance or expiration of theacceptance period, or satisfaction of the contingency, as applicable. TheCompany’s license fees are non-cancelable and non-refundable and Versant doesnot make concessions or grant a refund for any unused amount. Also, theCompany’s customer agreements for prepaid deployment licenses do not makepayment of the Company’s license fees contingent upon the actual deployment ofits software. Therefore, a customer’s delay or acceleration in its deploymentschedule does not impact the Company’s revenue recognition. Revenues fromrelated PCS for all product lines are usually billed in advance of the servicebeing provided and are deferred and recognized on a straight-line basis overthe term of the PCS, which is generally twelve months. In some cases PCSrevenues are paid in arrears of the service being provided and are recognizedas revenues at the time the customer provides a report to the Company fordeployments made during a given time period. Training and consulting revenuesare recognized when a purchase order is received, the services have beenperformed and collection is deemed probable. Consulting services are billed onan hourly, daily or monthly rate. Training classes are billed based on group orindividual attendance.

Versant categorizes its customers into two broadgroups, End-Users and Value Added Resellers (VARs). End User customers arecompanies who use the Company’s products internally and do not redistribute theproduct outside of their corporate organizations. VAR customers includetraditional Value Added Resellers, Systems Integrators, OEMs and other vendorswho redistribute the Company’s products to their external third partycustomers, either individually or as part of an integrated product. Versantlicenses its data management products through two types of perpetual licenses—developmentand test licenses and deployment licenses. Development and test licenses aretypically sold on a per seat basis and authorize a customer to develop and testan application program that uses the Company’s software product. Before anEnd-User customer may deploy an application that it has developed under ourdevelopment license, it must purchase deployment licenses based on the numberof computers connected to the server that will run the application using theCompany’s database management system. For certain applications, the Companyoffers deployment licenses priced on a per user basis. Pricing of VersantObject Database and FastObjects licenses varies according to several factors,including the number of computer servers on which the application runs and thenumber of users that are able to access the server at any one time. Customersmay elect to simultaneously purchase development and deployment licenses for anentire project. These development and deployment licenses may also provide forprepayment of a nonrefundable amount for future deployment*.*

VARs and distributors purchase development licensesfrom the Company on a per seat basis on terms similar to those of developmentlicenses sold directly to End-Users. VARs are authorized to sublicensedeployment copies of the Company’s data management products that are eitherbundled or embedded in 

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the VAR’s applications andsold directly to End-Users. VARs are required to report their distribution ofVersant’s software and are charged a royalty that is based either on the numberof copies of its application software that are distributed or computed as apercentage of the selling price charged by the VARs to their end-usercustomers. These royalties from VARs may be prepaid in full or paid upondeployment. Provided that all other conditions for revenue recognition havebeen met, revenues from arrangements with VARs are recognized, (i) as toprepaid license arrangements, when the prepaid licenses are sold to the VARs,and (ii) as to other license arrangements, at the time the VAR provides aroyalty report to the Company for sales made by the VAR during a given period.

Revenues from the resale of third-party products orservices are recorded at total contract value with the corresponding costincluded in the cost of sales when the Company acts as a principal in thesetransactions by assuming the risks and rewards of ownership (including the riskof loss for collection, delivery or returns). When Versant does not assume therisks and rewards of ownership, revenues from the resale of third-partyproducts or services are recorded at contract value net of the cost of sales.

In rare cases thata customer requests engineering work for porting the Company’s products to anunsupported platform or customization of its software for specificfunctionality, or any other non-routine technical work, Versant recognizesrevenues in accordance with SOP 81-1 and uses either time and materialpercentage of completion or completed contract methods for recognizing revenues.The Company uses the percentage of completion method if the Company can makereasonable and dependable estimates of labor costs and hours required tocomplete the work in question. Versant periodically reviews these estimates inconnection with work performed and rates actually charged and recognizes anylosses when identified. Progress to completion is determined using thecost-to-cost method, whereby cost incurred to date as a percentage of totalestimated cost determines the percentage completed and revenue recognized. Whenusing the percentage of completion method, the following conditions must exist:

·       An agreement must includeprovisions that clearly specify the rights regarding goods or services to beprovided and received by both parties, the consideration to be exchanged andthe manner and terms of settlement.

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

·       Versantis able to satisfy its obligations under the contract.

The completed contractmethod is used when reasonable or dependable estimates cannot be made. As aresult, in such situations, the Company defers all revenues until such timethat the work is fully completed.

***Foreign Currency Translation***

The functional currenciesof the Company’s foreign subsidiaries are their respective local currencies.The Company translates the assets and liabilities of international subsidiariesinto the U.S. Dollar at the current exchange rates in effect during eachperiod. Revenues and expenses are translated using rates that approximate theaverage of those in effect during the period. Gains and losses from translationadjustments are included in stockholders’ equity in the consolidated balancesheet caption as other comprehensive income.

***Other Comprehensive Income (Loss)***

Other comprehensive income (loss) consists entirely ofcumulative translation adjustments resulting from the Company’s application ofits foreign currency translation policy and unrealized gains (losses) onmarketable securities. The tax effects on the unrealized gains (losses) werenot significant during any of the periods presented.

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Thefollowing table summarizes the breakdown of other comprehensive loss for theyears ended  October 31, 2006, October 31,2005 and October 31, 2004 (in thousands):

| ** **                               | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss), as reported          |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (11,997 | ) |
| Foreign currency  translation adjustment |       | 125                                                   |       | (173 | ) | 547 |   |
| Other comprehensive  income (loss)       |       | $                                                     | 4,426      |   | $ | (14,727 | ) | $ | (11,450 | ) |

 

***Warranties and Indemnification Obligations***

The Company recognizes warranty and indemnificationobligations under FASB Statement No. 5 (As Amended), *Accounting for****Contingencies*,FASB Interpretation No. (“FIN”) 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others* and FASBConcepts Statement No. (“SFAC”) 7 (As Amended),*Using Cash Flow Information and Present Valuein Accounting Measurements.*These pronouncements require aguarantor to recognize and disclose a liability for obligations it hasundertaken in relation to the issuance of the guarantee.

The Company’s software license agreements generallyinclude certain provisions for indemnifying customers against liabilities ifthe Company’s software products infringe upon a third party’s intellectualproperty rights. To date, the Company has not incurred any material costs as aresult of any indemnification; therefore, the Company has not accrued anyexpenses for such indemnity liabilities either in the U.S. or Europe.

The Company’s software license agreements alsogenerally include a warranty that the Company’s software products willsubstantially operate as described in the applicable program documentation. TheCompany also warrants that services the Company performs will be provided in amanner consistent with industry standards. To date, Versant has not incurredany material costs associated with these warranties, and as such the Companyhas not provided for any reserves for any such warranty liabilities in its U.S.operation results.

In Europe, however, there is typically a one-yearwarranty period for all the Company’s products and services. During fiscal2006, Versant completed a significant consulting arrangement for which theCompany recorded a $117,000 warranty reserve. As a result, Versant has a totalwarranty reserve of $136,000 as of October 31, 2006 compared to $8,000 at October 31,2005, based on historical experience and expected need.

The Company is currently aparty to litigation in which Rockwell Automation, one of Versant’s  customers, is seeking indemnification fromthe Company for alleged infringement of intellectual property rights assertedagainst it by Systems America, Inc. Versant has not accrued for a losscontingency, as the Company is contesting legally the allegations and unable toestimate a loss amount under FASB Statement No. 5.

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***Deferred Revenue***

Deferredrevenue represents amounts received from customers under certain maintenance,software and service contracts for which the revenue earning process has notbeen completed and revenue has not been recognized. The deferred revenues willbe recognized ratably over the life of the contract or when the service is renderedand the Company has satisfied all the revenue recognition criteria.

| ** **               | ** ** | **As of October 31,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| Maintenance              |       | $                                    | 3,769      |   | $ | 2,910 |   |
| Training and  consulting |       | 56                                   |       | 53 |   |
| Total                    |       | $                                    | 3,825      |   | $ | 2,963 |   |

 

***AccruedLiabilities***

Thebreakdown of short-term and long-term accrued liabilities for the fiscal yearsended October 31, 2006 and October 31, 2005 were as follows:

| ** **             | ** ** | **As of October 31,** | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| Payroll and  related   |       | $                                    | 898        |   | $ | 725 |   |
| Customer deposits      |       | 131                                  |       | 92 |   |
| Taxes payable          |       | 357                                  |       | — |   |
| Restructuring  accrual |       | 448                                  |       | 1,181 |   |
| Other                  |       | 529                                  |       | 1,117 |   |
| Total                  |       | $                                    | 2,363      |   | $ | 3,115 |   |

 

***Software Development Costs***

Software development costsis included in product development and is expensed as incurred. Aftertechnological feasibility is established, material software development costsare capitalized in accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased orOtherwise Marketed*. The period between achieving technologicalfeasibility, which Versant has defined as the establishment of a working model,typically occurring when the beta testing commences, and the generalavailability of such software has been short, and software development costsqualifying for capitalization have been insignificant. No software developmentcosts have been capitalized for the periods ended October 31, 2006 and October 30,2005 since the timing of achieving technological feasibility and generalavailability has not been materially different.

***Income Taxes***

The Company uses the assetand liability method of accounting for income taxes based on Statement ofFinancial Accounting Standards (SFAS) No. 109, *Accounting for Income Taxes*. Under the asset and liabilitymethod, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between financial statement carryingamounts and the tax basis of existing assets and liabilities. The Companyrecords a valuation allowance to reduce tax assets to an amount for whichrealization is more likely than not. The Company has recorded a valuationallowance for substantially all of its deferred tax assets, except to theextent of deferred tax liabilities, as it is presently unable to conclude thatit is more likely than not those net deferred tax assets will be realized.

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***Stock-Based Compensation***

On November 1, 2006, Versant adopted the fairvalue recognition provisions of FASB Statement No. 123(R), *Share-Based Payment*, and Securities andExchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), usingthe modified-prospective transition method. (See Note 3).

Prior to fiscal 2006, Versantaccounted for stock issued to employees in accordance with AccountingPrinciples Board Opinion (APB) No. 25, *Accountingfor Stock Issued to Employees,* as interpreted by FIN 44, *Accounting for Certain Transactions Involving StockCompensation* and complied with the disclosure provision of SFASNo.123, *Accounting for Stock-BasedCompensation*. Under APB No. 25, compensation expense was basedon the difference, if any, on the date of the grant, between the fair value ofthe Company’s stock and the exercise price of the option. Stock compensationwas amortized over the vesting period of the individual awards in a mannerconsistent with the method described in FASB Interpretation No. 28, *Accounting for Stock Appreciation Rights and OtherVariable Stock Option Award Plus*. In addition, the Company accountedfor stock issued to non-employees in accordance with the provisions of SFAS123. Pursuant to SFAS 123, stock-based compensation is accounted for at thefair value of the equity instruments issued, or at the fair value of theconsideration received, whichever is more reliably measurable.

Pursuantto SFAS No. 148, *Accounting forStock-Based Compensation-Transition and Disclosure*, the Company isrequired to disclose the pro forma effects of stock-based compensation on netincome and net income per share as if the company had elected to use the fairvalue approach to account for all of its employee stock-based compensationplans. If the compensation cost of the Company’s plans had been determinedunder the fair value approach in accordance with SFAS No. 123, the Company’spro forma net loss and pro forma net loss per share during the fiscal 2005 andfiscal 2004 would have been (in thousands, except per share amounts) asfollows:

| ** **                                       | ** ** | **Fiscal year ended  October 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| Net income  (loss), as reported                  |       | $                                                 | (14,554    | ) | $ | (11,997 | ) |
| Stock based  compensation under APB 25           |       | 96                                                |       | 86 |   |
| Compensation  expense under SFAS 123 related to: |       |                                              |       |   |   |
| Stock option plans                               |       | (425                                              | )          | (656 | ) |
| Employee stock purchase plan                     |       | (46                                               | )          | (157 | ) |
| Pro forma net  income (loss)                     |       | $                                                 | (14,929    | ) | $ | (12,724 | ) |
| Basic and diluted  net income (loss) per share:  |       |                                              |       |   |   |
| As reported                                      |       | $                                                 | (4.11      | ) | $ | (3.85 | ) |
| Pro forma                                        |       | $                                                 | (4.22      | ) | $ | (4.08 | ) |

 

***Segmentand Geographic Information***

Statement of Financial AccountingStandards (SFAS) No. 131, *Disclosuresabout Segments of an Enterprise and Related Information* establishesstandards for the manner in which public companies report information aboutoperating segments in annual and interim financial statements. It alsoestablishes standards for related disclosures about products and services,geographic areas, and major customers. The method for determining whatinformation to report is based on the way management organizes the operatingsegments within the Company for making operating decisions and assessingfinancial performance. The Company’s chief operating decision-maker isconsidered to be the Company’s chief executive officer (CEO). The CEO reviewsfinancial information presented on an entity level basis accompanied bynon-aggregated information about revenues by product type and certaininformation about geographic regions for purposes of making operating decisionsand assessing financial performance. The entity level financial information isidentical to the information presented in the accompanying statements ofoperations. Therefore, the Company has determined that it operates in a singleoperating segment, Data Management.

