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

                                   FORM 10-K
                            ------------------------
(MARK ONE)

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934.

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934.

         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

                       COMMISSION FILE NUMBER: 333-87267
                            ------------------------

                              POET HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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                  DELAWARE                                      94-3221778
        (STATE OR OTHER JURISDICTION               (I.R.S. EMPLOYER IDENTIFICATION NO.)
      OF INCORPORATION OR ORGANIZATION)
</TABLE>

                            ------------------------

                            999 BAKER WAY, SUITE 200
                          SAN MATEO, CALIFORNIA 94404
                                 (650) 577-2500
 (ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
                     TELEPHONE NUMBER, INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
                                   PAR VALUE

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $59,617,000 as of March 1, 2001, based upon the
closing price on the Neuer Markt of the Frankfurt Stock Exchange reported for
such date. This calculation does not reflect a determination that certain
persons are affiliates of the Registrant for any other purpose.

     The number of shares outstanding of the Registrant's Common Stock on
December 31, 2000 was 10,818,867 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for its 2001 Annual Meeting of
Stockholders (the "Proxy Statement"), to be filed with the Securities and
Exchange Commission, are incorporated by reference to Part III of this Form 10-K
Report.

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                              POET HOLDINGS, INC.

                                   FORM 10-K

                                     INDEX

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                                   PART I

Item 1.   Business....................................................    1
Item 2.   Properties..................................................   12
Item 3.   Legal Proceedings...........................................   12
Item 4.   Submission of Matters to a Vote of Security Holders.........   12

                                  PART II

Item 5.   Market For Registrant's Common Equity and Related
          Stockholder Matters.........................................   12
Item 6.   Selected Consolidated Financial Data........................   16
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   17
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   31
Item 8.   Financial Statements and Supplementary Data.................   32
Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure....................................   49

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant..........   50
Item 11.  Executive Compensation......................................   51
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   52
Item 13.  Certain Relationships and Related Transactions..............   52

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   52
SIGNATURES............................................................   54
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                                     PART I

ITEM 1. BUSINESS

NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This annual report contains forward-looking statements that relate to
future events or future financial performance. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intends," "potential" or "continue," or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
the risks outlined under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" and elsewhere in this
annual report. All forward-looking statements included in this document are
based on information available to us on the date hereof. We assume no obligation
to update any such forward-looking statements.

OVERVIEW

     We are a provider of innovative software infrastructure and solutions that
allow organizations to efficiently share, manage and manipulate complex data and
facilitate effective business-to-business processes and information exchange
over the Internet. Our object database management system utilizes and supports
complex, multidimensional data models, or frameworks within a database for the
organization of information elements and their interrelationships, and standard
Internet programming languages. Our database system allows software vendors and
original equipment manufacturers, or manufacturers who develop and produce
products incorporating another company's product, to build efficient, high
performance applications that are fully integrated, easy to use and cost
efficient. Our Internet solutions provide our customers with the ability to
efficiently create, manage, manipulate and electronically distribute and
exchange complex business information such as product catalogs, customer pricing
and other related information. Our solutions leverage the Internet as a new
means to increase customer relationships, accelerate business processes and
reduce costs. Our open systems approach, which works with a variety of tools,
hardware, software and networks, allows our customers to rapidly develop
applications using our database products and customize our Internet solutions
for work with a variety of standard application environments and third-party
tools without having to make any significant adjustments to their existing
internal information technology systems. It is our objective to make complex
applications simple and affordable for a large group of organizations by
providing sophisticated, easy to use and powerful software products that
leverage the Internet.

INDUSTRY BACKGROUND

  The Growth of E-Commerce

     Companies are increasingly seeking to use the Internet in business
processes to communicate, share and exchange information, in the form of, for
instance, transaction records, orders, product descriptions, maintenance
manuals, health care records, marketing and product information, primarily
because they see the Internet as an opportunity to reduce costs, increase the
speed of business processes and improve the quality of their services.

     Companies have historically used information technology to integrate
internal workgroups, disseminate information and otherwise automate their
internal processes. However, even companies that are highly automated internally
continue to rely mostly on traditional means of communications such as phone,
fax or mail to obtain quotes, place orders, track shipments and otherwise
conduct business. As a consequence, the Internet has become the main driving
force behind moving business processes and e-commerce to a fully automated and
integrated environment that makes full use of the Internet infrastructure.

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  The Need for New Methods of Exchanging Information

     The use of the Internet as a means to conduct business necessitates uniform
and standardized data exchange protocols to enable market participants to
communicate. These exchange protocols are standard formats for content
structure, as well as the methods and means for exchanging data. As new Internet
applications become increasingly dynamic and proactive and are further
integrated with database content, the management of complex information becomes
more important. Moreover, the ability to easily and quickly assemble documents
from multiple sources is critical to applications such as e-commerce, marketing
automation, document publishing and electronic data interchange.

     The increasing use of the Internet as a means to conduct business requires
more powerful and flexible database management systems and the utilization of a
uniform exchange protocol to create and deploy Internet applications. The key
requirements of a database management system to be used on the Internet include
methodologies to support complex information, the programming language Java, and
sophisticated searching and manipulation of the database. In addition, to
promote widespread adoption, an ideal database management system should minimize
costs for applications, installation, administration, maintenance and training,
especially for small and medium-sized businesses that typically operate without
specialized information technology personnel.

  Support for Complex, Multidimensional Data Models

     Traditionally, data records have been stored in relational databases that
are comprised of simple character, numeric or date information. The structure of
individual data units has, however, become increasingly sophisticated and has
evolved into complex data models that are characterized by composites of
numerous pieces of information and their relationships. The use of a relational
database for storage, retrieval and manipulation of this type of data requires
tedious programming efforts for meaningful use of the information contained. In
order to make the data useful for a user, the data records must be searched and
retrieved by tracing programmed relationships. In contrast to the data records
stored in relational databases, object databases allow complex data models to be
stored, managed and manipulated through components known as data objects, which
are a compilation of various smaller pieces of information, including their
relationships to other data objects. The individual data objects are then
structured within frameworks known as complex data models, which are
increasingly used as a basis for information exchange on the Internet.

     Databases for current and future Internet applications should therefore
support complex data models that go beyond the simple information typically used
in traditional business applications and databases. Internet applications are
characterized by complex relationships among these sets of information objects.
Consequently, the ability to quickly add support for these complex data models
is essential for database management systems used for Internet applications. For
example, interacting with Web pages containing diverse content requires rapid
navigation, search and retrieval of numerous hierarchically structured
collections of data objects. Relational databases were designed to manage
numerical and text data arranged in tabular form and typically cannot provide
support for new data types without a substantial, time-consuming programming
effort.

  Support for Object-oriented Programming Methodologies

     Object-oriented programming methodologies that recognize and utilize data
objects for complex data models emerged in the 1980s and were developed for
various uses, such as improving software quality and increasing developer
productivity. Object-oriented languages, such as Java, have evolved as standard
languages to build Internet applications. These languages utilize nested,
hierarchically organized structures of data objects as basic building blocks.
When using object-oriented programming languages in conjunction with a
relational database, an extensive programming effort, referred to as "mapping,"
is generally required to "translate" data objects to a two-dimensional tabular
relational model. According to a study by the International Data Corporation
published in August 1997, when using object-oriented languages to develop
applications for use with a relational database, up to 35% of the application
code and development time may be devoted to solving the mapping problem. In
contrast, an object-oriented database that directly stores the

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software objects in the database without requiring translation results, in most
cases, in faster development cycles, fewer lines of application code and better
application performance.

  Support for Java

     Java is currently the predominant object-oriented programming language,
particularly for the Internet. The primary reason for the widespread acceptance
of Java is its portability, which allows programs written in Java to be executed
on any computer without regard to the computer's operating system or hardware
platform. Java relies on a so called Java Virtual Machine, or Java VM, an
architecture that executes Java programs on the target machine. The Java VM
allows a "write once, run anywhere" concept that is ideally suited for Internet
applications. This simple fact has eliminated serious portability issues typical
in traditional computing environments where applications are written for a
specific platform. Unlike other programming languages, it allows developers to
build self-contained software components with necessary specifications for data
structures and relationships and small and easy to use applications called
applets, instead of building large, monolithic applications. These small
components are well suited for being downloaded over the Internet as they are
requested, with no installation required and instant upgradability. Support for
Java is crucial for developers of Internet applications who require tools such
as databases that are Java compliant. In addition, due to the speed of change of
the Internet, Internet applications are also subject to constant change. Java's
component model addresses this rapid change better than any other programming
language.

  Support for a Uniform Exchange Protocol

     HTML, or the Hypertext Markup Language, is a protocol for presenting
information on the World Wide Web that is used today for the majority of Web
pages worldwide, but lacks the support for complex data exchange necessary for
e-commerce. Due to its limitations as solely a presentation language, it became
clear in the mid-1990s that HTML did not have the capability to exchange data
for e-commerce. As a result, in 1998, the World Wide Web Consortium, of which we
are a member, announced the release of the eXtensible Markup Language
specification, or XML, as a uniform protocol for data exchange.