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The Company operates in North America, Europe andAsia. In general, revenues are attributed to the country in which the contractoriginates.

Thefollowing tables summarize revenues and long-lived assets by each geographicregion (in thousands):

| ** **              | ** ** | **Fiscal year ended October 31,** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues by region:** |       |                                                  |       |   |   |   |   |
| North America           |       | $                                                     | 6,175      |   | $ | 5,306 |   | $ | 9,278 |   |
| Europe                  |       | 10,138                                                |       | 10,087 |   | 7,690 |   |
| Asia                    |       | 432                                                   |       | 353 |   | 729 |   |
| Total                   |       | $                                                     | 16,745     |   | $ | 15,746 |   | $ | 17,697 |   |

 

| ** **                              | ** ** | **Fiscal year ended  October 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **   2006   **      | ** ** | **   2005   ** | ** ** |
| **Total long-lived assets by  region:** |       |                                              |       |   |   |   |   |   |   |
| North America                           |       |                                              | $          | 161 |   |   |   | $ | 496 |   |   |
| Europe                                  |       |                                              | 173        |   |   |   | 183 |   |   |
| Asia                                    |       |                                              | 113        |   |   |   | 104 |   |   |
| Total                                   |       |                                              | $          | 447 |   |   |   | $ | 783 |   |   |

 

***Recent Accounting Pronouncements***

In May 2005, the Financial Accounting StandardsBoard issued SFAS 154, *Accounting Changes andError Corrections*. This new standard replaces APB Opinion 20, *Accounting Changes* and SFAS 3, *ReportingAccounting Changes in Interim Financial Statements*. Among otherchanges, SFAS 154 requires that a voluntary change in accounting principle beapplied retrospectively with all prior period financial statements presented onthe new accounting principle, unless it is impracticable to do so. SFAS 154also provides that a change in method of depreciating or amortizing along-lived non-financial asset be accounted for as a change in estimate(prospectively) that was effected by a change in accounting principle, and thatcorrections of previously issued financial statements should be termed a *restatement*. The new standard is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. Adoption of this standard is not expected to have a material impact onthe Company’s financial position or results of operations.

In November 2005, the Financial AccountingStandards Board issued FSP No. FAS 123(R)-3, “TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards”. This FSP provides a practical transition election related toaccounting for the tax effects of share-based payment awards to employees, asan alternative to the transition guidance for the APIC pool inparagraph 81 of Statement 123(R). The guidance in this FSP iseffective after November 10, 2005 as posted in the FASB website. The Companymay take up to one year from the later of adoption of SFAS 123(R) orthe effective date of this FSP to evaluate its available transitionalternatives and make its one-time election. The Company will evaluate thisguidance, but does not expect a material impact on its results of operations orfinancial position.

In June 2006, the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*—an interpretation of FASB Statement No. 109(FIN 48). FIN 48 seeks to reduce the significant diversity inpractice associated with financial statement recognition and measurement inaccounting for income taxes. In recognition that a period of six to nine monthswould be needed to initially apply FIN 48, the effective date of FIN 48is the first fiscal year beginning after 

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December 15, 2006,with early adoption encouraged. The Company is currently in the process ofevaluating the impact that the adoption of FIN 48 will have on itsfinancial position, results of operations and cash flows. FIN 48 willbecome effective for us with our fiscal year beginning November 1, 2007.

In September 2006, the FASB issuedStatement 157,*Fair Value Measurements,*(FAS 157). This statement clarifies the definition of fairvalue, the methods used to measure fair value, and requires expanded financialstatement disclosures about fair value measurements for assets and liabilities.FAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The new guidance will be effective forus on November 1, 2008 and the Company is currently assessing the impacton our financial statements.

In September 2006, the SEC’s Office of the ChiefAccountant and Divisions of Corporation Finance and Investment Management releasedStaff Accounting Bulletin No. 108 (SAB 108), which providesinterpretive guidance on how registrants should quantify financial-statementmisstatements. Currently, the two methods most commonly used by preparers andauditors to quantify misstatements are the “rollover” method (which focusesprimarily on the income statement impact of misstatements) and the “ironcurtain” method (which focuses primarily on the balance sheet impact ofmisstatements). Under SAB 108, registrants will be required to considerboth the rollover and iron curtain methods (i.e., a dual approach) whenevaluating the materiality of financial statement errors. Registrants will needto revisit their prior materiality assessments and consider them using both therollover and iron curtain methods.

SAB 108 is effectivefor annual financial statements in the first fiscal year ending after November 15,2006, therefore for us, the year ended October 31, 2007. The SAB providestransition accounting and disclosure guidance for situations in which aregistrant concludes that a material error(s) existed in prior-periodfinancial statements under the dual approach. Specifically, registrants will bepermitted to restate prior period financial statements or recognize thecumulative effect of initially applying SAB 108 through an adjustment tobeginning retained earnings in the year of adoption. The Company believesSAB 108 will not have a material impact on its annual financialstatements.

**NOTE 3.   STOCK-BASEDCOMPENSATION**

Versant maintains a 2005 Equity Incentive Plan, whichis a successor and replacement to the Company’s 1996 Equity Incentive Plan. The2005 Equity Incentive Plan was approved by the Company’s shareholders at theCompany’s annual meeting of shareholders held on August 22, 2005. Thestandard term of stock options granted pursuant to the 2005 Equity IncentivePlan and its 1996 predecessor plan is ten years from the date of grant (subjectto earlier termination if the option holder ceases to be employed or otherwiseceases to have a service relationship with the Company). Under the standardvesting schedule for options granted under the 2005 Equity Incentive Plan andits predecessor 1996 Plan, for so long as the option holder continues to beemployed by or otherwise provide services to the Company, options vest andbecome exercisable in installments over a three-year period, with 25% of theshares subject to the option vesting and becoming exercisable on the date ninemonths after the option was granted and 1/27 of the remaining 75% of the optionshares vesting each month thereafter over the next 27 months.

Versant also maintains a 2005 Directors Stock OptionPlan, which is a successor and replacement to the Company’s 1996 DirectorsStock Option Plan. The 2005 Directors Stock Option Plan was approved by theCompany’s shareholders at the Company’s annual meeting of shareholders held on August 22,2005.  Options granted under the 2005Directors Stock Option Plan and its predecessor 1996 plan are immediatelyexercisable. However, if a director ceases to be a member of the Company’sboard of directors or a consultant to the Company at any time within thetwo-year period after he or she is granted an option under these plans, thenany shares the director purchases upon exercise of such options that areunvested when he or she ceases to be a director or a consultant may, at theCompany’s option, be repurchased by the Company at their original purchaseprice per share. Under the standard vesting schedule for options 

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granted under the 2005Directors Stock Option Plan and its predecessor 1996 plan, for so long as theoption holder continuously serves as a member of the Company’s board ofdirectors or as a consultant, 50% of the shares subject to an option granted tosuch director under these plans will vest free of the Company’s repurchaseoption on each of the first two anniversaries of the date such option isgranted.

Lastly, the Company maintains a 2005 Stock PurchasePlan, which is a successor and replacement to the Company’s 1996 Employee StockPurchase Plan. The 2005 Stock Purchase Plan was approved by the Company’sshareholders at the Company’s annual meeting of shareholders held on August 22,2005. The 1996 Stock Purchase Plan remained in effect until late May 2006when it expired and was replaced by the Company’s 2005 Employee Stock PurchasePlan effective June 1, 2006. Under the 1996 Employee Stock Purchase Plan,each offering of common shares thereunder was for a period of twenty-fourmonths, consisting of four six-month purchase periods. Under the 2005 EmployeeStock Purchase Plan, each offering of common shares thereunder is for a periodof twelve months, consisting of two six-month purchase periods. The purchaseprice of shares, which employees may acquire at any purchase period, is 85% ofthe lesser of either of the following: the fair market value of the shares onthe offering date; or the fair market value of the shares on the purchase date.

A more detailed description of each of the above-mentionedstock and stock option plans can be found in Note 12 of these Notes toConsolidated Financial Statements.

Prior to November 1, 2005, Versant accounted forstock issued to employees in accordance with the recognition and measurementprovisions of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and its related Interpretations, aspermitted by FASB Statement No. 123, *Accountingfor Stock-Based Compensation*. For fiscal 2005, the Company also didnot record any compensation expense in connection with its Employee StockPurchase Plan since the purchase price of the stock was 85% of the lower of thefair market value of its common stock at the beginning or the end of eachoffering period.

Effective November 1, 2005, the Company adoptedthe fair value recognition provisions of FASB Statement No. 123(R), *Share-Based Payment*, and Securities andExchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), usingthe modified-prospective transition method. Under the modified-prospectivetransition method, the recognized compensation costs during fiscal 2006 includethe following components:

First, compensation cost for all share-based paymentsgranted prior to, but not yet vested as of November 1, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123.

Second, compensation cost for all share-based paymentsgranted or modified subsequent to November 1, 2005, based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123(R).

Versant uses straight-line vesting attribution toevenly distribute the compensation cost over the requisite service period.

SFAS 123(R) requires companies to estimate *forfeiture rates* at the time of grant andto revise these estimates in subsequent periods if actual *forfeiture rates* differ from thoseestimates. Versant applies the *forfeiture rate*tothe unvested portion of the option valuation and performs a true up for theamount of the valuation to be recorded if the actual *forfeiturerate*is different from the one applied on prior periods. The current*forfeiture rate* for the unvested portionof the option valuation recognized as of October 31, 2006 is 20%.

Versant estimates the fair value of employee stockoptions and rights to purchase shares under its employee stock purchase plan,or “ESPP” using a Black-Scholes Option Pricing Model. This is consistent withthe provisions of SFAS 123(R), SEC Staff Accounting Bulletin No. (“SAB”)107, *Share-Based*

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*Payment,*and the Company’s prior period pro forma disclosures of net income (loss),including share-based compensation.

The purchase price of shares which employees mayacquire under the Company’s employee stock purchase plan, or ESPP, at anypurchase period, is 85% of the lesser of either of the following: the fairmarket value of the shares on the offering date or the fair market value of theshares on the purchase date. Since the 85% threshold is no longer a safe harborunder SFAS 123(R), Versant records compensation expense based on the estimatedfair value of the shares granted under the ESPP.

Versant uses a historical model to arrive at theexpected life of its options, but it takes into consideration other factorsthat could possibly impact the future expected life of the options. As of October 31,2006, the Company determined that the estimated expected life of an employeeshare option granted under the Company’s Equity Incentive Plan was 2.2 years.

The expected life for the options granted to the boardmembers under the Directors Plan, who are not full time employees of Versant,is 5.75 years. Versant used the *simplifiedmethod* allowed by SAB 107 to arrive at this calculation. Under the *simplified method*,**the expected term is equal to vestingterm plus original contractual term divided by two.

Versant uses the U.S. Treasury Strip rates listed onthe last Thursday of every month on *The**Wall Street Journal* to compute *risk-freeinterest rate.*

Versant uses the historical volatility over theexpected term of the options to estimate the expected volatility. The Company,however, takes into account other current information available to determinethe expected volatility. Versant believes that the historical volatility, atthis time, represents fairly the future volatility of its common stock.

Versant currently does not expect to receive any taxbenefits in fiscal 2006 related to stock options or shares issued under itsESPP. Versant currently provides a full valuation allowance for its deferredtax assets and accordingly, a valuation allowance is also provided for any taxeffects of stock-based compensation expense pursuant to SFAS 123(R).

Versant has not distributed any dividend to its commonshareholders and does not expect to do so in the near future.