     XML additionally provides the ability to capture the meaning of document
content in a format that can be processed by computers. In this format,
documents can be easily composed of smaller XML objects, queried for specific
content, manipulated more intelligently and exchanged with other applications.
XML thus enables a new group of applications that are based on sophisticated
content manipulations and exchange, such as the automation of business
processes. XML has received widespread support in the information technology
industry since inception. Organizations such as Microsoft Corporation, Sun
Microsystems, Inc., IBM, Netscape Communications Corporation, Lotus Development
Corporation, Adobe Systems Incorporated, ArborText, Inc., Ariba, Inc.,
DataChannel, Inc., CommerceOne, Inc., Inso Corporation, Hewlett-Packard Company,
the National Center for Supercomputing Applications, SAP AG, Software AG, Baan
Company N.V., Vignette Corporation and Fuji Xerox, Ltd. are endorsing the XML
standard for e-commerce applications. The International Data Corporation, in a
report dated May 1998, identified XML as "the heir apparent to HTML" and as a
"technology that will fuel the development of a new generation of Internet
applications."

     The use, transmission and storage of XML will also have a significant
impact on the usage of database technology in Internet applications. The storage
requirements of XML differ from HTML in many significant ways. Given that XML
objects can be composed of a large number of discrete elements, the interlinking
between these objects and the need to query, share and create different
presentation formats for the content make managing XML in the file system
extremely cumbersome without a more sophisticated form of data management. The
structure and linking of XML makes using an object-oriented database to manage
XML an attractive approach. Object-oriented database management systems
naturally support both navigation and query access to XML data, providing
significant performance advantages over relational databases. In a report dated
May 1998, the International Data Corporation described the integration of
object-oriented database management systems with XML as "a natural fit." We
believe that the reception of XML as a uniform data exchange protocol for
e-commerce will be a major driver of demand for object-oriented database
management systems such as ours. In addition, the implementation of
industry-specific exchange protocols based on XML
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is not far behind. For instance, cXML, the commercial eXtended Markup Language,
is a form of XML that is specifically designed for commercial use, which we
expect will eventually develop into a widely accepted e-commerce standard.

  Low Cost of Ownership

     To date, costs of licensing and operations of information systems have been
high due, in part, to expensive database administration, high education and
training costs and expensive software upgrades. These costs can prohibit small
and mid-sized companies from investing in these information systems. With the
proliferation of the Internet and Internet applications into a vast range of
business areas, it has become even more critical that applications require
little training and do not require significant ongoing operational costs.
Applications that access information through the Internet such as Web browsers
and graphical user interfaces are designed to reduce installation and training
costs and, when used with efficient database systems, can be even more powerful
and cost-effective tools. We believe that Internet applications and databases
supporting these applications can and should operate with little or no ongoing
administration or maintenance. We believe that designing database management
systems with these concepts in mind reduces the cost of ownership of these
products, and ultimately, the cost of doing business over the Internet. In
reducing the cost of ownership, the key features of a database system should
include the following:

     - simple server installation;

     - a Web browser-based user interface that does not require client software
       installation;

     - a self-explanatory user interface to reduce or eliminate training;

     - database operation that is fully integrated and not visible to the
       end-user and requires little or no administration and maintenance; and

     - a scalable software architecture that can evolve with the addition of
       software components without requiring a major upgrade of the entire
       application.

THE POET SOLUTION

     We are a provider of innovative data management software that enables
organizations to efficiently manage and share complex information. Our database
management system, the Poet Object Server Suite, together with its database
development and administration tools, provides a powerful object data management
solution to be integrated in Internet and other software applications and an
efficient, high-performance database system with an overall low cost of
ownership. We have developed a suite of Internet applications, dubbed Poet
eSupplierSolutions (formerly named Poet eCatalog Suite), which allows suppliers
of goods and services to exchange product information such as catalogs with
business partners over the Internet without having to make significant
adjustments to their existing internal technology systems. These applications
address the specific requirements of our customers who wish to engage in
e-commerce using the XML standard. Our products thus provide unique business
critical solutions for companies looking to utilize XML and the Internet for
e-commerce initiatives. These applications utilize our object database
management system but can also be deployed with a relational database system,
most notably the Oracle database.

     We are one of the few software companies that provide both a database that
supports XML and applications for storing, manipulating and managing business
documents and related processes. Our customers may benefit greatly from the
synergies resulting from the combination of our proven object-oriented database
management system and these innovative e-commerce applications.

STRATEGY

     Our objective is to make complex applications simple and affordable for a
large group of organizations by providing sophisticated, easy to use and
powerful software and applications that leverage the Internet. To this end, we
aspire to become the leading supplier of object-oriented data management
solutions and to capitalize on our substantial experience and know-how in the
area of object-oriented data management systems and

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XML to develop and market successfully our Internet e-commerce applications. Key
elements of our strategy include the following:

     Leverage Database Technology for New Internet Applications. With the
development of the Poet eSupplierSolutions product suite we have extended our
core competency of object database technology into software applications to
facilitate business-to-business exchange of documents and related processes.
With the advent of data exchange standards such as XML, we anticipate additional
demand for these applications that will foster revenue growth. We intend to
further develop these applications to provide complete solutions including
further enhanced features and functions.

     Expand Sales and Distribution. We intend to expand our global sales
capabilities by increasing the size of our direct sales force and by expanding
the number of systems integrators, software vendors, value added resellers and
original equipment manufacturers that form our indirect sales channel. We also
plan to extend our sales force in Europe beyond the German-speaking countries
and most recently the United Kingdom, where we have focused our marketing
efforts to date.

     Foster Strategic Relationships. We have entered into strategic
relationships with software developers, original equipment manufacturers and
marketing partners in order to accelerate the development and acceptance of our
products. We intend to continue our strategy of partnering with software vendors
who offer complementary products and functions and incorporating those products
and functions into our products. We are fostering existing and new
relationships, similar to our licensing arrangement with Verity, Inc., for a
text search engine, and Simba Technologies Inc. for the creation of an Open
Database Connectivity driver for the Poet Object Server Suite. In addition, we
intend to enter into joint marketing partnerships with vendors of complimentary
products, such as our existing partnerships with Ariba, Inc. and Commerce One,
Inc., both developers of complimentary business to business eCommerce software
applications.

     Extend Database Technology. We have historically pursued and will continue
to pursue the development of state of the art technology. We intend to extend
our database technology by continuing to enhance the performance and scalability
of our Poet Object Server Suite product lines and by providing advanced support
for complex data models and integration with object-oriented programming
languages. In addition, we intend to continue to enhance our development and
administration tools and data access products to make it easier to build, deploy
and use applications based on our Poet Object Server Suite.

     Continue to Pursue Open Systems Approach. We intend to continue to pursue
an open systems approach, which allows customers to rapidly develop applications
using our database products and customize our existing Internet solutions. Our
products are designed to work with a variety of standard tools and to take
advantage of existing investments in hardware, software and network
infrastructures. Our products support the programming languages Java and C++,
the data exchange protocols XML and cXML and numerous operating systems such as
Microsoft Windows, Novell Netware, Sun Solaris, HP-UX and Linux. In addition, we
are members of Internet and database standards organizations including the
Object Data Management Group, Java Data Objects and the World Wide Web
Consortium.

PRODUCTS

     The core of our product offerings is the object-oriented database
management system, Poet the Poet Object Server Suite. From this product base, we
are leveraging our core competency in the area of object-oriented database
systems by developing and marketing powerful business-to-business e-commerce
Internet applications based on the Poet Object Server Suite technology. Our Poet
eSupplierSolutions Suite provides a tool for businesses to efficiently manage
and exchange electronic catalogs of supplies over the Internet for electronic
purchasing systems such as the Ariba Operating Resource Management System.

  The Poet Object Server Suite

     The Poet Object Server Suite allows software developers to build standard
applications that require low to zero maintenance and administration. The
products support powerful programming of complex multidimensional data models,
such as those common among Internet applications, without the performance and

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programming difficulties often experienced with relational databases. Since its
introduction in 1991 by a predecessor entity, the Poet Object Server Suite has
been used by our customers to build high-performance applications in a variety
of challenging programming environments where relational databases have been
unable to provide adequate functionality. Our customers use the Poet Object
Server Suite as an integrated data management engine for a wide variety of
products, systems and applications, including commercial Web sites,
telecommunications equipment, production process control, financial information
systems, customer information systems, electronic product documentation to
mobile computing applications and XML-based, Internet business applications. For
more information regarding the predecessor entities to our subsidiaries, see
"Statutory Information."

     The Poet Object Server Suite is currently our core product and continues to
represent the basis of our present operations. The development of the Poet
Object Server Suite was started in 1989 by a predecessor entity, which began
marketing Poet Object Server Suite Version 1.0 in 1991. Four subsequent versions
were introduced through July 1997. The sixth major version, Poet Object Server
Suite 6.0, was released in September 1999. We have licensed our software to more
than 1,000 independent software vendors, original equipment manufacturers and
corporate customers since 1996.

     We believe that the Poet Object Server Suite delivers the following key
benefits to our customers who build applications:

     Faster Time to Market. Because data is represented in the Poet Object
Server Suite exactly as it is used by the object-oriented programming languages,
such as Java, no translation from other programming languages is necessary.
Using an object-oriented database management system such as the Poet Object
Server Suite reduces the total application's source code, as well as the time to
program the source code substantially. The Poet Object Server Suite also offers
customers an HTML interface to build Web pages and an interface for other
productivity tools. To further reduce time to market, the Poet Object Server
Suite eliminates the need to write database conversion programs for application
upgrades and new applications accessing existing Poet databases.

     Low Cost of Ownership. Because the Poet Object Server Suite needs virtually
no administration and maintenance after being installed, the products are well
suited for applications requiring a database that is integrated into the
application and invisible to the end-user. Due to these features, the Poet
Object Server Suite may be used in environments with minimal or no
administration, such as applications for mobile computers, telecommunications
equipment, medical devices and large volume end-user software applications. In
addition, because the low to zero administration feature reduces costs
significantly, customers using the Poet Object Server Suite can build
applications for end-user markets in which the ongoing costs of a database
administrator would be prohibitive.

     Provides Direct Storage and Management of Complex Data Models Without
Additional Programming. The Poet Object Server Suite provides direct storage of
C++, Java and XML data models without requiring the programmer to write
additional code to map these models from applications into relational databases.
This permits rapid access to and processing of complex data models and
facilitates concurrent use of the database as other transactions may freely
access other stored objects. As a result of these features, applications can be
developed in less time with higher performance and greater reliability and
flexibility.

     Low Memory Requirements and High Scalability. The low memory consumption of
the Poet Object Server Suite enables deployment in a wide variety of computing
environments, reaching from personal computers and mobile computers to Windows
NT and UNIX server environments. The Poet Object Server Suite can overcome
resource limitations associated with laptop computers by scaling down while
maintaining the capability to size up to databases on large server systems. We
are striving to make our powerful database management systems available to even
more limited computing environments such as personal digital assistants, like
3Com Corporation's Palm Pilot, and have, in a research project conducted
together with Ericsson, Inc., developed a Java database with memory requirements
as low as one-tenth of our standard database that can be included in hand-held
devices.

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     Open Systems Approach. The Poet Object Server Suite is designed as a
platform-independent product capable of working on numerous standard operating
systems. The Poet Object Server Suite is compatible with leading operating
systems such as Microsoft Windows, Novell Netware, Sun Solaris, HP-UX and Linux.
In addition, the Poet Object Server Suite is compatible within widely-used
relational database management systems such as those of Oracle and Microsoft. We
intend to continue this open platform approach, which allows our customers to
easily and rapidly deploy applications on these platforms without modification.

  The Poet eSupplierSolutions Suite (formerly called Poet eCatalog Suite)

     Our Poet eSupplierSolutions Suite is composed of applications that provide
a comprehensive electronic catalog system that enables companies of all sizes to
seamlessly conduct business-to-business e-commerce. These applications provide a
turnkey solution to create electronic catalogs from existing internal
information systems and databases and manage the processes to automate
customization and distribution of these catalogs. Traditionally, catalog
information has been distributed by paper, phone or email with infrequent
updates, often outdated information and no customization for particular
customers. We believe that the Poet eSupplierSolutions Suite has the potential
to foster stronger, longer lasting business relationships and, when established,
will lead to significantly higher efficiencies and eventually to greater volumes
of business.

     The Poet eSupplierSolutions Suite provides users with the following
benefits:

     Enables Suppliers to Use the Internet More Efficiently for
Business-to-Business E-Commerce. Suppliers typically use traditional electronic
data interchange, or EDI, solutions or conventional paper, fax and telephone to
provide catalog information to their business customers. EDI is often used over
costly private networks primarily by large companies with significant
information technology resources. In contrast, our applications use the Internet
as the transport medium and XML as a uniform exchange protocol to provide
cost-effective and ubiquitous communication with a wide range of customers.

     Protection of Investment in Existing Information Systems. Many suppliers
currently operate internal information systems that contain at least portions of
relevant catalog data. However, this data is often stored in proprietary formats
inappropriate for electronic distribution, and it would be difficult and
expensive to change the existing internal information systems to reformat this
data into uniform formats for useful e-commerce. The Poet eSupplierSolutions
Suite complements existing internal information systems by extracting product
and service information from the existing system and by transforming the
information into a standard XML format for a generic master catalog. The master
catalog can then be extended with our tools by adding information such as
comprehensive descriptions and pictures.

     Automatically Creates Customized Catalogs. The Poet eSupplierSolutions
Suite provides an intuitive, user-friendly interface for creating and managing
customer catalogs. The applications are capable of mass customization, which
allows the creation of customer profiles that are used to maintain information
specific to each business customer, such as special pricing, selection of
products and required data formats. The customer profiles are used to generate
customized catalogs. The catalogs are then transmitted to the business customer
and automatically interact with customer's own purchasing software via the
Internet. Administration of the data exchange is automatic, resulting in a
scalable solution that can easily serve hundreds of customer organizations.

     Provides a Platform for Integration with Purchasing Systems. We expect that
many different and competing XML dialects for catalog data exchange will evolve.
The Poet eSupplierSolutions Suite provides a flexible platform architecture that
can easily be extended with additional delivery formats. Today, the Poet
applications support a range of catalog exchange formats, such as cXML and the
Catalog Information Format, or CIF, xCBL, CUP and BMEcat. cXML and CIF support
the compatibility with the Ariba Operating Resource Management System electronic
purchasing system. Ariba, Inc. is a leading provider of electronic purchasing
systems for the purchasers of goods. Ariba's Operating Resource Management
System is an e-commerce application that automates the purchasing of
maintenance, repair and operating supplies. XCBL and CUP are the exchange
formats to connect electronic catalogs to the e-business applications from
Commerce One, Inc., a leading provider of electronic marketplace software.
BMEcat is a standardized catalog exchange format defined by Germany's
Bundesanstalt fuer Materialwirtschaft (BME). This format is widely
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used in the German marketplace. We plan to develop future versions of the Poet
eSupplierSolutions Suite with additional functionalities that will make it
compatible with other leading electronic purchasing systems.

     Reduces Costs for Catalog Management. Internal information systems are not
designed to provide outbound and customized electronic catalog management. The
conventional distribution of this information via paper, fax or telephone is
slow and expensive, quickly becomes outdated and cannot be customized. The costs
for a proprietary electronic data interchange solution are prohibitive for most
suppliers. Our applications can reduce costs by automating significant portions
of the catalog management process by accelerating the speed of business
processes without requiring additional expensive personnel for administration
and maintenance. In addition, the Poet eSupplierSolutions Suite has the
potential to help establish strong business relationships with customers by
linking the companies electronically, which may increase business volume.

     We began shipping Version 1.0 of the Poet eCatalog Suite in September 1999.
As of December 31, 2000, we are shipping version 4.1 of our eSupplierSolutions
software applications.

SERVICES

     We believe that providing high-quality services is critical to ensuring
customer success and satisfaction. Accordingly, we supplement all of our product
offerings with technical support and consulting services. We offer several
levels of support including software updates, telephone technical support, the
service of dedicated support engineers, training and customer specific
workshops. Our Consulting Group provides fee-based consulting services designed
to allow the seamless integration of our products into the software systems of
our customers. In addition, our Consulting Group undertakes custom development
projects for customers by which we add additional and customized features and
functionality to our product base. The Support & Maintenance Group provides
support for a software product once it has been approved by our quality control
department and has been made commercially available.

     We support customers on a continuous basis through the provision of product
information and software patches over our support Website. In addition,
customers may seek offline support from us via e-mail and facsimile.

CUSTOMERS

     We have licensed versions of our products to over 1,000 customers
worldwide. In 1999, Novell, Inc. accounted for 16% of our revenues and more than
24% of our revenues in both 1998 and 1997. However, we fulfilled our contractual
obligations with Novell in the third quarter of 1999, and since such date, we
have not derived any revenue from sales to Novell. Our customers represent a
broad spectrum of enterprises within diverse sectors, including technology,
telecommunications, publishing, defense, transportation, banking and finance.

     The following is a representative list of customers from our customer base
who have purchased licenses and/or services from us.

     Financial Services and Insurance

     Audatex Holdings Ltd
     Bankgesellschaft Berlin AG
     Bausparkasse Schwabisch Hall AG
     DataCard Corporation
     Dresdner Bank
     Techniker Krankenkasse
     HSBC Trinkaus & Burkhardt KGaA

     Software, Technology and Internet

     ADDISON Software und Service GmbH
     BuildNET, Inc.
     CompuServe Incorporated
                                        8
<PAGE>   11

     Cyra Technologies, Inc.
     Digital Zone International A/S
     Evolve Software, Inc.
     The ForeFront Group, Inc.
     Ganymede Software Inc.
     GSD Software und Datentechnik mbH
     IDS Scheer AG
     IntelliCorp, Inc.
     ipro Consulting GmbH
     Lernout & Hauspie Speech Products N.V.
     On Center Software, Inc.
     Pixelpark GmbH
     Philips GmbH
     Pythia Communication & Computer GmbH
     Riverton Software
     Tool, S.A.
     TurboMed EDV GmbH

     Publishing/Technical Documentation

     Deutsches Institut fur Medizinische Dokumentation und Information
     GiL Group Information Logistics GmbH
     juris GmbH
     Lockheed Martin Corporation
     Mannesmann Datenverarbeitung GmbH
     Marcel Dekker
     Minolta GmbH
     PPS GmbH
     Sema Group GmbH
     WEKA Baufachverlage GmbH

     Telecommunications Equipment and Embedded Systems

     AM Communications, Inc.
     Avaya
     Beckman Coulter, Inc.
     Bosch Telecom GmbH
     Echelon Corporation
     Ericsson, Inc.
     Lucent Technologies Network Systems GmbH
     Lucent Technologies, Inc.
     Metrohm AG
     Nortel Networks
     The Perkin-Elmer Corporation
     Rohde & Schwarz International GmbH
     Siemens AG
     U S West, Inc.
     Wandel & Golterman, Inc.