The fair values of each option granted and eachshare issued under the ESPP are estimatedon the date of grant, using the Black-Scholes Option Pricing Model, based on the following weighted averageassumptions:

| ** **                               | ** ** | **Stock Options**                                | ** ** | **ESPP**                                              | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                               | ** ** | **Fiscal year ended October 31,** | ** ** | **Fiscal year ended October 31,** | ** ** |
| ** **                               | ** ** | **2006**                                              | ** ** | **2005**                                              | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (in years)                 |       | 2.2 -  5.75 years                                     |       | 3  years                                              |       | 3  years |   | 6  months |   | 6  months |   | 0.5-2  years |   |
| Weighted-average Risk-free interest rate |       | 4.28%  - 5.23%                                        |       | 3.30%-3.81%                                           |       | 2.78% |   | 3.2% -4.76% |   | 3.30%-3.81% |   | 1.97% |   |
| Volatility                               |       | 87% -  115%                                           |       | 115%                                                  |       | 129% |   | 72%-83% |   | 115% |   | 145% |   |
| Dividend yield                           |       | —                                                |       | —                                                |       | — |   | — |   | — |   | — |   |

 

Stock-based compensation expense recognized under SFAS123(R) in the consolidated income statements for the fiscal 2006 relatedto stock options and ESPP were $192,000 and $44,000, respectively.

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Thefollowing table summarizes the changes in stock option activities under theCompany’s equity-based compensation plan during fiscal 2006 and fiscal 2005,respectively:

| ** **                                                       | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **Shares**                                            | ** ** | **Weighted average** | ** ** | **Shares** | ** ** | **Weighted average** | ** ** |
| ** **                                                       | ** ** | **in thousands**                                 | ** ** | **exercise price** | ** ** | **in thousands** | ** ** | **exercise price** | ** ** |
| Outstanding at  the beginning of the period                      |       |                                                  | 301        |   |   |   | $ | 24.90 |   |   |   | 460 |   |   |   | $ | 31.20 |   |   |
| Granted                                                          |       |                                                  | 68         |   |   |   | 5.65 |   |   |   | 89 |   |   |   | 7.34 |   |   |
| Exercised                                                        |       |                                                  | (26        | ) |   |   | 5.01 |   |   |   | (53 | ) |   |   | 5.13 |   |   |
| Forfeited and Expired                                            |       |                                                  | (158       | ) |   |   | 29.40 |   |   |   | (195 | ) |   |   | 37.03 |   |   |
| Outstanding at  the end of the period                            |       |                                                  | 185        |   |   |   | $ | 16.91 |   |   |   | 301 |   |   |   | $ | 24.90 |   |   |
| Vested options at the end of the fiscal year since  inception    |       |                                                  | 301        |   |   |   | $ | 31.19 |   |   |   | 395 |   |   |   | $ | 33.44 |   |   |
| Options exercised at the end of the fiscal year  since inception |       |                                                  | 193        |   |   |   | $ | 36.72 |   |   |   | 168 |   |   |   | $ | 39.83 |   |   |
| Options  exercisable at the end of the fiscal year               |       |                                                  | 115        |   |   |   | $ | 20.97 |   |   |   | 249 |   |   |   | $ | 27.43 |   |   |

 

Thefollowing table summarizes significant ranges of outstanding and exercisableoptions as of October 31, 2006:

| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**   | ** ** |
|---------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **Number**                   | ** ** | **Weighted average**      | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted average** | ** ** | **Weighted** | ** ** |
| ** **                | ** ** | **outstanding at**      | ** ** | **remaining**                  | ** ** | **average** | ** ** | **exercisable at** | ** ** | **remaining** | ** ** | **average** | ** ** |
| **Exercise Prices**  | ** ** | ** **                   | ** ** | **October 31, 2006** | ** ** | **contractual life** | ** ** | **price** | ** ** | **October 31, 2006** | ** ** | **contractual life** | ** ** | **price** | ** ** |
| From $3.00 to $6.00       |       |                         | 50,707     |                           |       |   | 7.56 |   |   |   | $ | 4.29 |   |   |   | 36,818 |   |   |   | 6.99 |   |   |   | $ | 4.51 |   |   |
| From $6.10 to $9.90       |       |                         | 80,823     |                           |       |   | 8.62 |   |   |   | 7.12 |   |   |   | 25,986 |   |   |   | 7.24 |   |   |   | 7.98 |   |   |
| From $9.20 to $16.00      |       |                         | 19,963     |                           |       |   | 5.66 |   |   |   | 11.92 |   |   |   | 19,436 |   |   |   | 5.61 |   |   |   | 11.93 |   |   |
| From $17.19 to $40.00     |       |                         | 20,065     |                           |       |   | 5.11 |   |   |   | 26.79 |   |   |   | 19,899 |   |   |   | 5.09 |   |   |   | 26.84 |   |   |
| From $42.00 to $122.2     |       |                         | 11,842     |                           |       |   | 3.30 |   |   |   | 86.49 |   |   |   | 11,842 |   |   |   | 3.30 |   |   |   | 86.49 |   |   |
| From $180.00 to $1,287.00 |       |                         | 1,190      |                           |       |   | 2.33 |   |   |   | 444.59 |   |   |   | 1,190 |   |   |   | 2.33 |   |   |   | 444.59 |   |   |
|                      |       |                         | 184,590    |                           |       |   | 7.25 |   |   |   | $ | 16.89 |   |   |   | 115,171 |   |   |   | 6.05 |   |   |   | $ | 23.38 |   |   |
|                           |            |                              |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thesummary of the status of Versant’s nonvested shares as of October 31, 2006and changes during the fiscal year ended October 31, 2006 is as follows:

| ** **                          | ** ** | ** **             | ** ** | **Weighted-average** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | ** **             | ** ** | **grant- date** | ** ** |
| **Nonvested shares**           | ** ** | ** **             | ** ** | **Shares**           | ** ** | **fair value** | ** ** |
| ** **                          | ** ** | **(in thousand)** | ** ** | ** **           | ** ** |
| Nonvested at  October 31, 2005 |       |                   | 73         |                 |       |   | $ | 3.47 |   |   |
| Granted                             |       |                   | 68         |                 |       |   | 3.40 |   |   |
| Vested                              |       |                   | (53        | )                    |       |   | 3.14 |   |   |
| Forfeited                           |       |                   | (11        | )                    |       |   | 2.75 |   |   |
| Nonvested at  October 31, 2006 |       |                   | 77         |                 |       |   | $ | 3.72 |   |   |
|                                     |            |                        |            |                      |            |  |  |  |  |  |  |  |

 

The weighted average grant date fair value of optionsgranted during fiscal 2006, fiscal 2005 and fiscal 2004 were $3.40, $6.04, and$3.19, respectively. The total fair value of shares granted during fiscal 2006,fiscal 2005 and fiscal 2004 were $231,000, $529,000 and $615,000, respectively.The aggregated intrinsic values of options exercised during fiscal 2006, fiscal2005 and fiscal 2004 were $120,000, $158,000 and $203,000, respectively. Thetotal fair value of shares vested during fiscal 2006, fiscal 2005 and fiscal2004 were $167,000, $316,000 and $464,000, respectively.

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The total unrecognizedcompensation costs related to non-vested options were $253,000 atOctober 31, 2006 and October 31, 2005 and will be recognized usingthe straight-line attribution method ratably for the subsequent three years. Wewill, however, adjust total stock-based compensation cost for changes inestimated *forfeiture rates* and true-ups.

**NOTE 4.   ACQUISITIONS**

**Poet Holdings, Inc.**

On March 18, 2004,Poet Holdings, Inc., or Poet, was merged with a wholly owned subsidiary ofthe Company. As a result of this merger, Poet became a wholly owned subsidiaryof Versant. The merger with Poet was consummated to obtain a broader objectdatabase product suite and thereby increase the size and variety of Versant’scustomer base, as well as to capitalize on Poet’s strong European presence andbring Poet’s cash assets into the merged company. The total purchase price was$29,967,916, and consisted of the following: a) a total of 15,525,342 shares ofVersant common stock, valued at $25,927,321, using a fair value per share of$1.67 per share, which were exchanged for 11,089,542 shares of Poet commonstock; b) options to purchase a total of 1,784,780 shares of Versantcommon stock, valued at $2,402,825 (reduced by the intrinsic value of unvestedassumed options in the amount of $299,546) which were issued upon theconversion and assumption of 1,274,834 options to purchase shares of Poetcommon stock in the merger; and c) direct transaction costs of $1,937,316.The fair value per Versant share of $1.67 was computed using Versant’s averagestock price five days before and five days after the acquisition, eliminatingthe high and the low prices in that date range. The results of operations ofPoet Holdings are included in Versant’s statement of operations fromMarch 18, 2004 onwards.

**FastObjects, Inc.**

On July 6, 2004, theCompany acquired FastObjects, Inc., then the exclusive US and Canadiandistributor for Poet’s FastObjects database management products. Theacquisition of FastObjects was part of the post-merger process of integratingVersant and Poet’s businesses. Prior to the acquisition, a Poet subsidiaryowned preferred shares of FastObjects, Inc. representing approximately 19%of FastObjects’ stock. In 2002, prior to its merger with Versant in March 2004,Poet had granted FastObjects, Inc. exclusive North American distributionrights for Poet’s FastObjects product. This acquisition allowed Versant tore-acquire those rights and bring the FastObjects product back into itsregional distribution network in North America. The total purchase price was$636,249 and consisted of the following: a) pre-existing investment of 19% ownershipin FastObjects, Inc. of $300,000; b) increase in investment of $35,020,based on conversion from cost to equity method of accounting; c) net cash of$277,730, which includes a payment of $540,974 to the shareholders of FastObjects, Inc, less cash of $263,244 received from Fast Objects; and d) directtransaction costs of $23,499.

**JDOGenie**

On June 30, 2004, Versant purchased the JDOGenie product line and its customers from JDO Genie (PTY) Ltd., or JDO Genie, aprivately held South African company. The JDO Genie product and technologyprovides a solution that can serve as the foundation for multiple data accessproducts connecting applications to both object and relational databases. Thisarrangement also included a one-year consulting contract with the JDO Geniedevelopment team, which included objective-based bonus payments totaling$250,000. These amounts were expensed as incurred and not included as part ofthe purchase price. The original purchase price recorded by the Company was$525,000, and consisted of the following: a) a cash payment of $ 200,000 madein July of 2004; and b) a contingent deferred cash payment 

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of $325,000. Under the terms of the agreement, thedeferred portion of the purchase price payable to JDO Genie (PTY) Ltd was to beeither:

a.                 230,150restricted shares of Versant common stock (then valued at $400,000), if JDOGenie (PTY) Ltd received formal written approval to receive such shares fromthe South African Reserve Bank; or

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

On January 14, 2005, the South African ReserveBank approved the issuance of the Versant common shares to JDO Genie.Consequently, Versant issued the 230,150 common shares to JDO Genie in March 2005.As a result, an adjustment of the purchase price for the JDO Genie assetpurchase was recorded during the quarter ending January 31, 2005, whichresulted in an increase in purchase price of $75,000 ($50,000 of which wasrecorded as goodwill and the remaining $25,000 was allocated to intangibleassets).

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

**Pro forma results of operations**

Thepro forma condensed consolidated statements of operations for fiscal 2004 ispresented below as if the merger with Poet and the acquisition of FastObjects, Inc.had occurred on November 1, 2003. These pro forma figures do not includeamounts related to the JDO Genie acquisition, as they are unavailable (inthousands except per share data):

| ** **                   | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **October 31,**            | ** ** |
| ** **                   | ** ** | **2004**                        | ** ** |
| Revenues                     |       |                            | $          | 20,757 |   |   |
| Net income (loss)            |       |                            | $          | (8,587 | ) |   |
| Net income (loss) per  share |       |                            | $          | (2.75 | ) |   |

 

**NOTE 5.   DISCONTINUEDOPERATIONS**

On February 1, 2006 Versant completed the sale ofthe assets associated with its WebSphere consulting practice to Sima Solutions(“Sima”), a privately held U.S. based company. Versant’s WebSphere practiceprovided consulting and training services to end-users of IBM’s WebSphere®application server software. As a result of this transaction, Versant ceasedconducting its WebSphere practice. In connection with Versant’s sale of itsWebSphere assets, certain employees of Versant, who formerly worked in Versant’sWebSphere Practice, joined Sima.

The WebSphere transaction, based on SFAS 144, *Impairments of Long-Lived Assets and Discontinued Operations*,met the criteria of a long-lived asset (disposal group) held for sale at theend of the first quarter ended January 31, 2006. As a result, Versant hasreflected the results of operations of its WebSphere consulting practice forfiscal 2006 and fiscal 2005 as discontinued operations. Therefore, reportedrevenues for these periods no longer include any revenues from the WebSphereconsulting practice. The results from the discontinued WebSphere operations,however, are reported as net income from discontinued operations, net of incometaxes.