     Other

     National Board of Medical Examiners
     ARINC Incorporated

                                        9
<PAGE>   12

SELLING AND MARKETING

     We market our products primarily through our direct sales force and
indirect sales channels. As of December 31, 2000, our direct sales force
consisted of 74 sales representatives and sales support personnel, 31 of whom
are based in the U.S. and 43 of whom are based in Europe. We have developed
profiles of target customers for each product. Potential customers in each of
our sales regions are matched against such profiles and ranked by priority. We
use a variety of marketing programs to build market awareness of our company,
our Poet brand name, our products and our services. Our activities include
market research, product and strategy updates with industry analysts, public
relations activities, direct mail and relationship marketing programs, seminars,
trade shows, speaking engagements of senior management and Website marketing.
Our marketing organization also produces marketing materials in support of sales
to potential customers including brochures, white papers, presentations and
demonstrations.

     In marketing our current core product, the Poet Object Server Suite, our
direct sales force focuses on original equipment manufacturers, independent
software vendors and large commercial end-users who maintain their own
development units, all of whom integrate our database into their own systems. In
order to increase the visibility of the Poet Object Server Suite to end-users
working with applications into which the product is embedded, we seek agreements
with our original equipment manufacturers, independent software vendors and
large commercial end-user customers to label their products "Powered by Poet."

     The Poet eSupplierSolutions Suite is targeted at small, medium-sized and
large supplier organizations, operators of electronic marketplaces, application
service providers as well as purchasing departments of Fortune 1000 companies.
We intend to sell our Poet eSupplierSolutions Suite directly and via partners.

RESEARCH AND DEVELOPMENT

     We have made substantial investments in research and development through
both internal development and, to a lesser extent, technology acquisition.
Although we plan to continue to evaluate externally developed technology for
integration into our products, we expect that the majority of enhancements to
existing as well as new products will be developed by our internal research and
development department.

     The strategic importance which we place on our research and development is
reflected by the size of our Research and Development Group which, as of
December 31, 2000, comprised 46 of our 167 total employees. Most of our
employees in the Research and Development Group have university degrees in
either information technology or mathematics. Our Research and Development Group
is based entirely in Hamburg, Germany, where the cost of attracting and
retaining highly qualified research and development staff is considerably lower
than in the United States.

     Our research and development expenditures, including purchased software,
for fiscal 2000, 1999 and 1998 were approximately $4.4 million, $3.2 million and
$2.6 million, respectively. We expect that we will continue to commit
significant resources to research and development in the future, especially for
the development of Internet-related applications. All research and development
expenses have been expensed as incurred.

COMPETITION

     The markets for database and e-commerce software are intensely competitive.
Our customers' requirements and the technology available to satisfy those
requirements continually change. We expect competition to persist and intensify
in the future. Not only were we the first database vendor to provide support for
XML, but we also believe that we are a pioneer in building the next generation
of XML-based Internet e-commerce applications. Our sources of principal
competition include:

     - In-house development efforts by potential customers or partners;

     - Other software vendors that address similar customer needs and that may
       have a larger market share or greater name recognition and resources than
       us, including vendors of object-oriented database management systems,
       such as eXcelon, Inc. (formerly Object Design Inc.), Versant Corporation,
       and Objectivity, Inc.;

                                        10
<PAGE>   13

     - Other content management companies, such as Vignette Corporation, Inso
       Corporation, Documentum, Inc., Requisite Technology, Inc., SAQQARA
       Systems, Inc., Broadvision, Inc. and Webmethods, Inc.; and

     - Potentially, vendors of relational database systems, such as Oracle
       Corporation, Microsoft Corporation, Sybase, Inc., Pervasive Software,
       Inc., Progress Software Corporation, IBM, and Informix Corporation.

     We believe that our competitive advantages over each of these principal
sources of competition are as follows:

     - We provide faster time to market and lower cost with our ready solutions
       due to the expense and time required to independently develop
       object-oriented storage solutions;

     - Our products are easily integrated into other software;

     - Our product architecture provides for optimal performance and
       scalability;

     - We offer discrete solutions for catalog content and management as opposed
       to competing products that may be offered as part of larger, more
       expensive products with multiple purposes; and

     - Our object-oriented databases eliminate extra coding and maintenance
       required by relational databases offered by other vendors.

PROPRIETARY RIGHTS AND LICENSING

     Our success and ability to compete is dependent upon our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law, and contractual restrictions of our
customers, partners, employees, management contractors and consultants to
protect the proprietary aspects of our technology. We have entered into a
license agreement with Novell with regard to Version 5.0 of our Poet Object
Server Suite. For more details, see Item 13 of this Annual Report.

     We presently own the U.S. trademark "POET" and the U.S. trademark
application for "FastObject." Our German subsidiary, Poet Software GmbH, owns
the trademark "POET" in Germany, Austria, Netherlands, Luxembourg, Belgium,
France, Spain, Italy, Yugoslavia, Switzerland and China. We currently own no
patents and have no patent applications. We are not dependent on any material
licenses from third parties. We license our software to customers under license
agreements that impose restrictions on the licensee's ability to utilize our
software. However, these legal protections afford only limited protection for
our technology.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. We integrate third-party software into our
products. This third-party software may not continue to be available on
commercially reasonable terms. We license the Simba SQL Engine for Open Database
Connectivity from Simba Technologies, Inc. as an open database connectivity
engine, Topic Developer Toolkit from Verity, Inc., a text search engine, which
is an optional function of the Poet Object Server Suite. If we cannot maintain
these third-party software licenses, shipments of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products.

     We have entered into a two-year strategic agreement with Ariba with regard
to our Poet eSupplierSolutions Suite. Upon a change of control of our company or
Ariba, one or more of our rights under this agreement may be limited or
otherwise adversely affected.

EMPLOYEES

     We consider our qualified and highly motivated employees a key factor in
our success. Our future success will depend in part on our ability to attract,
retain and motivate highly qualified technical management

                                        11
<PAGE>   14

personnel for whom competition is intense. Approximately half of our employees
hold a university degree. As of December 31, 2000, the Company had a total of
167 employees, 71% of whom are based in Europe.

     From time to time, we also employ independent contractors to support our
professional services, research and development, and sales and marketing
organizations. Our employees are not represented by any collective bargaining
unit, and we have never experienced a work stoppage. We believe our relations
with our employees are good.

ITEM 2. PROPERTIES

     Our headquarters, as well as the headquarters of our subsidiary Poet
Software Corporation, are currently located in a leased facility in San Mateo,
California, consisting of approximately 12,118 square feet under a four-year
lease, which expires in April 2004. We have also leased offices in Hamburg,
Germany; Frankfurt, Germany; Munich, Germany; London, England; San Diego,
California; New York City, New York; Clearwater, Florida; and Chicago, Illinois.
We own no real estate.

ITEM 3. LEGAL PROCEEDINGS

     We currently do not have any ongoing legal proceedings.

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

     Not Applicable.

                                    PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Poet's common stock has been quoted on the Neuer Markt of the Frankfurt
Stock Exchange under the symbol "POXA" since our initial public offering on
November 17, 1999. Prior to this time, there was no public market for our stock.
See "Selected Consolidated Financial Data" in "Item 6. -- Selected Financial
Data" for the high and low closing sales prices per share of our common stock as
reported on the Neuer Markt for the periods indicated.

     We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. At March 1, 2001, there were approximately
107 stockholders of record of our common stock.

THE GERMAN EQUITY MARKET

GERMAN SECURITIES LAWS

     As a United States company offering securities on a German stock exchange,
we are subject to various laws and regulations in both jurisdictions. Some of
these laws and regulations, in turn, can affect the ability of holders of our
securities to transfer or sell our securities.

     At present, Germany does not restrict the export or import of capital,
except for investments in Iraq and Libya in accordance with applicable
resolutions adopted by the United Nations and the European Union. However, for
statistical purposes only, every individual or corporation residing in Germany
must report to the German Central Bank, subject only to immaterial exceptions,
any payment received from or made to an individual or a corporation not a
resident of Germany if such payment exceeds DM 5,000 (2,550 euro or the
equivalent in a foreign currency). In addition, residents of Germany must report
any claims against or any liabilities payable to non-residents if such claims or
liabilities, in the aggregate, exceed DM 3.0 million (1.53 million euro, or the
equivalent in a foreign currency) during any one month. Residents must also
report any direct investment outside Germany if such investment exceeds DM
100,000 (51,000 euro, or the equivalent in a foreign currency).

                                        12
<PAGE>   15

     There are no limitations on the right of non-resident owners to hold or
vote the shares imposed by German law or our certificate of incorporation or
bylaws.