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The sale of Versant’sWebSphere consulting practice assets was consummated pursuant to an AssetPurchase Agreement dated February 1, 2006 (the “Sale Agreement”) betweenVersant and Sima. Pursuant to the Sale Agreement, Sima acquired assets,consisting principally of certain contracts with customers, contractors andbusiness partners of Versant’s WebSphere consulting practice, an office leasein the Chicago, Illinois area, certain office equipment, customer lists,marketing information and marketing collateral. In exchange for these assets,Sima assumed certain liabilities associated with the WebSphere consultingpractice, paid Versant $500,000 in cash and agreed to make certain contingentcash “earn-out” payments to Versant based on varying percentages of therevenues Sima collects from its operation of the WebSphere practice during the24-month period immediately following closing of this transaction, substantiallyas follows:

·       Duringthe first twelve months following the closing of the sale to Sima (the “FirstYear”), Sima has agreed to pay Versant: (i) 12% of the first$3.74 million of earn-out revenue collected during the First Year, if any;(ii) 5% of the next $2.0 million of earn-out revenue collected duringthe First Year, if any; and (iii) 2% of any other earn-out revenuecollected during the First Year in excess of $5.74 million.

·       Duringthe second twelve months immediately following the First Year (the “Second Year”),Sima has agreed to pay Versant: (i) 12% of the first $3.74 million ofearn-out revenue collected during the Second Year, if any; (ii) 5% of thenext $2.0 million of earn-out revenue collected during the Second Year, ifany; and (iii) 2% of any other earn-out revenue collected during theSecond Year in excess of $5.74 million.

The above earn-out payment formula is subject tocertain adjustments, including adjustments which reduce the dollar thresholdsat which the percentages of earn-out revenue are to be paid under the aboveformula if certain former Versant employees do not remain employed by Sima fora certain time period following the closing of the WebSphere transaction.Versant expects some normal attrition on the number of the former employees ofVersant, who are currently working for Sima. Any potential earn-out paymentswill be recognized if and when achieved during fiscal 2007 and beyond.

TheWebSphere sale transaction was reflected in the quarter ending April 30,2006, and during the quarters ending April 30, July 31 and October 31,2006, Versant recorded $41,000, $90,700 and $118,000, respectively, inroyalties from WebSphere as income from discontinued operations. The followingtable reflects the gain from the disposal of the discontinued WebSphereoperation and earnings from discontinued operations, net of income taxes forWebSphere.

| ** **                                                      | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **October 31,**            | ** ** |
| ** **                                                      | ** ** | **2006**                        | ** ** |
| WebSphere sales  proceeds                                       |       |                            | $          | 500 |   |   |
| Lease  cancellation                                             |       |                            | (24        | ) |   |
| Legal fees                                                      |       |                            | (8         | ) |   |
| Gain from sale of discontinued operations, net of  income taxes |       |                            | $          | 468 |   |   |
| WebSphere Quarterly royalty Q2 2006                             |       |                            | $          | 41 |   |   |
| WebSphere  Quarterly royalty Q3 2006                            |       |                            | 91         |   |   |
| WebSphere  Quarterly royalty Q4 2006                            |       |                            | 118        |   |   |
| Other WebSphere  revenues, net of expenses                      |       |                            | (19        | ) |   |
| Net income from discontinued operations, net of  income taxes   |       |                            | $          | 231 |   |   |
| Total                                                           |       |                            | $          | 699 |   |   |

 

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In September 2004, the Company completed its saleof all the stock of Poet GmbH, an indirect Versant subsidiary that owned theassets and employed the personnel of Versant’s Catalog Solutions Business (the “CatalogBusiness”) to ems ePublishing AG, a privately held German company based inKarlsruhe, Germany (“EMS”). The sale was consummated pursuant to a SharePurchase and Transfer Agreement dated September 13, 2004 (the “SaleAgreement”) between EMS and Poet Software GmbH, another subsidiary of Versant (“PoetSoftware”) that owned all the shares of Poet GmbH. Pursuant to the SaleAgreement, EMS agreed to assume the operations of the Catalog Business.

The Catalog Business was originated by Poet andacquired by Versant in connection with its March 2004 merger with Poet.This business involved the development and sale of software product lines thatenable companies to create, manage, customize and distribute electronic salescatalogs to conduct business-to-business e-commerce transactions. The principalassets disposed of in the sale of the Catalog Business to EMS include theX-Solutions and eSupplier Solutions product lines, including the Poet X-Buy,Poet X-Market, Poet X-Sell, Poet eSupplier Port, Poet eSupplier Web and PoeteSupplier Link products, related rights to those products and customeragreements of the Catalog Business as well as the transfer of Catalog Businesspersonnel. Pursuant to the Sale Agreement, it was also agreed that Poet GmbH(now owned by EMS) may use the “Poet” trade name and mark in connection withdata processing and software businesses and that Versant, its subsidiary PoetHoldings, Inc. and their affiliates would cease their use of the “Poet” tradename or mark effective as of January 1, 2005. In addition, pursuant to theSale Agreement Poet Software granted Poet GmbH certain non-exclusive rights tocertain Poet database software for use with certain existing Poet GmbH customercontracts.

In exchange for the sharesof Poet GmbH, EMS paid Poet Software a closing cash payment of 1,000,000 eurosand paid a further 172,000 euros for a total of 1,172,000 euros cashconsideration (or approximately $1.4 million USD). In addition EMS agreedto pay a royalty on future revenues of Poet GmbH’s Catalog Business over theten-month period following the signing of the Sale Agreement in an amount equalto 30% of all Poet GmbH’s Catalog Solutions Business revenues which: (a) exceeded800,000 euros (or approximately $1.0 million) during the period from September 1,2004 to December 31, 2004; (b) exceeded 600,000 euros (orapproximately $786,000) during the period from January 1, 2005 to March 31,2005; and (c) exceeded 600,000 euros (or approximately $786,000) duringthe period from April 1, 2005 to June 30, 2005. Versant had notreceived any royalties from EMS pursuant to the Sale Agreement referred toabove as of October 31, 2006.

**NOTE 6.   RESTRUCTURING**

Versant has undergoneseveral restructuring programs since fiscal 2004 with the intent of reducingongoing operating costs.

*Fiscal 2005*

In June 2005, Versant committed to and beganimplementing a restructuring program to realign its resources to focus on itsVersant Object Database product. Versant assessed its product portfolio andassociated research and development efforts and expenditures, and thenstreamlined the rest of its operations to support those reassessments. Versantplanned to spin off and eliminate marginally profitable or non-strategicproducts lines, consolidate development activities, eliminate four managementpositions and certain duplicate positions in marketing functions and programs,and centralize its sales support functions.

In July 2005, Versant, through its subsidiaryVersant GmbH, entered into certain agreements to effect a spin-off of tangibleassets, technology rights and contracts related to its Versant Open Access .NET(“VOA.NET”) business to Vanatec GmbH (“Vanatec”), a then newly formed privatelyheld German based company. In connection with that spin-off, seven formerVersant employees departed Versant to 

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join Vanatec, and apartnership formed by those individuals, received an 80.4% equity interest inVanatec, with Versant retaining the remaining 19.6% equity interest. Inconnection with that spin-off, on July 29, 2005, Versant committed toprovide funding to Vanatec in a total amount not to exceed 425,000 euros (or$520,000) in two equal installments of 212,500 euros (or $260,000) each on August 3,2005 and November 3, 2005, which Versant contributed to Vanatec. Inaddition, during the three months ended July 31, 2005, Versant contributed25,000 euros (or $30,000) to Vanatec; therefore, the total cash capitalcontributed and committed by Versant to Vanatec was 450,000 euros (or$550,000). VOA.NET was one of the aforementioned non-strategic product lineswhich Versant decided to spin off as part of its restructuring efforts designedto enable Versant to focus on its core database business and progress towardsits long-term profitability goal.

Versant determined that equity at risk in Vanatec isnot sufficient to permit it to finance its activities without additionalsubordinated financial support; therefore, Versant determined that Vanatec wasa variable interest entity in accordance with FIN 46(R), *Consolidation of Variable Interest Entities*(As Amended). Vanatec results were included in Versant’s consolidated financialstatements from July 2005 through March 27, 2006 in which thecriteria of FIN 46(R) for consolidation are met. Accordingly, a variableinterest entity liability in the amount of $137,000 was recorded in Versant’saccompanying condensed consolidated balance sheet as of October 31, 2005reflecting the 80.4% equity interest in Vanatec held by the former Versantemployees. The recording of the aforementioned variable interest entityliability resulted in a corresponding restructuring charge of $480,000 duringfiscal 2005. On March 27, 2006, Versant sold its 19.6% interest in Vanatecto a third party investor for 4,900 euros and entered into a joint ownershipagreement with Vanatec. As a result of the transaction, Versant determined thatit is no longer the primary beneficiary of Vanatec, and thus, in accordancewith FIN 46(R) is no longer required to consolidate its operating resultseffective March 28, 2006.

In fiscal 2005, Versantrecorded total restructuring charges of approximately $638,000, which includedapproximately $280,000 of severance payments for headcount reductions; $480,000related to the aforementioned Vanatec spin off of which $24,000 related tolegal fees incurred due to the VOA.Net spin-off; offset by a $122,000adjustment as result of the sublease of the Company’s UK facilities.

*Fiscal 2006*

The restructuring programs initiated in the thirdquarter of fiscal 2005 were effectively completed in the second quarter offiscal 2006. During the quarters ended July 31 and October 31, 2006,Versant did not record any restructuring expenses. In fiscal 2006, Versantrecorded total restructuring charges of approximately $218,000, which consistprimarily of severance payments due to headcount reductions.

As of October 31, 2006, there remains $448,000restructuring accrual and zero variable interest entity liability on Versant’sconsolidated balance sheet.

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Thefollowing table summarizes the Company’s restructuring activities from October 31, 2004through October 31, 2006 (in thousands):

| ** **                                                                 | ** ** | **Facility** | ** ** | **Employee**     | ** ** | **Others/** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                                                 | ** ** | **Leases**   | ** ** | **Terminations** | ** ** | **Vanatec** | ** ** | **Total**  | ** ** |
| **Opening  accrual balance as of October 31, 2004**                   | ** ** | **$**        | **2,107**  | ** **       |       | **$**       | **504**    | ** ** |       |   | **$** | **—** | ** ** |   | **$** | **2,611** | ** ** |
| Non-cash adjustment during the fiscal year 2005                            |       | (122         | )          |             | 280        |        |       |       | 480        |   |   | 638 |   |
| Net cash payments  during the fiscal year 2005                             |       | (804         | )          |             | (784       | )           |       |       | (343       | ) |   | (1,931 | ) |
| **Accrual  and variable interest liability as of   October 31, 2005** | ** ** | **$**        | **1,181**  | ** **       |       | **$**       | **—** | ** ** |       |   | **$** | **137** | ** ** |   | **$** | **1,318** | ** ** |
| Non-cash adjustment during the fiscal year 2006                            |       | 218          |       |             | —     |        |       |       | —     |   |   | 218 |   |
| Net cash payments  during the fiscal year 2006                             |       | (951         | )          |             | —     |        |       |       | —     |   |   | (951 | ) |
| Deconsolidation  of Vanatec adjustment during the fiscal year 2006         |       | —       |       |             | —     |        |       |       | (137       | ) |   | (137 | ) |
| **Accrual and variable interest  liability as of   October 31, 2006** | ** ** | **$**        | **448**    | ** **       |       | **$**       | **—** | ** ** |       |   | **$** | **—** | ** ** |   | **$** | **448** | ** ** |

 

The facility leasepayments during the fiscal 2006 were related to Versant’s obligations for itsCalifornia and European facilities, which were accrued for as part of therestructuring plans.

**NOTE 7.   CONSOLIDATIONOF VARIABLE INTEREST ENTITY**

**Versant******in July 2005 through its subsidiary Versant GmbH,entered into certain agreements to effect a spin-off of tangible assets,technology rights and contracts related to its Versant Open Access .NET (“VOA.NET”)business to Vanatec GmbH (a then newly formed privately held German basedcompany). Versant, subsequent to this agreement, determined that the equity atrisk in Vanatec was not sufficient to permit the company to finance itsactivities without additional subordinated**financialsupport from Versant; therefore, it considered Vanatec a variable interestentity in accordance with FIN 46(R), *Consolidation of VariableInterest Entities* (As Amended).

As a result, in accordance with FIN 46(R), Vanatec’soperating results were included in Versant’s consolidated financial statementsfor the three-month periods ended July 31, 2005, October 31, 2005 andJanuary 31, 2006. During the three months ended January 31, 2006,Versant absorbed its share of Vanatec’s losses up to the point that it exceededthe variable interest liability; and subsequent to that it continued to absorb100% of the losses that Vanatec had incurred for an additional amount of$35,000 for the three months ended January 31, 2006. During the threemonths ended April 30, 2006, Versant continued to absorb 100% of Vanatec’slosses for an additional amount of $70,000 for the period between February 1,2006 and March 27, 2006.

On March 27, 2006, Versant sold its 19.6%interest in Vanatec to a third party investor for 4,900 euros and entered intoa joint ownership agreement with Vanatec. According to this agreement, Vanatecshall pay Versant a running royalty interest at a rate of six percent of itsnet proceeds, but no less than 30 euros per copy of the technology subject tothe licenses granted, for a period of five years following the effective dateof the agreement. Further, at any time during the royalty period, Vanatec hasthe right to exercise a buyout for its royalty obligations by making a one-timepayment to Versant of 450,000 euros. As a result of the aforementionedtransaction, Versant determined that it is no longer the primary beneficiary ofVanatec, and thus, in accordance with FIN 46(R) is no longer required toconsolidate its operating results effective March 27, 2006.

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As Versant was no longerrequired to consolidate the operating results of Vanatec as of March 27,2006, it recorded a gain of approximately $131,000 on deconsolidation,representing the reversal of the excess losses that it had absorbed and theconsideration that it received from the third party investor in lieu of itsinterest in Vanatec. The gain is reported as Gain on Disposal of VariableInterest Entity in the accompanying consolidated statements of operations forfiscal 2006.

**NOTE 8.**   LEASEOBLIGATIONS AND OTHER COMMITMENTS

Versant’s principal commitments as of October 31,2006 consisted of obligations under operating leases for facilities, equipment,and contract commitments.

In November 1996, Versant entered into a ten-yearoperating lease agreement for the Company’s corporate headquarters in Fremont,California that commenced on July 1, 1997 and expires on June 30,2007. The terms of the lease provide for certain increases in rental paymentsduring the lease term. Rental expense under this agreement, includingcontractual rent increases, is recognized on a straight-line basis. Versantalso leases field office space in Europe and India, generally under multi-yearoperating lease agreements. Consolidated rent expenses for the fiscal yearsended October 31, 2006, October 31, 2005 and October 31, 2004,were approximately $877,000, $1.0 million, and $1.7 million,respectively.

TheCompany has recorded approximately $591,000 of its commitments on its October 31,2006 Balance Sheet. The Company’s future annual minimum commitments as of October 31,2006 under non-cancelable operating leases are listed in the table below:

| ** **                           | ** ** | **Rental** | ** ** | **Equipment** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                           | ** ** | **Lease**  | ** ** | **Leases**    | ** ** | **Total**  | ** ** |
| Fiscal year ending  October 31, |       |       |       |          |       |       |       |   |   |
| 2007                                 |       | 1,054      |       |          | 60         |       |       | 1,114 |   |
| 2008                                 |       | 93         |       |          | 43         |       |       | 136 |   |
| 2009                                 |       | —     |       |          | 34         |       |       | 34 |   |
| 2010                                 |       | —     |       |          | 16         |       |       | 16 |   |
| Thereafter                           |       | —     |       |          | 22         |       |       | 22 |   |
| Total                                |       | $          | 1,147      |          |       | $          | 175        |   |   | $ | 1,322 |   |
|                                      |            |            |            |               |            |            |            |  |  |  |  |  |

 

**NOTE 9.   LINEOF CREDIT**

On June 21, 2005,Versant and a financial institution entered into a Loan and Security Agreement,a Streamline Facility Agreement and an Intellectual Property Security Agreement(collectively, the “Loan Agreements”). Under the terms of these LoanAgreements, Versant may borrow up to a maximum of $3.0 million from thefinancial institution at****any onetime under a revolving secured accounts receivable-based line of credit. Thisline of credit permits Versant to obtain short-term loan advances from thefinancial institution equal to 80% of the face amount of specific eligibleaccounts receivable of Versant. The interest rate on each advance will beeither 4.0% or 4.5% above the bank’s prime rate. As of October 31, 2006,there was no outstanding debt under this credit line. The Company has been incompliance with all the covenants of the line of credit.

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**NOTE 10.   SHAREHOLDERS’EQUITY AND EARNINGS PER SHARE**

Basic and dilutednet loss per common share has been computed using the weighted average numberof shares of common stock outstanding during the period, less shares subject torepurchase. The following table presents the calculation of basic and dilutednet loss per share (in thousands, except per share amounts):

| ** **                                                                                             | ** ** | **Fiscal year ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) from  continuing operations attributable to   common shareholders                    |       | $                                                | 3,602      |   | $  | (14,971 | ) | $  | (10,374 | ) |
| Net income (loss) from  discontinued operations, net of   income tax                                   |       | 231                                                   |       | 417 |   | (1,314 | ) |
| Gain (loss) from sale of  discontinued operations, net of   income taxes                               |       | 468                                                   |       | — |   | (309 | ) |
| Net income (loss)  attibutable to common shareholders                                                  |       | $                                                     | 4,301      |   | $ | (14,554 | ) | $ | (11,997 | ) |
| Calculation of basic net loss per share:                                                               |       |                                                  |       |   |   |   |   |
| Weighted average common  shares outstanding                                                            |       | 3,577                                                 |       | 3,539 |   | 3,117 |   |
| Net income (loss) per  share from continuing operations   attributable to common shareholders, basic   |       | $                                                | 1.01       |   | $  | (4.23 | ) | $  | (3.33 | ) |
| Earnings (loss) per  share from discontinued operations, net of   income tax, basic                    |       | $                                                     | 0.19       |   | $ | 0.12 |   | $ | (0.52 | ) |
| Net income (loss) per  share attibutable to common   shareholders, basic                               |       | $                                                     | 1.20       |   | $ | (4.11 | ) | $ | (3.85 | ) |
| Calculation of diluted net income per share:                                                           |       |                                                  |       |   |   |   |   |
| Weighted average—common  shares outstanding                                                       |       | 3,577                                                 |       | 3,539 |   | 3,117 |   |
| Dilutive securities—common  stock options and shares   subject to repurchase                      |       | 7                                                     |       | — |   | — |   |
| Weighted average—common  shares outstanding and   potentially dilutive common shares              |       | 3,584                                                 |       | 3,539 |   | 3,117 |   |
| Net income (loss) per  share from continuing operations   attributable to common shareholders, diluted |       | $                                                | 1.01       |   | $  | (4.23 | ) | $  | (3.33 | ) |
| Earnings (loss) per  share from discontinued operations,   net of income tax, diluted                  |       | $                                                     | 0.19       |   | $ | 0.12 |   | $ | (0.52 | ) |
| Net income (loss) per  share attibutable to common   shareholders, diluted                             |       | $                                                     | 1.20       |   | $ | (4.11 | ) | $ | (3.85 | ) |
| Anti-dilutive common  stock options, not included in   net income per share calculation                |       | 239                                                   |       | 341 |   | 591 |   |

 

TheCompany excludes potentially dilutive securities from its diluted net loss pershare computation when their effects are anti-dilutive to net loss per shareamounts. The following common stock equivalents were excluded from the net lossper share computation (in thousands):

| ** **                                                                                                       | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **  2006  **                      | ** ** | **   2005   ** | ** ** | **   2004  ** | ** ** |
| Anti-dilutive common  stock options and non-vested common stock   not included in net loss per share calculation |       | 239                                                   |       | 341 |   | 460 |   |   |
| Shares issuable pursuant  to warants to purchase common stock                                                    |       | —                                                |       | — |   | 131 |   |   |
| Total anti-dilutive common shares excluded from  basic & diluted   net loss per share                   |       | 239                                                   |       | 341 |   | 591 |   |   |

 

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**NOTE 11.   INCOMETAXES**

The Company accounts for income taxes pursuant to theprovisions of SFAS No. 109, *Accounting for IncomeTaxes*, which requires an asset and liability approach to accountingfor income taxes. Deferred tax liabilities and assets are determined based onthe difference between the financial statement carrying amounts and the tax basisof assets and liabilities and are measured using the enacted statutory taxrates in effect at the balance sheet date. The Company records a valuationallowance to reduce its deferred tax assets when uncertainty regardingrealizability exists.

Income(Loss) before provision for income taxes consisted of the following (inthousands):

| ** **    | ** ** | **Fiscal year ended October 31,** | ** ** |
|---------------|------------|-------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                                                     | 930        |   | $ | (16,653 | ) | $ | (10,282 | ) |
| International |       | 3,761                                                 |       | 2,123 |   | (1,627 | ) |
|          |       | $                                                     | 4,691      |   | $ | (14,530 | ) | $ | (11,909 | ) |

 

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

| ** **                        | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|
| ** **                        | ** ** | **   2006   **          | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Current:                          | ** ** |                                                  | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Federal                           |       |                                                  | $          | — | ** ** |   | $ | — | ** ** | $ | — | ** ** |
| State                             |       |                                                  | 32         | ** ** |   | 13 | ** ** | — | ** ** |
| Foreign                           |       |                                                  | 351        | ** ** |   | — | ** ** | — | ** ** |
| Foreign withholding               |       |                                                  | 7          | ** ** |   | 24 | ** ** | 88 | ** ** |
| Total current                     |       |                                                  | $          | 390 | ** ** |   | $ | 37 | ** ** | $ | 88 | ** ** |
| Deferred:                         |       |                                                  |       | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Federal                           |       |                                                  | —     | ** ** |   | — | ** ** | — | ** ** |
| State                             |       |                                                  | —     | ** ** |   | — | ** ** | — | ** ** |
| Total deferred                    |       |                                                  | $          | — | ** ** |   | $ | — | ** ** | $ | — | ** ** |
| Total provision for  income taxes |       |                                                  | $          | 390 | ** ** |   | $ | 37 | ** ** | $ | 88 | ** ** |

 

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

| ** **                                                       | ** ** | **Fiscal year ended October 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                       | ** ** | **   2006   **          | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Federal tax  (benefit) at statutory rate                         |       | $                                                     | 1,642      |   | $ | (5,086 | ) | $ | (4,168 | ) |
| State tax  (benefit) at statutory rate, net of   federal benefit |       | 188                                                   |       | (64 | ) | (101 | ) |
| Change in  valuation allowance                                   |       | (420                                                  | )          | 2,212 |   | 1,761 |   |
| Foreign tax  differential                                        |       | (1,053                                                | )          | (743 | ) | 488 |   |
| Impairment of  intangible asets                                  |       | —                                                |       | 3,605 |   | — |   |
| Book intangible  assets amortization not   deductible for tax    |       | —                                                |       | — |   | 1,073 |   |
| Deemed divident  not deductible for tax                          |       | —                                                |       | — |   | 848 |   |
| Other                                                            |       | 33                                                    |       | 113 |   | 187 |   |
| Provision for income  taxes                                      |       | $                                                     | 390        |   | $ | 37 |   | $ | 88 |   |

 

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

| ** **                       | ** ** | **Fiscal year ended  October 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **   2006   **      | ** ** | **   2005   ** | ** ** |
| Deferred tax  asset:             |       |                                              |       |   |   |
| Net operating loss carryforwards |       | $                                                 | 44,736     |   | $ | 44,848 |   |
| Tax credit carryforwards         |       | 3,509                                             |       | 3,502 |   |
| Other                            |       | (73                                               | )          | 242 |   |
|                             |       | $                                                 | 48,172     |   | $ | 48,592 |   |
| Valuation allowance              |       | (48,172                                           | )          | (48,592 | ) |
| Net deferred tax asset           |       | $                                                 | —     |   | $ | — |   |

 

At October 31, 2006, the Company had federal andstate net operating loss carry forwards of $82.5 million and$22.6 million, respectively and federal and state tax credit carryforwards of $2.2 million and 1.3 million, respectively. The federaltax credit carry forwards expire on various dates through 2025, if notutilized. The state tax credit can be carried forward indefinitely.Additionally, at October 31, 2006, the Company had German net operatingtax loss carry forwards of approximately $40.2 million. The German tax codeprovides for certain annual statutory limitations related to the use of taxloss carry forward amounts. For each taxable year, the Company may utilizeGerman tax loss carry forwards fully up to the first million euros oftaxable income, and thereafter, the tax loss carry forwards are limited to 60%of taxable income. Due to the Company’s history of operating losses, theCompany believes that there is sufficient uncertainty regarding therealizability of these carry forwards and, therefore, a valuation allowance ofapproximately $48.2 million has been recorded against the Company’s netdeferred tax assets. The Company will continue to assess the realizability ofthe tax benefit available based on actual and forecasted operating results.