THE FRANKFURT STOCK EXCHANGE AND THE NEUER MARKT

     The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges and accounts for more than 75% of the turnover in traded shares
in Germany. The aggregate annual turnover of the Frankfurt Stock Exchange in
1998 of approximately DM 8,338 billion, based on the Frankfurt Stock Exchange's
practice of separately recording the sale and purchase components involved in
any trade, for both equity and debt instruments, made it the fourth largest
stock exchange in the world behind the New York Stock Exchange, London and Tokyo
in terms of turnover.

     The Neuer Markt segment of the Frankfurt Stock Exchange is a new trading
segment that was launched in March 1997. It is designed for innovative, small to
mid-size companies in high growth industries or in traditional industries that
have an international orientation and that are willing to provide active
investor relations. Issuers are requested to provide investors on an ongoing
basis with information such as annual and quarterly reports, including cash flow
statements, and a corporate action timetable. This information is required to be
submitted in English and German as well as in electronic form, thus enabling the
stock exchange to disseminate corporate information via the Internet.

TRADING ON THE NEUER MARKT

     Trading of shares listed on the Neuer Markt takes place on the floor of the
stock exchange, but is computer-aided. Shares listed on the Neuer Markt can also
be traded on a computer-aided system called Xetra. Trading takes place on every
business day between 9:00 a.m. and 8:00 p.m., Frankfurt time. Trading within the
Xetra system is done by banks and securities dealers who have been admitted to
trading on at least one of Germany's stock exchanges. Xetra is integrated into
the Frankfurt Stock Exchange and is subject to its rules and regulations.

     Markets in listed securities are generally of the auction type, but listed
securities also change hands in inter-bank dealer markets off the Frankfurt
Stock Exchange. Price formation is determined by open bid by state-appointed
specialists who are themselves exchange members, but who do not, as a rule, deal
with the public. Prices of shares traded on the Neuer Markt are displayed
continuously during trading hours. At the half-way point of each trading day, a
single standard quotation is determined for all shares. The members' association
of the Frankfurt Stock Exchange publishes a daily list of prices which contains
the standard prices of all traded securities, as well as their highest and
lowest quotations during the past year.

     Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions off the Frankfurt Stock Exchange, for large volumes or if one of
the parties is foreign, are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following a recent amendment to the conditions of German banks for securities
trading, customers' orders to buy or sell listed securities must be executed on
a stock exchange, unless the customer instructs otherwise. Trading can be
suspended by the Frankfurt Stock Exchange if orderly stock exchange trading is
temporarily endangered or if a suspension is in the public interest.

     A specific feature of the Neuer Markt is the introduction of the obligatory
"Designated Sponsor" or, an entity admitted for trading at the Frankfurt Stock
Exchange which provides additional liquidity by quoting prices for the buying
and selling of shares on request. Each issuer on the Neuer Markt is required to
nominate at least two Designated Sponsors which will not only ensure that there
is sufficient liquidity for its shares, but also serve as consultants on all
stock market related matters for the issuer.

     The shares have been admitted for listing on the Neuer Markt. The Neuer
Markt is still a relatively new market. Accordingly, there can be no assurance
that an active trading market for the shares will develop on the Neuer Markt or
that the Neuer Markt will not experience problems in settlement or clearance as
trading

                                        13
<PAGE>   16

develops. Any such delays or problems could adversely affect the market price of
the shares. Persons proposing to trade the shares on the Neuer Markt should
inform themselves about the potential costs of such trading.

GERMAN TAX MATTERS

     The following is a summary of certain tax matters arising under German tax
law in force of which we are aware at the date of this Annual Report. The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant as to the decision to acquire shares of
common stock. The summary is based on the tax laws of Germany in effect on the
date of this Annual Report, which may be subject to changes, possibly with
retroactive effect. The summary does not address aspects of German taxation
other than taxation of dividends, capital gains taxation and gift and
inheritance taxation, and does not address all aspects of such German taxation.
The summary does not consider any specific facts or circumstances that may apply
to a particular purchaser. The summary assumes that the stockholder is subject
to unlimited German income taxation and is referred to as a German holder.
Prospective investors should consult their professional advisors as to the tax
consequences of the acquisition, holding and disposal of the shares of common
stock, including in particular, the effect of tax laws of any other
jurisdiction.

INCOME TAXATION OF DIVIDENDS

     Any dividends distributed to German holders are, in principle, fully
subject to German income tax including a solidarity surcharge and possibly
church tax. An individual German holder will be entitled to a deduction of
income-related expenses to be proved to the tax authorities or alternatively to
a fixed allowance of DM 100 per calendar year, and a tax exemption known as a
savers exemption of DM 6,000 per calendar year in relation to his or her total
income from capital investments including dividends. This savers exemption is
reduced to DM 3,000 per calendar year effective January 1, 2000.

     Dividend withholding tax levied in the United States in accordance with the
U.S./German Double Taxation Treaty of August 29, 1989 can be credited against
the German income tax liability of the German holder. Alternatively, a German
holder may deduct the total amount of U.S. withholding tax from his or her
German taxable income. This tax credit or deduction is not available if the
savers exemption mentioned above is available to the German holder.

     A German corporation having beneficial title to at least 10% of the shares
in a U.S. corporation is entitled to a reduction or refund of U.S. tax in excess
of 5%, and all other German holders are entitled to a refund or reduction of
U.S. tax in excess of 15% if the treaty applies. If the shares are held by
German holders through a partnership, the dividends, including the withholding
tax credit are allocated to the partners according to their interest in the
partnership.

     German holders that are corporate investors, or a German corporate holder,
holding at least 10% of the outstanding shares of common stock, and to whom the
Treaty applies, are exempt from German corporation tax in relation to dividends
received, and cannot claim any credit for, or deduction of, foreign withholding
taxes in Germany. Such dividends will be placed in the so-called "EK01" equity
basket of the corporate investor. Upon distribution of dividends out of the EK01
equity basket to its stockholders, the German corporate holder does not need to
establish the corporation tax distribution burden, which presently is 30% plus
the solidarity surcharge at a rate of 5.5% of the corporation tax distribution
burden.

     In addition, distributions to a German holder are subject to German
withholding tax at a rate of 25%, plus solidarity surcharge at a rate of 5.5%
thereon, resulting in an effective tax rate of 26.37%.

     German holders that are corporate investors holding less than 10% of our
shares will be entitled to a tax credit for U.S. withholding taxes.

CAPITAL GAINS TAX

     Capital gains on the disposal of shares held as a private asset of a German
holder are only taxable if the disposal is (i) effected within a twelve-month
period after their acquisition or (ii) upon expiration of this

                                        14
<PAGE>   17

speculation period, if the stockholder at any time during the five years
preceding the disposal, directly or indirectly, held an interest of 10% or above
in a company.

     Capital gains resulting from the disposal of shares of common stock by a
stockholder who is not tax resident in Germany is not subject to German capital
gains tax unless the shares of common stock are part of the business property of
a permanent establishment or a fixed place of business of the stockholder
located in Germany.

GIFT AND INHERITANCE TAXES

     Shares held by an individual resident in Germany are subject to German
inheritance and gift tax upon transfer by reason of death or as a gift, based on
the market value at the time of the death or donation, respectively. Transfers
of shares of common stock held by a person who is not a tax resident in Germany
are not subject to German inheritance and gift tax, unless:

     - the shares of common stock are part of the business property of a
       permanent establishment or a fixed place of business of the stockholder
       located in Germany; or

     - the heir, donee or beneficiary is tax resident in Germany or, if of
       German nationality, has been resident in Germany within the five-year
       period prior to the death or the gift (certain public officials resident
       abroad are also covered).

TRADE TAX

     A holder who is not tax resident in Germany will not be subject to German
trade tax with respect to the shares of common stock, unless the shares of
common stock are part of the business property of a permanent establishment or a
fixed place of business of the stockholder located in Germany. If a German
resident taxpayer elects to deduct the foreign withholding taxes from his
taxable income in Germany, such deduction would not be accepted for computing
his taxable income for trade tax purposes.

     The trade tax on income is levied at rates varying from 13-20%. Trade tax
qualifies for a deductible business expense for income tax purposes in Germany.

OTHER GERMAN TAXES

     There are no German transfer, stamp or other similar taxes of which we are
aware which would apply to the sale or transfer of the shares of common stock.