Due to “change in ownership” provisions of theInternal Revenue Code of 1986, the availability of net operating loss and taxcarry forwards to offset federal taxable income in future periods is subject toan annual limitation.

A portion of deferred taxassets relating to net operating losses pertains to net operating loss carryforwards resulting from tax deductions upon the exercise of employee stockoptions of approximately $1.6 million. When recognized, the tax benefit ofthese loss carry forwards will be accounted for as a credit to additionalpaid-in capital rather than a reduction of income tax expense.

**NOTE 12.   EMPLOYEEAND DIRECTOR BENEFIT PLANS**

Versanthas, or had during fiscal 2006, the following option plans in place:

·       2005 Equity Incentive Plan

At the Company’s Annual Meeting of Shareholders on August 22,2005, the Company’s shareholders approved the adoption of the 2005 EquityIncentive Plan. On that date, the Company immediately terminated use of the1996 Equity Incentive Plan and ceased to grant stock options or other stockawards under the 1996 Equity Incentive Plan, instead granting them under the2005 Equity Incentive Plan.

Under Versant’s 2005 Equity Incentive Plan, optionsare generally granted to its employees with a three-year vestingschedule in which 25% of the option vests and becomes exercisable ninemonths from grant date and the remaining 75% vests ratably, on a monthly-basisthereafter over the remaining 27 months of the vesting schedule. Alloptions granted to employees under the Company’s 2005 Equity Incentive Planexpire ten years after the grant date. Grant holders have three months afterleaving the Company to exercise their vested options.

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Thepurpose of adopting the 2005 Equity Incentive Plan was to continue to reserveand make available under that plan the same number of common shares that wouldhave been reserved and available for future option grants and stock awardsunder the 1996 Equity Incentive Plan if it were not then expiring. Accordingly,the number of common shares reserved for issuance under the 2005 EquityIncentive Plan is equal to the number of shares that were reserved andavailable for issuance under the 1996 Equity Incentive Plan on the date the2005 Equity Incentive Plan was approved by the Company’s shareholders, plus anyshares that in the future would have become available for issuance under the1996 Equity Incentive Plan due to the expiration of unexercised options orother forfeitures of equity awards granted under that plan. Thus, adoption andapproval of the 2005 Equity Incentive Plan did not result in any increase inthe number of shares of Common Stock available for equity awards beyond thenumber of shares that would otherwise have been available for issuance underthe 1996 Equity Incentive Plan if it did not expire.

·       1996 Equity Incentive Plan

UnderVersant’s 1996 Equity Incentive Plan, options are generally granted to itsemployees with a three-year vesting schedule in which 25% of the optionvests and becomes exercisable nine months from grant date and the remaining 75%vests ratably, on a monthly-basis thereafter over the remaining 27 months ofthe vesting schedule. Versant’s Compensation Committee has from time to timeapproved non-standard stock option vesting schedules for the purposes ofemployee retention or bonus grants, such as a three-year grant, with 25%vesting in three months and the remaining vesting ratably on a monthly-basisthereafter or an option grant with 100% of the option grant vesting threemonths after the grant date. All options granted to employees under the Company’s1996 Equity Incentive Plan expire ten years after the grant date. Grant holdershave three months after leaving the Company to exercise their vested options.No further options will be granted under 1996 Equity Incentive Plan.

·       2005 Directors Stock Option Plan

On August 22, 2005, the Company’s shareholdersapproved the 2005 Director Stock Option Plan at the Annual Meeting. The Companyimmediately terminated use of the 1996 Director Stock Option Plan and ceased togrant stock options or other stock awards under the 1996 Director Stock OptionPlan, and instead granted them under the 2005 Director Stock Option Plan.

Under Versant’s 2005 Directors Stock Option Plan,Versant grants 4,000 options as an initial grant to new directors of the Boardand 2,000 as an annual succeeding grant thereafter. Both grants vest 50% on thefirst and second anniversaries of the option grant. The options granted underthe 2005 Directors Stock Option Plan expire ten years after the grant date. Directorshave seven months after leaving their directorships to exercise their vestedoptions.

The purpose of adopting the 2005 Directors Plan was tocontinue to reserve and make available under that plan the same number ofcommon shares that would be reserved and available for future option grantsunder the 1996 Directors Plan if it were not then expiring. Accordingly, thenumber of common shares reserved for issuance under the 2005 Directors Planwill be equal to the number of shares that are reserved and available forissuance under the 1996 Directors Plan on the date the 2005 Directors Plan wasapproved by the Company’s shareholders (the “Directors Plan Effective Date”),which was August 22, 2005, plus any shares that in the future would havebecome available for issuance under the 1996 Directors Plan due to theexpiration of unexercised options granted under that plan or the Company’srepurchase of shares issued under that plan at their original issue price.Thus, adoption and approval of the 2005 Directors Plan will not result in anyincrease in the number of shares of Common Stock available for options beyondthe number of shares that would otherwise have been available for issuanceunder the prior Directors Plan if it did not expire.

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Thepurpose of the 2005 Directors Plan was also to enhance the Company’s ability toattract and retain highly qualified directors who are not employees of theCompany or any of parent, subsidiary or affiliate of the Company (an “OutsideDirector”) through the use of equity incentives. The Board believed that the1996 Directors Plan played an important role in the Company’s efforts toattract and retain Outside Directors and expected the 2005 Directors Plan toplay a similar role. The Board believes that adoption of the new 2005 DirectorsPlan is in the best interests of the Company because it believes that the 2005Directors Plan will help enable the Company to provide equity participation toattract and retain Outside Directors of outstanding ability. In this regard theCompany noted that recent legislation, stock exchange requirements and case lawhave increased the importance to the Company of having qualified independentdirectors. However, these changes had also increased the obligations, risks andtime commitment of directors of public companies such as the Company, making iteven more important for the Company to be able to offer equity incentives toattract and retain qualified Outside Directors.

·       1996 Directors Stock Option Plan

Under Versant’s 1996 Directors Stock Option Plan,Versant grants 40,000 options as an initial grant to new directors of the Boardand 20,000 as an annual succeeding grant thereafter. Both grants vest 50% onthe first and second anniversaries of the option grant. The options grantedunder the 1996 Directors Stock Option Plan expire ten years after the grantdate. Directors have seven months after leaving their directorships to exercisetheir vested options. No further options will be granted under 1996 DirectorStock Option Plan.

Versantacquired all of Poet’s stock option plans in connection with our March 2004acquisition of Poet. Prior to the acquisition Poet had the following plans inplace:

·       1995 Stock Option Plan

UnderPoet’s 1995 Stock Option Plan, options were generally granted with a four-yearvesting schedule of which 25% are vested twelve months after the date ofgrant with the remaining options vesting ratably on a monthly-basis over theremaining 36-month vesting period. Poet has approved non-standard stockoption vesting schedules for the purposes of employee retention or bonusgrants, including an option grant with 100% of the option grant vested at 6months.

·       2001 Non-statutory Plan.

Standardvesting under this plan is a three-year vesting schedule with 33% of theoptions vesting one year after the date of grant, and the remaining optionsvesting ratably on a monthly-basis over the remaining 24-month vestingperiod.

·       Director Plan

Under Poet’s 1999 Director’s Plan, options weregenerally granted to its directors with a three-year vesting schedule, with 33%vesting twelve months from the option grant date with remaining vesting ratablyon a monthly-basis over the remaining 24-month vesting period. Poet hasgranted options, as approved by their Board of Directors, with non-standardoption vesting, including an option grant vesting 100% on the fourthanniversary of the grant date; and a four-year grant with 25% vesting on eachsubsequent anniversary of the grant date.

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

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***Shares Reserved for Future Issuance***

As of October 31,2006, the Company had reserved shares of common stock for the followingpurposes:

| Employee stock  purchase plan      |   | 25,402  |   |
|------------------------------------|--------|---------|--------|
| Stock options  available for grant |   | 193,234 |   |
| Unexercised stock  options         |   | 184,590 |   |
|                               |   | 403,226 |   |

 

***Stock Options Activities***

Thestock option activities in fiscal years 2006, 2005 and 2004 were as follows:

| ** **                            | ** ** | **Options**            | ** **  | **Number of** | ** ** | **Weighted** | ** **  |
|---------------------------------------|------------|------------------------|-------------|--------------------|------------|--------------|-------------|
| ** **                            | ** ** | **available for** | ** **  | **options**        | ** ** | **average**  | ** **  |
| ** **                            | ** ** | **grant**              | ** **  | **outstanding**    | ** ** | **price**    | ** **  |
| **Balance  at October 31, 2003** | ** ** |                   | **163,739** | ** **         |       |         | **373,076** | ** ** |   |   | **$** | **26.60** | ** ** |   |
| Authorized                            |       |                   | 178,478     |               |       |         | —      |   |   |   | — | ** ** |   |
| Granted                               |       |                   | (192,693    | )                  |       |         | 13,020      |   |   |   | 15.40 | ** ** |   |
| Assumed                               |       |                   | —      |               |       |         | 178,478     |   |   |   | 34.90 | ** ** |   |
| Exercised/Expired                     |       |                   | (12,771     | )                  |       |         | (28,394     | ) |   |   | 9.50 | ** ** |   |
| Canceled                              |       |                   | 77,315      |               |       |         | (76,287     | ) |   |   | 23.30 | ** ** |   |
| **Balance  at October 31, 2004** | ** ** |                   | **214,068** | ** **         |       |         | **459,893** | ** ** |   |   | **$** | **31.20** | ** ** |   |
| Authorized                            |       |                   | —      |               |       |         | —      |   |   |   | — | ** ** |   |
| Granted                               |       |                   | (88,950     | )                  |       |         | 88,950      |   |   |   | 7.34 | ** ** |   |
| Exercised/Expired                     |       |                   | (53,199     | )                  |       |         | (52,338     | ) |   |   | 5.13 | ** ** |   |
| Canceled                              |       |                   | 195,018     |               |       |         | (195,018    | ) |   |   | 37.03 | ** ** |   |
| **Balance  at October 31, 2005** | ** ** |                   | **266,937** | ** **         |       |         | **301,487** | ** ** |   |   | **$** | **24.90** | ** ** |   |
| Authorized                            |       |                   | —      |               |       |         | —      |   |   |   | — | ** ** |   |
| Granted                               |       |                   | (67,875     | )                  |       |         | 67,875      |   |   |   | 5.65 | ** ** |   |
| Exercised/Expired                     |       |                   | (163,776    | )                  |       |         | (26,824     | ) |   |   | 5.01 | ** ** |   |
| Canceled                              |       |                   | 157,948     |               |       |         | (157,948    | ) |   |   | 29.40 | ** ** |   |
| **Balance at October 31,  2006** | ** ** |                   | **193,234** | ** **         |       |         | **184,590** | ** ** |   |   | **$** | **16.89** | ** ** |   |

 

Thefollowing table summarizes information concerning outstanding and exercisableoptions at October 31, 2006:

| ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**   | ** ** |
|---------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **Number**                   | ** ** | **Weighted average**      | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted average** | ** ** | **Weighted** | ** ** |
| ** **                | ** ** | **outstanding at**      | ** ** | **remaining**                  | ** ** | **average** | ** ** | **exercisable at** | ** ** | **remaining** | ** ** | **average** | ** ** |
| **Exercise Prices**  | ** ** | ** **                   | ** ** | **October 31, 2006** | ** ** | **contractual life** | ** ** | **price** | ** ** | **October 31, 2006** | ** ** | **contractual life** | ** ** | **price** | ** ** |
| From $3.00 to $6.00       |       |                         | 50,707     |                           |       |   | 7.56 |   |   |   | $ | 4.29 |   |   |   | 36,818 |   |   |   | 6.99 |   |   |   | $ | 4.51 |   |   |
| From $6.10 to $9.90       |       |                         | 80,823     |                           |       |   | 8.62 |   |   |   | 7.12 |   |   |   | 25,986 |   |   |   | 7.24 |   |   |   | 7.98 |   |   |
| From $9.20 to $16.00      |       |                         | 19,963     |                           |       |   | 5.66 |   |   |   | 11.92 |   |   |   | 19,436 |   |   |   | 5.61 |   |   |   | 11.93 |   |   |
| From $17.19 to $40.00     |       |                         | 20,065     |                           |       |   | 5.11 |   |   |   | 26.79 |   |   |   | 19,899 |   |   |   | 5.09 |   |   |   | 26.84 |   |   |
| From $42.00 to $122.2     |       |                         | 11,842     |                           |       |   | 3.30 |   |   |   | 86.49 |   |   |   | 11,842 |   |   |   | 3.30 |   |   |   | 86.49 |   |   |
| From $180.00 to $1,287.00 |       |                         | 1,190      |                           |       |   | 2.33 |   |   |   | 444.59 |   |   |   | 1,190 |   |   |   | 2.33 |   |   |   | 444.59 |   |   |
|                      |       |                         | 184,590    |                           |       |   | 7.25 |   |   |   | $ | 16.89 |   |   |   | 115,171 |   |   |   | 6.05 |   |   |   | $ | 23.38 |   |   |
|                           |            |                              |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***Non CashStock Expense***

Thefollowing table summarizes the non-cash stock expenses in fiscal 2006, 2005 and2004:

| ** **                                   | ** ** | **Fiscal Year ended October 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                   | ** ** | **   2006   **          | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Stock options  expenses under FAS 123R       |       |                                                  | $          | 192 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Stock expenses  related ESPP under FAS 123R  |       |                                                  | 44         |   |   |   | — |   |   |   | — |   |   |
| Unvested Poet  Options expenses under APB 25 |       |                                                  | 96         |   |   |   | 86 |   |   |   |   |   |   |
| Total non cash stock  expense                |       |                                                  | $          | 236 |   |   |   | $ | 96 |   |   |   | $ | 86 |   |   |

 

In both fiscal 2005 andfiscal 2004, stock based compensation expense represents the amortization ofthe deferred compensation related to options assumed in the Poet merger.

**NOTE 13.   FORFEITUREOF COMMON STOCK**

In October 2004,Systems America Inc. served a complaint against Versant in a lawsuit allegingthat former employees of Systems America who left that company to form MokumeSoftware, Inc. (“Mokume”) misappropriated Systems America trade secretsand confidential information, unfairly competed with Systems America andinfringed Systems America’s trademarks. The Systems America suit alleged thatwhen Versant acquired Mokume in November 2002, it acquired the benefit ofthe allegedly misappropriated trade secrets, confidential information, customerrelationships, trademarks and trade names, and thus Systems America soughtdamages and injunctive relief from Versant. In connection with this litigation,Versant in turn sought indemnification from the former stockholders of Mokumeunder the terms of the merger agreement pursuant to which Versant acquiredMokume in November 2002. Versant’s indemnification claims were made on thegrounds that the allegations in and the existence of the Systems Americalitigation constituted a breach of certain representations and warranties madeby the former Mokume stockholders to Versant in the merger agreement. Versant’sindemnification rights entitled Versant to obtain indemnification by cancelingand recovering certain shares of Versant Common Stock issued to the formerMokume stockholders in connection with Versant’s acquisition of Mokume.Pursuant to a written agreement with the representative of the former Mokumestockholders in accordance with the merger agreement, 8,998 shares of VersantCommon Stock for $50,000 held by the former Mokume stockholders were forfeitedand cancelled as of January 12, 2006 in satisfaction of Versant’sindemnification rights.

**NOTE 14.   RELATEDPARTY TRANSACTIONS**

The Company paid one ofits directors, Bernhard Woebker, $60,000 in fiscal 2006 for consultingservices, in addition to the amounts paid to Mr. Woebker as part of theCompany’s standard director compensation.

**NOTE 15.   VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES**

Versant evaluates and revises its bad debt allowanceas part of its quarter end process at each subsidiary and corporate level. TheCompany’s management assigns a risk factor and percentage of risk to eachaccount receivable, the collection of which is considered non-routine. TheCompany also assigns a general reserve to all its overdue accounts, excludingthe non-routine items.

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Thefollowing table summarizes the activities in the Company’s allowance fordoubtful accounts (in thousands):

| ** **                                    | ** ** | **Fiscal year ended October 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **   2006   **          | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| **Allowance  for doubtful accounts**          |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Beginning balance                             |       |                                                  | $          | 114 |   |   |   | $ | 368 |   |   |   | $ | 258 |   |   |
| Provision in  allowance for doubtful accounts |       |                                                  | 175        |   |   |   | 29 |   |   |   | 111 |   |   |
| Recovery in  allowance for doubtful accounts  |       |                                                  | (227       | ) |   |   | (283 | ) |   |   | (1 | ) |   |
| Ending balance                                |       |                                                  | $          | 62 |   |   |   | $ | 114 |   |   |   | $ | 368 |   |   |

 

**NOTE 16.   QUARTERLYINFORMATION (unaudited)**

Summarizedquarterly supplemental consolidated financial information for fiscal 2006 and2005, net of discontinued operations (in thousands):

| ** **                                                                            | ** ** | **Fiscal 2006 Quarters Ended** | ** ** | **Fiscal 2005 Quarters Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **October 31,**                          | ** ** | **July 31,**                             | ** ** | **April 30,** | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **July 31,** | ** ** | **April 30,** | ** ** | **January 31,** | ** ** |
| **Revenues**                                                                          |       |                                          | $          | 4,585                                         |       |   |   | $ | 3,755 |   |   |   | $ | 3,780 |   |   |   | $ | 4,625 |   |   |   | $ | 3,802 |   |   | $ | 3,452 |   |   | $ | 3,210 |   |   |   | $ | 5,281 |   |   |
| **Cost of revenues**                                                                  |       |                                          | $          | 882                                           |       |   |   | $ | 536 |   |   |   | $ | 773 |   |   |   | $ | 900 |   |   |   | $ | 662 |   |   | $ | 823 |   |   | $ | 831 |   |   |   | $ | 948 |   |   |
| **Gross profit**                                                                      |       |                                          | $          | 3,703                                         |       |   |   | $ | 3,219 |   |   |   | $ | 3,007 |   |   |   | $ | 3,725 |   |   |   | $ | 3,140 |   |   | $ | 2,629 |   |   | $ | 2,379 |   |   |   | $ | 4,333 |   |   |
| **Operating expenses**                                                                |       |                                          | $          | 2,463                                         |       |   |   | $ | 2,252 |   |   |   | $ | 2,422 |   |   |   | $ | 3,002 |   |   |   | $ | 3,110 |   |   | $ | 17,000 |   |   | $ | 3,705 |   |   |   | $ | 4,117 |   |   |
| **Income (loss) from operations**                                                     |       |                                          | $          | 1,240                                         |       |   |   | $ | 967 |   |   |   | $ | 585 |   |   |   | $ | 723 |   |   |   | $ | 30 |   |   | $ | (14,371 | ) |   | $ | (1,326 | ) |   |   | $ | 216 |   |   |
| **Net income (loss) from continuing operations  attributable to common shareholders** |       |                                          | $          | 1,245                                         |       |   |   | $ | 917 |   |   |   | $ | 651 |   |   |   | $ | 789 |   |   |   | $ | 416 |   |   | $ | (14,413 | ) |   | $ | (1,226 | ) |   |   | $ | 252 |   |   |
| **Income (loss) from discontinued operations, net  of income tax**                    |       |                                          | $          | 118                                           |       |   |   | $ | 91 |   |   |   | $ | 35 |   |   |   | $ | (13 | ) |   |   | $ | 96 |   |   | $ | 61 |   |   | $ | 167 |   |   |   | $ | 93 |   |   |
| **Gain (loss) from sale of discontinued  operations, net of income tax**              |       |                                          | $          | —                                        |       |   |   | $ | — |   |   |   | $ | 468 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |   | $ | — |   |   |
| **Net income (loss)**                                                                 |       |                                          | $          | 1,363                                         |       |   |   | $ | 1,008 |   |   |   | $ | 1,154 |   |   |   | $ | 776 |   |   |   | $ | 512 |   |   | $ | (14,352 | ) |   | $ | (1,059 | ) |   |   | $ | 345 |   |   |
| **Net income (loss) per share**                                                       |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                 |       |                                          | $          | 0.38                                          |       |   |   | $ | 0.28 |   |   |   | $ | 0.32 |   |   |   | $ | 0.22 |   |   |   | $ | 0.14 |   |   | $ | (4.04 | ) |   | $ | (0.30 | ) |   |   | $ | 0.10 |   |   |
| Diluted                                                                               |       |                                          | $          | 0.38                                          |       |   |   | $ | 0.28 |   |   |   | $ | 0.32 |   |   |   | $ | 0.22 |   |   |   | $ | 0.14 |   |   | $ | (4.04 | ) |   | $ | (0.30 | ) |   |   | $ | 0.10 |   |   |

 

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**ITEM 9.   Changesin and Disagreements with Accountants on Accounting and Financial Disclosures**

Not applicable.

**ITEM 9A.   Controlsand Procedures**

*Evaluation ofDisclosure Controls and Procedures.*

Our management (with the participation of our ChiefExecutive Officer and our Chief Financial Officer) evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, orthe Exchange Act), as of October 31, 2006, the end of the fiscal periodcovered by this report on Form 10-K. Securities and ExchangeCommission, or SEC, rules define the term “disclosure controls andprocedures” to mean a company’s controls and other procedures that are designedto ensure that information required to be disclosed in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time period specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by a company inits reports filed under the Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

Based on the evaluation of the effectiveness of ourdisclosure controls and procedures by our management with the participation ofthe Chief Executive Officer and the Chief Financial Officer, our ChiefExecutive Officer and our Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, our disclosure controls andprocedures were effective to ensure that information required to be disclosedin the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theCommission’s rules and forms.

A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, because of the inherentlimitations in all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, have been orwill be detected. These inherent limitations include the fact that there areresource constraints, and that the benefits of controls must be consideredrelative to their costs.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

The certification ofVersant’s Chief Executive Officer and Chief Financial Officer attached as Exhibit 31.01and 31.02 to this Annual Report on Form 10-K include, in paragraph 4of such certifications, information concerning Versant’s disclosure controlsand procedures and internal control over financial reporting. Suchcertifications should be read in conjunction with the information contained in thisItem 9A for a more complete understanding of the matters covered by suchcertifications. The certifying officers have worked to design, or caused to bedesigned, disclosure controls and procedures, for the purpose of ensuring thatmaterial information relating to Versant, including its consolidatedsubsidiaries, is made known to them by other personnel of Versant on a timelybasis. These disclosure controls and procedures were designed and adopted ingood faith for this purpose, but it is recognized that these procedures must becontinually evaluated and can always merit further improvement.

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*Changes in InternalControl over Financial Reporting.*

There was no change in our internal control overfinancial reporting during the fiscal 2006 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

SEC rules definethe term “internal control over financial reporting” as a process designed by,or under the supervision of, the Company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe Company’s board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

**Item 9B.   OtherInformation.**

**None**

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**PART III**

**Item 10.   Directorsand Executive Officers of the Registrant**

The Board has adopted a Code of Conduct and Ethicsthat applies to Versant’s principal executive officer, principal financialofficer, principal accounting officer and all other employees of the Company. ThisCode of Conduct and Ethics is posted on our website at http://www.versant.com. Weintend to satisfy the disclosure requirement under Item 10 of Form 8-Kregarding any amendment to, or waiver from, a provision of this Code of Conductand Ethics by posting such information on our website at http://www.versant.comon the investors’ relations page.

The remainder of theinformation required for this Item is incorporated by reference from our ProxyStatement to be filed in connection with our 2007 Annual Meeting ofShareholders.

**Item 11.   ExecutiveCompensation**

The information requiredfor this Item is incorporated by reference from our Proxy Statement to be filedin connection with our 2007 Annual Meeting of Shareholders.

**Item 12.   SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

The information requiredfor this Item is incorporated by reference from our Proxy Statement to be filedin connection with our 2007 Annual Meeting of Shareholders.

**Item 13.   CertainRelationships and Related Transactions**

The information requiredfor this Item is incorporated by reference from our Proxy Statement to be filedin connection with our 2007 Annual Meeting of Shareholders.

**Item 14.   PrincipalAccounting Fees and Services**

The information requiredfor this Item is incorporated by reference from our Proxy Statement to be filedin connection with our 2007 Annual Meeting of Shareholders.