                                        15
<PAGE>   18

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of Poet
Holdings, Inc. and its subsidiaries included elsewhere in this Form 10-K. The
historical results are not necessarily indicative of results to be expected for
any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            2000       1999       1998       1997       1996
                                          --------    -------    -------    -------    -------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>         <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA:
Revenues................................  $ 12,227    $10,614    $ 8,917    $ 7,717    $ 8,285
Cost of revenues........................     2,822      2,376      2,546      1,931      2,342
                                          --------    -------    -------    -------    -------
     Gross profit (loss)................     9,405      8,238      6,371      5,786      5,943
Operating expenses:
  Selling and marketing.................    13,092      7,591      5,922      7,163      4,935
  Research and development..............     4,448      3,221      2,612      2,906      1,555
  General and administrative............     3,631      1,825      1,428      1,581      1,324
  Amortization of deferred stock
     compensation.......................       444        626         47          0          0
                                          --------    -------    -------    -------    -------
          Total operating expenses......    21,615     13,263     10,009     11,650      7,814
                                          ========    =======    =======    =======    =======
Operating loss..........................   (12,210)    (5,025)    (3,638)    (5,864)    (1,871)
Other, net..............................     2,375       (539)      (352)       (19)      (278)
                                          --------    -------    -------    -------    -------
Net loss................................  $ (9,835)   $(5,564)   $(3,990)   $(5,883)   $(2,149)
                                          ========    =======    =======    =======    =======
Basic and diluted net loss per share....  $  (0.92)   $ (2.64)   $ (2.65)   $ (4.17)   $ (1.57)
                                          ========    =======    =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------
                                          2000       1999        1998        1997       1996
                                         -------    -------    --------    --------    -------
                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                      <C>        <C>        <C>         <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments..........................  $29,168    $44,350    $  4,776    $  1,525    $ 7,226
Working capital........................   28,927     42,585       2,809         456      5,708
Total assets...........................   38,907     47,600       7,533       4,000      8,902
Long-term portion of debt and capital
  lease obligations....................       95        326       2,906       2,846      2,262
Redeemable convertible preferred
  stock................................        0          0      15,996       9,925      9,925
Total stockholders' equity (deficit)...  $34,382    $43,064    $(15,302)   $(11,218)   $(5,661)
</TABLE>

     Stock prices (in euros -- close values as traded on the Neuer Markt):

<TABLE>
<CAPTION>
               FISCAL 2000                   HIGH      LOW      FISCAL 1999      HIGH      LOW
               -----------                  ------    -----    --------------    -----    -----
<S>                                         <C>       <C>      <C>               <C>      <C>
First Quarter.............................  200.00    25.30    n/a                 n/a      n/a
Second Quarter............................  117.80     39.5    n/a                 n/a      n/a
Third Quarter.............................   37.00    11.61    n/a                 n/a      n/a
Fourth Quarter............................   21.00    10.50    Fourth Quarter    26.48    12.15
</TABLE>

                                        16
<PAGE>   19

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

     The following discussion should be read in conjunction with the selected
financial data in Item 6 of this Annual Report and our financial statements and
notes thereto in Item 8 of this Annual Report.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This discussion contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intends," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined under "Risk Factors" and elsewhere in this annual
report. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements.

OVERVIEW

     We are a provider of innovative data management software and solutions that
allow organizations to share, manage and manipulate complex information and to
facilitate effective business-to-business processes and information exchange
over the Internet. Our database management system utilizes and supports complex,
multidimensional data models and standard Internet programming languages. Our
Internet solutions provide our customers with the ability to author, manipulate
and electronically distribute complex business documents based on advanced
exchange protocols using the Internet as a new means to increase customer
relationships, accelerate business processes and reduce costs, thereby
facilitating effective business-to-business information exchange.

     From commencement of our operations in March 1995 through December 2000,
our operating activities related primarily to increasing our research and
development capabilities, designing and developing the software products which
we are currently selling and staffing our administrative, sales and marketing
organizations. Since our inception, we have incurred significant losses, and as
of December 31, 2000, we had an accumulated deficit of $31.9 million, and for
the year ended December 31, 2000, our net loss was $9.8 million. We have not
achieved profitability on a quarterly or annual basis and anticipate that we
will incur net losses for the foreseeable future. We expect to continue to incur
significant selling and marketing, product development, professional services
and administrative expenses, and as a result, we will need to generate
significantly higher revenues to achieve and maintain profitability.

     We derive our revenue from the sale of software product licenses and
services revenue from professional consulting, training and technical support
and maintenance. The software product license revenue is currently substantially
derived from the sales of our Poet Object Server Suite product line, and to a
lesser extent, revenues generated from our Poet electronic Catalog Suite product
line. Product revenue generated from our Poet Object Server Suite Suite product
line was $6.3 million and $6.8 million for years ended December 31, 2000 and
December 31, 1999, respectively. Product revenue generated from our Poet
eCatalog Suite product line was $2.1 million and $96,000 for years ended
December 31, 2000 and December 31, 1999, respectively. Revenue generated from
our Poet Content Management Suite product line was $658,000 and $939,000 in the
years ended December 31, 2000 and December 31, 1999, respectively.

     Substantially all of our customers enter into maintenance and support
agreements upon the commercial release of the customer's application that
includes licensed Poet products. Since 1996, we have had an average renewal rate
of maintenance and support contracts of approximately 58%.

     Over the past several years, we have been dependent on a few key customers.
In 1999 and 1998 approximately 16% and 27%, respectively, of our revenues were
derived from Novell. Since March 1998, the revenues generated from Novell have
been due to the pro-rated amortization of deferred revenues. As of

                                        17
<PAGE>   20

December 31, 1999, all deferred revenues related to Novell were recognized as
planned. In 2000, there were no revenues attributable to Novell. Novell is a
stockholder of our company. Although we are seeking to diversify our customer
base and expand our net revenues through our product offerings, we anticipate
that our operating results will continue to depend on volume sales to a
relatively small number of customers.

     Amortization of deferred stock compensation represents the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of grant. We have recorded
deferred compensation within stockholders' equity of approximately $1.5 million
through December 31, 2000. We recorded amortization of deferred compensation of
$444,000, $626,000 and $47,000 during 2000, 1999 and 1998, respectively. At
December 31, 2000, the remaining deferred compensation will be amortized as
follows: $227,000 during 2001, $106,000 during 2002 and $20,000 during 2003. The
amortization expense relates to options awarded to employees in all operating
expense categories. The amount of deferred compensation expense to be recorded
in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 AND 1999

TOTAL REVENUES

     Total revenues increased 15.2% to $12.2 million in the year ended December
31, 2000, from $10.6 million in the year ended December 31, 1999.

     Product revenue. Our product revenues were comprised primarily of sales of
the Poet Object Server Suite (OSS), Poet eCatalog Suite (eCS) and Poet Content
Management Suite (CMS) product lines. Product revenues increased 16.7% to $9.1
million, or 74.5% of total revenues, in the year ended December 31, 2000, from
$7.8 million, or 73.6% of total revenues, in the year ended December 31, 1999.
The increase in product revenues was primarily attributable to an additional
$2.0 million of revenues from sales of eCS offset by a decrease of revenues
generated by the OSS and CMS product lines. The decrease in revenues generated
by the OSS product line was primarily attributable to the absence of amortized
revenue from Novell. Novell accounted for $1.6 million in amortized OSS license
revenue in fiscal year 1999 and none in 2000. The decrease in revenues generated
by the CMS product line was primarily attributable to our decision to cease
development and promotion of the product midway through fiscal year 2000. We
subsequently sold the CMS product line in September 2000.

     Consulting and training revenues. Consulting and training revenues
decreased 9.8% to $1.4 million, or 11.1% of total revenues, in the year ended
December 31, 2000, from $1.5 million, or 14.2% of total revenues, in the year
ended December 31, 1999. The decrease in consulting and training revenues was
primarily attributable to significant consulting engagements in fiscal year 1999
not repeated in fiscal year 2000.

     Support and maintenance revenues. Support and maintenance revenues
increased 35.3% to $1.8 million, or 14.4% of total revenues, in the year ended
December 31, 2000, from $1.3 million, or 12.2% of total revenues, in the year
ended December 31, 1999. The increase is primarily attributable to an increase
in the overall number of support and maintenance customers.

COST OF REVENUES

     Cost of product revenue. Cost of software product revenues increased 14.9%
to $339,000 in the year ended December 31, 2000 from $295,000 in the year ended
December 31, 1999. As a percentage of product revenues, cost of product revenues
decreased to 3.7% in the year ended December 31, 2000, from 3.8% in the year
ended December 31, 1999. The increase is primarily attributable to increased
third-party license fees.

     Cost of consulting and training revenues. Cost of consulting and training
revenues increased 13.6% to $1.2 million for the year ended December 31, 2000,
from $1.1 million for the year ended December 31, 1999. As a percentage of
consulting and training revenues, cost of consulting and training revenues
increased to 88.0% in the year ended December 31, 2000, from 69.9% in the year
ended December 31, 1999, due to a greater utilization of outside consultants,
who have a higher average cost than in-house consultants, during the fiscal year
ended December 31, 2000 compared to the fiscal year ended December 31, 1999.

                                        18
<PAGE>   21

     Cost of support and maintenance revenues. Cost of support and maintenance
revenues increased 25.2% to $1.3 million for the year ended December 31, 2000,
from $1.0 million for the year ended December 31, 1999. As a percentage of
support and maintenance revenues, cost of support and maintenance revenues
decreased to 73.4% in the year ended December 31, 2000, from 79.3% in the year
ended December 31, 1999. The decrease in cost of support and maintenance
revenues as a percentage of support and maintenance revenues was primarily
attributable to the increase in support and maintenance revenues.

GROSS PROFIT

     Gross profit increased 14.2% to $9.4 million in the year ended December 31,
2000, from $8.2 million in the year ended December 31, 1999. The increase in
gross profit was primarily attributable to an increase in product revenues,
which generate a higher profit margin than service revenues. Gross profit as a
percent of total revenues remained relatively stable at 76.9% in the year ended
December 31, 2000, from 77.6% in the year ended December 31, 1999.

OPERATING EXPENSES

     Selling and marketing. Selling and marketing expenses increased 72.5% to
$13.1 million in the year ended December 31, 2000, from $7.6 million in the year
ended December 31, 1999. Of this increase, $3.0 million was attributable to
selling expenses and $2.5 million was attributable to marketing expenses. The
increase in the selling related expenses was primarily attributable to an
increase in sales personnel and related compensation. The increase in marketing
expenses was primarily attributable to an increase in spending on marketing
programs and an increase in marketing personnel and related compensation.

     Research and development. Research and development expenses increased 38.1%
to $4.4 million in the year ended December 31, 2000, from $3.2 million in the
year ended December 31, 1999. The increase in research and development expenses
resulted primarily from increases in the number of research and development
personnel due to new product development, including the Poet eCatalog Suite, and
an increase in the number of outside consultants hired to perform research and
development.

     General and administrative. General and administrative expenses increased
99.0% to $3.6 million in the year ended December 31, 2000, from $1.8 million in
the year ended December 31, 1999. The increase was primarily attributable to an
increase in bad debt expense, costs of being a public company and personnel and
related compensation.

     Other, net. Other, net increased 540% to income of $2.4 million in the year
ended December 31, 2000, from expense of $547,000 in the year ended December 31,
1999. The increase to income was primarily attributable to an increase in
interest income as a result of higher average cash and cash equivalent balances
in the fiscal year ended December 31, 2000 due to the receipt of proceeds from
our initial public offering in November 1999, and an interest expense charge of
$809,000 made in conjunction with the conversion of debt to common stock in the
fiscal year ended December 31, 1999.

COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998

TOTAL REVENUES

     Total revenues increased 19.0% to $10.6 million in the year ended December
31, 1999, from $8.9 million in the year ended December 31, 1998.

     Product revenue. Our product revenues were comprised primarily of sales of
the Poet Object Server Suite, Poet Content Management Suite and Poet eCatalog
Suite. Product revenues increased 37.8% to $7.8 million, or 73.6% of total
revenues, in the year ended December 31, 1999, from $5.7 million, or 63.6% of
total revenues, in the year ended December 31, 1998. The increase in product
revenues was primarily attributable to an additional $1.2 million of revenues
from sales of our Poet Object Server Suite and an additional $910,000 derived
from sales of the Poet Content Management Suite and eCatalog Suite product
lines.

                                        19
<PAGE>   22

     Consulting and training revenues. Consulting and training revenues
decreased 17.3% to $1.5 million, or 14.2% of total revenues, in the year ended
December 31, 1999, from $1.8 million, or 20.4% of total revenues, in the year
ended December 31, 1998. The decrease in consulting and training revenues was
primarily attributable to reduced consulting services provided to Novell.

     Support and maintenance revenues. Support and maintenance revenues
decreased 9.3% to $1.3 million, or 12.2% of total revenues, in the year ended
December 31, 1999, from $1.4 million, or 16.0% of total revenues, in the year
ended December 31, 1998. The decrease is primarily attributable to a decrease in
support revenues derived from Novell of approximately $543,000, offset by an
increase in the overall number of support and maintenance customers.

COST OF REVENUES

     Cost of product revenue. Cost of software product revenues remained
unchanged in the year ended December 31, 1999 as compared to the year ended
December 31, 1998. As a percentage of product revenues, cost of product revenues
decreased to 3.8% in the year ended December 31, 1999, from 5.2% in the year
ended December 31, 1998.

     Cost of consulting and training revenues. Cost of consulting and training
revenues decreased 11.1% to $1.1 million for the year ended December 31, 1999,
from $1.2 million for the year ended December 31, 1998. As a percentage of
consulting and training revenues, cost of consulting and training revenues
increased to 69.9% in the year ended December 31, 1999, from 65.1% in the year
ended December 31, 1998, due to a lower utilization of consulting personnel
during the year ended December 31, 2000 primarily due to recently hired
personnel who have not achieved full productivity levels.

     Cost of support and maintenance revenues. Cost of support and maintenance
revenues decreased 3.6% to $1.0 million for the year ended December 31, 1999,
from $1.1 million for the year ended December 31, 1998. As a percentage of
support and maintenance revenues, cost of support and maintenance revenues
increased to 79.3% in the year ended December 31, 1999, from 74.6% in the year
ended December 31, 1998. The increase in cost of support and maintenance
revenues as a percentage of support and maintenance revenues was primarily
attributable to the decrease in support and maintenance revenues.

GROSS PROFIT

     Gross profit increased 29.3% to $8.2 million in the year ended December 31,
1999, from $6.4 million in the year ended December 31, 1998. As a percentage of
total revenues, gross profit increased to 77.7% in the year ended December 31,
1999, from 71.4% in the year ended December 31, 1998. The increase was primarily
attributable to an increase in product revenues, which generate a higher profit
margin than services revenues.

OPERATING EXPENSES

     Selling and marketing. Selling and marketing expenses increased 28.2% to
$7.6 million in the year ended December 31, 1999, from $5.9 million in the year
ended December 31, 1998. Of this increase, $1.2 million was attributable to
selling expenses and $459,000 was attributable to marketing expenses. The
increase in the selling related expenses was primarily attributable to an
increase in sales personnel and related compensation. The increase in marketing
expenses was primarily attributable to an increase in spending on public
relations and an increase in marketing, personnel and related compensation. We
believe these expenses will increase significantly in future periods as we
expect to continue to expand our selling and marketing efforts.

     Research and development. Research and development expenses increased 23.3%
to $3.2 million in the year ended December 31, 1999, from $2.6 million in the
year ended December 31, 1998. The increase in research and development expenses
resulted primarily from increases in the number of research and development
personnel due to new product development which included the Poet eCatalog Suite.

                                        20
<PAGE>   23

     General and administrative. General and administrative expenses increased
27.8% to $1.8 million in the year ended December 31, 1999, from $1.4 million in
the year ended December 31, 1998. The increase was primarily attributable to an
increase in legal expenses.

     Other, net. Other, net increased 53.1% to expenses of $539,000 in the year
ended December 31, 1999, from expense of $352,000 in the year ended December 31,
1998. The increase in expense was primarily attributable to an interest expense
charge of $809,000 made in conjunction with the conversion of debt to common
stock offset by an increase in interest income as a result of higher average
cash and cash equivalent balances due to the receipt of proceeds from our
initial public offering in November 1999, the sale of our Series D convertible
preferred stock in December 1998 and April 1999 and a convertible debt financing
in January 1999.

INVESTMENTS

     During 2000 and the 1999, we made the following investments in the
acquisition of fixed assets (comprised of property, furniture and equipment) and
the acquisition of short-term and long-term investments, such as equity holdings
or other investments. All of these acquisitions were largely financed through
the sale of equity securities, bank loans and out of our cash flows. For 2001,
we currently expect to make aggregate investments in fixed assets in the amount
of approximately $1.3 million, which will be financed largely through working
capital. Approximately 55% of these investments will be made in Europe and 45%
in North America. We currently have no definite plans for the acquisition of
financial assets.

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------    ----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Acquisition of fixed assets.................................  $1,300    $501
Acquisition of short-term and long-term investments (net)...   5,112       0
                                                              ------    ----
          Total.............................................  $6,412    $501
                                                              ======    ====
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have primarily financed our operations through private
sales of redeemable convertible preferred stock and from our initial public
offering, resulting in net proceeds of $16.4 million and $41.5 million,
respectively. To a lesser extent, we have also financed our operations through a
convertible note financing and lending arrangements in the aggregate amount of
$6.3 million.

     As of December 31, 2000, we had $18.7 million in cash and equivalents,
$10.4 million in short term investments, $4.0 million in long term investments
and $28.9 million in working capital. As of December 31, 1999, we had $35.0
million in cash and equivalents, $9.3 million in short term investments and
$42.6 million in working capital. The decrease in working capital was primarily
due to operational expenditures.

     Net cash used in operating activities was $10.3 million in 2000, $3.9
million in 1999 and $2.6 million in 1998. Net cash used in operating activities
in each period primarily reflects the net losses in each period.

     Net cash used in investing activities was $6.5 million in 2000, $9.8
million in 1999 and $199,000 in 1998. Investing activities reflect purchases of
property, furniture and equipment in each period, as well as purchases of
short-term and long-term investments. Short-term investments are securities with
an original maturity of greater than three months and less than a year.
Long-term investments are securities with an original maturity of greater than a
year. Since inception, we have generally funded capital expenditures either
through the use of working capital or, to a lesser extent, through equipment
leases.

     Net cash provided by financing activities was $455,000 in 2000, $43.9
million in 1999 and $6.2 million in 1998. Our financing activities in fiscal
year 2000 provided cash primarily through the issuance of common stock upon
exercise of stock options. Our financing activities in fiscal years 1999 and
1998 provided cash primarily through the issuance of common stock upon the
completion of our initial public offering and through the issuance of redeemable
convertible preferred stock, respectively.