**Item 15.   Exhibits,Financial Statement Schedules**

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

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Exchange Act, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
|                       |   | VERSANT CORPORATION                                                                               |
|-----------------------|--------|---------------------------------------------------------------------------------------------------|
| Dated:                |   | /s/ Jerry Wong                                                                                    |   |
| January 29, 2007 |   | Jerry Wong                                                                                        |
|                  |   | Vice President, Finance                                                                           |
|                  |   | Chief Financial Officer                                                                           |
|                  |   | (Duly Authorized Officer and Principal                                                            |
|                  |   | Financial and Accounting Officer)                                                                 |
|                  |   | /s/ Jochen Witte                                                                                  |   |
|                  |   | Jochen Witte                                                                                      |
|                  |   | President and Chief Executive Officer  (Duly Authorized Officer and Principal  Executive Officer) |
|                       |        |                                                                                                   |  |  |

 

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**POWER OF ATTORNEY**

By signing this Form 10-K below, I herebyappoint each of Jochen Witte and Jerry Wong as my attorneys-in-fact to sign allamendments to this Form 10-K on my behalf, and to file this reporton Form 10-K (including all exhibits and other documents related tothe Form 10-K) with the Securities and Exchange Commission. Iauthorize each of my attorneys-in-fact to (1) appoint a substituteattorney-in-fact for himself and (2) perform any actions that he believesare necessary or appropriate to carry out the intention and purpose of thisPower of Attorney. I ratify and confirm all lawful actions taken, directly orindirectly, by my attorneys-in-fact and by any properly appointed substituteattorneys-in-fact.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| Name                                                           | ** ** | ** **                            | ** ** | ** **            | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|-----------|------------|------------|------------|----------|------------|
|                                                           |       |                                  |       |                  |
| PRINCIPAL EXECUTIVE OFFICER:                                   |       |                                  |       |                  |
| /s/Jochen Witte                                                |       | President and Chief Executive Officer |       | January 29, 2007 |
| Jochen Witte                                                   |       |                                  |       |                  |
| PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING  OFFICER: |       |                                  |       |                  |
| /s/ Jerry Wong                                                 |       | Vice President, Finance and           |       | January 29, 2007 |
| Jerry Wong                                                     |       | Chief Financial Officer               |       |                  |
| ADDITIONAL DIRECTORS:                                          |       |                                  |       |                  |
| /s/ Uday Bellary                                               |       | Director                              |       | January 29, 2007 |
| Uday Bellary                                                   |       |                                  |       |                  |
| /s/ William Henry Delevati                                     |       | Director                              |       | January 29, 2007 |
| William Henry Delevati                                         |       |                                  |       |                  |
| /s/ Herbert May                                                |       | Director                              |       | January 29, 2007 |
| Herbert May                                                    |       |                                  |       |                  |
| /s/ Bernhard Woebker                                           |       | Director                              |       | January 29, 2007 |
| Bernhard Woebker                                               |       |                                  |       |                  |

 

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**EXHIBITINDEX**

| **Exhibit** | ** ** | ** **                   | ** ** | **Incorporated by Reference**                                                                                                                                                                                           | ** ** | **Filed** | ** ** |
|-------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| **Number**  | ** ** | **Exhibit Description** | ** ** | **Form**                                                                                                                                                                                                                          | ** ** | **Date**  | ** ** | **Number** | ** ** | **Herewith** | ** ** |
|        | 2.01       |                         |       | Agreement  and Plan of Merger with Poet Holdings, Inc. dated September 27,  2003 by and among the Registrant, Puma Acquisition Inc. and Poet Holdings  Inc. †                                                      |       | 8-K       |       | 09/29/03 |   |   | 99.01 |   |   |   |   |   |   |
|        | 2.02       |                         |       | Amendment to  Agreement and Plan of Merger, dated as of January 20, 2004, by and among  the Registrant, Poet Holdings, Inc. and Puma Acquisition, Inc.                                                             |       | S-4/A     |       | 2/2/04 |   |   | 2.2 |   |   |   |   |   |   |
|        | 2.03       |                         |       | Share Purchase  and Transfer Agreement dated as of September 13, 2004 between Poet  Software GmbH and ems ePublishing AG and attached list of annexes thereto  (translated to English from the original German text). † |       | 8-K       |       | 9/17/03 |   |   | 2.1 |   |   |   |   |   |   |
|        | 2.04       |                         |       | Vanatec GmbH Asset  Purchase Agreement                                                                                                                                                                                            |       | 10-KSB    |       | 1/30/06 |   |   | 2.06 |   |   |   |   |   |   |
|        | 2.05       |                         |       | Vanatec GmbH  Agreement on the Purchase and Assignment of a Share                                                                                                                                                                 |       | 10-KSB    |       | 1/30/06 |   |   | 2.07 |   |   |   |   |   |   |
|        | 2.06       |                         |       | Asset Purchase  Agreement as of February 1, 2006 between Versant Corporation and Sima  Solutions                                                                                                                             |       | 8-K       |       | 02/7/06 |   |   | 2.01 |   |   |   |   |   |   |
|        | 3.01       |                         |       | Amended and  Restated Articles of Incorporation of the Registrant, filed with the  California Secretary of State on March 18, 2004                                                                                           |       | S-8       |       | 03/24/04 |   |   | 4.01 |   |   |   |   |   |   |
|        | 3.02       |                         |       | Certificate of  Amendment of Amended and Restated Articles of Incorporation of the  Registrant, filed with the California Secretary of State on August 22,  2005                                                             |       | 8-K       |       | 8/26/05 |   |   | 3.1 |   |   |   |   |   |   |
|        | 3.03       |                         |       | Registrant’s  Amended and Restated Bylaws                                                                                                                                                                                    |       | 10-K      |       | 2/15/05 |   |   | 3.2 |   |   |   |   |   |   |
|        | 10.01      |                         |       | Registrant’s 2005  Equity Incentive Plan**                                                                                                                                                                                   |       | S-8       |       | 12/22/05 |   |   | 99.01 |   |   |   |   |   |   |
|        | 10.02      |                         |       | Forms of Stock  Option Agreements and Stock Option Exercise Agreements under Registrant’s  2005 Equity Incentive Plan**                                                                                                      |       | S-8       |       | 12/22/05 |   |   | 99.02 |   |   |   |   |   |   |
|        | 10.03      |                         |       | Registrant’s 2005  Directors Stock Option Plan**                                                                                                                                                                             |       | S-8       |       | 12/22/05 |   |   | 99.03 |   |   |   |   |   |   |
|        | 10.04      |                         |       | Forms of Stock  Option Grants and Stock Option Exercise Agreements under Registrant’s 2005  Directors Stock Option Plan**                                                                                                    |       | S-8       |       | 12/22/05 |   |   | 99.04 |   |   |   |   |   |   |
|        | 10.05      |                         |       | Registrant’s 2005  Employee Stock Purchase Plan**                                                                                                                                                                            |       | S-8       |       | 12/22/05 |   |   | 99.05 |   |   |   |   |   |   |
|        | 10.06      |                         |       | Forms of  Enrollment Form and Subscription Agreement under Registrant’s 2005  Employee Stock Purchase Plan**                                                                                                            |       | S-8       |       | 12/22/05 |   |   | 99.06 |   |   |   |   |   |   |
|        | 10.07      |                         |       | Registrant’s 1996  Directors Stock Option Plan, as amended as of July 30, 2003, and related  documents**                                                                                                                |       | S-8       |       | 08/14/03 |   |   | 4.06 |   |   |   |   |   |   |
|        | 10.08      |                         |       | Registrant’s 1996  Employee Stock Purchase Plan, as amended as of August 17, 2004 and  related documents**                                                                                                              |       | 10-K      |       | 2/15/05 |   |   | 10.02 |   |   |   |   |   |   |

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|   | 10.09 |   |   | Registrant’s 1996  Equity Incentive Plan, as amended as of April 18, 2002, and related  documents**                                                         |   | S-8    |   | 05/09/02 |   |   | 4.05   |   |   |   |   |   |   |
|--------|-------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   | 10.10 |   |   | Poet  Holdings, Inc. Amended and Restated 1995 Stock Plan and Forms of Stock  Option Agreement and Exercise Notice thereunder**                                  |   | S-8    |   | 3/24/04  |   |   | 4.5    |   |   |   |   |   |   |
|   | 10.11 |   |   | Poet Holdings, Inc.  1999 Director Option Plan and Forms of Director Option Agreement and Director  Option Exercise Notice thereunder**                          |   | S-8    |   | 3/24/04  |   |   | 4.6    |   |   |   |   |   |   |
|   | 10.12 |   |   | Poet  Holdings, Inc. 2001 Non Statutory Stock Option Plan and Forms of Stock  Option Agreement and Exercise Notice thereunder**                                  |   | S-8    |   | 3/24/04  |   |   | 4.7    |   |   |   |   |   |   |
|   | 10.13 |   |   | Form of  Letter from Registrant to option holders of Poet Holdings, Inc.,  regarding assumption of options by Registrant**                                  |   | S-8    |   | 3/24/04  |   |   | 99.01  |   |   |   |   |   |   |
|   | 10.14 |   |   | Form of  Indemnity Agreement entered into by Registrant with each of its directors and  executive officers                                                       |   | 10-K   |   | 2/15/05  |   |   | 10.9   |   |   |   |   |   |   |
|   | 10.15 |   |   | Form of  Amendment to Versant Corporation Stock Option Agreement**                                                                                               |   | SB-2   |   | 7/16/96  |   |   |   |   |   |   |   |   |   |
|   | 10.16 |   |   | Lease Agreement  dated November 25, 1996 between John Arrillaga, Trustee et al. and  Registrant                                                                  |   | 10-KSB |   | 4/03/98  |   |   | 10.15  |   |   |   |   |   |   |
|   | 10.17 |   |   | Separation  Agreement dated June 14, 2005 between Versant Corporation and Nick  Ordon**                                                                          |   | 8-K    |   | 6/16/05  |   |   | 10.01  |   |   |   |   |   |   |
|   | 10.18 |   |   | Separation  Agreement dated June 14, 2005 between Registrant and Lee McGrath**                                                                                   |   | 8-K    |   | 6/16/05  |   |   | 10,02  |   |   |   |   |   |   |
|   | 10.19 |   |   | Joint Employment  Agreement and Managing Director Service Contract between Registrant, Versant  GmbH, a wholly owned subsidiary of Registrant, and Jochen Witte**     |   | 8-K    |   | 12/1/06  |   |   | 5.02   |   |   |   |   |   |   |
|   | 10.20 |   |   | Registration  Rights Agreement dated December 28, 1998 between the Registrant and the  parties listed on the Schedule of Investors attached thereto         |   | 10-KSB |   | 03/31/99 |   |   | 10.35  |   |   |   |   |   |   |
|   | 10.21 |   |   | Supplement dated  June 28, 1999 to Registration Rights Agreement among the Registrant and  the parties listed on the Schedule of Investors attached thereto |   | 8-K    |   | 07/13/99 |   |   | 10.02  |   |   |   |   |   |   |
|   | 10.22 |   |   | Silicon Valley  Bank Loan and Security Agreement                                                                                                                      |   | 10-KSB |   | 01/30/06 |   |   | 10.23  |   |   |   |   |   |   |
|   | 10.23 |   |   | Silicon Valley  Bank and Versant Corporation Streamline Facility Agreement                                                                                            |   | 10-KSB |   | 01/30/06 |   |   | 10.24  |   |   |   |   |   |   |
|   | 10.24 |   |   | Silicon Valley  Bank and Versant Corporation Intellectual Property Security Agreement                                                                                 |   | 10-KSB |   | 01/30/06 |   |   | 10.25  |   |   |   |   |   |   |

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|   | 10.25 |   |   | Silicon Valley  Bank and Versant Corporation Default Waiver and First Amendment to Loan and  Security Agreement |   | 10-Q   |   | 03/17/06 |   |   | 10.01  |   |   |   |   |   |   |
|--------|-------|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   | 21.01 |   |   | Subsidiaries of  the Registrant                                                                                 |   |   |   |     |   |   |   |   |   |   | x      |   |   |
|   | 23.01 |   |   | Consent of Grant  Thornton LLP                                                                                  |   |   |   |     |   |   |   |   |   |   | x      |   |   |
|   | 31.01 |   |   | Rule 13a-14(a) Certification  of Principal Executive Officer                                          |   |   |   |     |   |   |   |   |   |   | x      |   |   |
|   | 31.02 |   |   | Rule 13a-14(a) Certification  of Principal Financial Officer                                          |   |   |   |     |   |   |   |   |   |   | x      |   |   |
|   | 32.01 |   |   | Section 1350  Certification of Principal Executive Officer                                                 |   |   |   |     |   |   |   |   |   |   | x      |   |   |
|   | 32.02 |   |   | Section 1350  Certification of Principal Financial Officer                                                 |   |   |   |     |   |   |   |   |   |   | x      |   |   |

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

**             Management contractor compensatory plan.

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