     In June 2000, we entered into an unsecured note agreement loaning 2.5
million euros (approximately $2,356,000 based upon the U.S. dollar/euro exchange
rate on December 31, 2000) to a services provider. The
                                        21
<PAGE>   24

loan bears interest at 11% per annum and is due on December 31, 2000. In
November 2000, the note agreement was amended calling for an immediate interest
payment of 230,000 DM (approximately $111,000 based upon the U.S. dollar/German
Deutsche Mark exchange rate on December 31, 2000) and for the payment of the
principal in full by the end of December 2000. The note was paid in full in
December 2000.

     In January 1999, we entered into a $3.9 million convertible note agreement
with Technologie Beteiligungsgesellschaft (TBG). Under this agreement, TBG
purchased a convertible note in the aggregate principal amount of $3.9 million
maturing on December 31, 2003, and bearing interest at 6% per year. In September
1999, we entered into an amendment to the convertible note agreement with TBG
which converted the entire outstanding principal balance of the note, excluding
accrued interest, into 275,106 shares of our Series A common stock effective as
of September 30, 1999. As a result of this amendment, we recognized a
non-recurring charge in the quarter ended September 30, 1999 of approximately
$809,000.

     In September 1998, we entered into a $1.0 million bridge financing note
agreement bearing interest at 10% per year with European Technology Holding, El
Dorado Ventures III, El Dorado Technology IV, El Dorado C&L Fund, Sigma Partners
III, Sigma Associates III, Sigma Investors III, Innovacom, Atlas Venture Europe
Fund and Lawrence Owen Brown, Trustee for the Lawrence Owen Brown Family Trust.
The outstanding principal and accrued interest under this agreement was repaid
through the issuance of preferred stock as of the exchange date in December
1998. In conjunction with the note agreement, we granted the stockholders
warrants to purchase 49,710 shares of Series D redeemable convertible preferred
stock.

     In 1997, our subsidiary Poet Software GmbH entered into a loan agreement
with IKB Deutsche Industriebank in the amount of DM 1.5 million (approximately
$723,000 based on the U.S. Dollar/Deutsche Mark exchange rate at December 31,
2000) bearing interest at 7% per year with principal payments due quarterly of
DM 125,000 commencing on June 15, 1999 and ending on March 15, 2002. The
principal balance of the IKB Deutsche Industriebank AG loan at December 31, 2000
was DM 625,000 (approximately $301,000 based on the U.S. Dollar/Deutsche Mark
exchange rate at December 31, 2000). We have guaranteed the payment of principal
and interest under this loan.

     We also have non-cancelable operating leases for office space, and to a
lesser extent, equipment and automobiles of approximately $ 4.0 million at
December 31, 2000 that are payable through 2004.

     We expect to experience significant growth in our operating expenses,
particularly as we increase our selling and marketing activities, increase
research and development and professional services spending, and enhance our
operational and financial systems for the foreseeable future in order to execute
our business plan. As a result, we anticipate that such operating expenses, as
well as planned capital expenditures, will constitute a material use of our cash
resources. In addition, we may utilize cash resources to fund acquisitions of,
or investments in, complementary businesses, technologies or product lines and
payoffs of credit lines. Management is of the opinion that the Company's cash
and cash equivalents and investments at December 31, 2000 are adequate to meet
the liquidity needs of the Company for 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1999, the Securities Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The
implementation of SAB No. 101 in 2000 had no effect on the Company's financial
statements.

     In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of SFAS 133," which delayed the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for
Poet's fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
consolidated balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. The

                                        22
<PAGE>   25

Company has completed its evaluation of the impact of reporting SFAS 133 and has
concluded that its adoption as of January 1, 2001 will not have a material
effect on its consolidated financial statements.

     In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB No. 25." Interpretation No. 44 is
effective July 1, 2000. The Interpretation clarifies the application of Opinion
25 for various issues, specifically: the definition of an employee, the criteria
for determining whether a plan qualifies as a non-compensatory plan, the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. The adoption of Interpretation
No. 44 did have a material impact on our financial position or results of
operations.

                                  RISK FACTORS

                         RISKS RELATED TO OUR BUSINESS

OUR FAILURE TO INCREASE OUR REVENUES WOULD PREVENT US FROM ACHIEVING AND
MAINTAINING PROFITABILITY.

     We have incurred significant net losses since we commenced operations in
1995. We have not achieved profitability, and we expect to incur net losses for
the foreseeable future. Although our revenues have generally grown or remained
stable in recent quarters, we cannot be certain that we can sustain comparable
growth rates or that we will achieve sufficient revenues for profitability. To
date, we have funded our operations from the sale of equity securities and have
not generated cash from operations. As of December 31, 2000, we had an
accumulated deficit of $31.9 million. We expect to continue to incur significant
product development, sales and marketing, and administrative expenses. As a
result, we will need to generate significant revenues to achieve and maintain
profitability. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more information.

IF WE FAIL TO EXPAND OUR SALES OPERATIONS, WE MAY NOT BE ABLE TO INCREASE
REVENUES FROM OUR PRODUCTS.

     We need to expand our direct and indirect sales operations to increase
market awareness of our products and services in order to increase revenues. The
complexity of our products and their installation require highly trained sales
personnel. The demand for sales personnel is very competitive in our industry
due to the limited number of individuals with the requisite technical skills,
understanding of the Internet and database management systems. We cannot be
certain that we will be successful in our efforts to hire qualified sales
personnel. If we are unable to expand our sales operations, we may not be able
to increase sales of our products and grow our revenues which would in turn,
seriously harm our business, financial condition and results of operations.

IF WE FAIL TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH INDIRECT SALES PARTNERS,
OUR DISTRIBUTION CAPABILITIES WILL BE SERIOUSLY HARMED, WHICH WOULD HARM OUR
REVENUES.

     We rely heavily upon our indirect sales channels, which consist of other
businesses that implement our software into their products. These partners
currently consist of original equipment manufacturers, system integrators,
independent software vendors and other third-party resellers. For the years
ended 2000 and 1999, approximately 65% and 85%, respectively, of our product
revenues were derived through these indirect sales partners. In order to
successfully market our products, we need to maintain relationships with our
indirect sales partners as well as establish new relationships with similar
parties. Our failure to maintain existing relationships or establish a
sufficient number of new relationships with sufficiently qualified indirect
sales partners would limit our distribution capabilities and, in turn, adversely
affect our revenues, which would seriously harm our financial condition and
results of operations.

                                        23
<PAGE>   26

WE DO NOT EXPECT TO DERIVE FURTHER REVENUE FROM A KEY CUSTOMER FROM WHICH WE
PREVIOUSLY DERIVED A SIGNIFICANT PORTION OF OUR REVENUES, AND IF WE ARE UNABLE
TO REPLACE THESE REVENUES OUR RESULTS OF OPERATIONS WILL BE HARMED.

     We derived a significant portion of our revenues in fiscal years 1996
through 1999 from one key customer, Novell, Inc. For the year ended 1999, we
derived 16% of our revenues from Novell. For each of the years ended 1998, 1997
and 1996, we derived 24% or more of our revenues from Novell. We have completed
our delivery, support and maintenance obligations to Novell, and we have not
generated further revenue from Novell after September 1999. If we are unable to
generate revenues at an equivalent level from other customers in the future, our
revenues will decrease, which will harm our results of operations.

IF WE ARE UNABLE TO MAINTAIN AND DEVELOP STRATEGIC RELATIONSHIPS WITH VENDORS OF
INTERNET-BASED PURCHASING SYSTEMS, OUR LICENSING REVENUES FROM THE POET
ESUPPLIERSOLUTIONS SUITE WOULD BE HARMED.

     Our ability to maintain and develop strategic relationships with vendors of
Internet-based purchasing systems, such as Ariba, Inc., is fundamental to the
success of our Poet eSupplierSolutions Suite. Ariba is a leading provider of
electronic purchasing systems for Internet-based purchases of goods. To date,
our strategic business relationship with Ariba is our most significant agreement
of this kind, and the success of the Poet eSupplierSolutions Suite in its
current version is highly dependent upon the market acceptance of the Ariba
Operating Resource Management System, which has been developed to connect
business consumers to business suppliers and to automate the purchasing process
of business consumers. Although the Poet eSupplierSolutions Suite can be adapted
to complement purchasing systems other than Ariba's, the process of adapting the
Poet eSupplierSolutions Suite to a new system could be expensive and
time-consuming. If the Ariba Operating Resource Management System is
unsuccessful, or if we are unable to leverage the current version of the Poet
eSupplierSolutions Suite from the success of the Ariba Operating Resource
Management System, our ability to market the Poet eSupplierSolutions Suite will
be harmed.

     Even if our relationship with Ariba continues and the Ariba Operating
Resource Management System is successful, we cannot be certain that we will be
able to establish and retain business relationships with other developers and
suppliers of Internet-based electronic purchasing systems in the marketing of
the Poet eSupplierSolutions Suite. If our strategic relationship with Ariba ends
or we are unable to develop additional business relationships of this kind, our
prospects for generating revenues through the licensing of the Poet
eSupplierSolutions Suite would be harmed.

OUR FUTURE REVENUE IS DEPENDENT UPON OUR ABILITY TO SUCCESSFULLY INCREASE SALES
OF OUR POET ESUPPLIERSOLUTIONS SUITE.

     We expect that our future financial performance will depend significantly
on revenue from our Poet eSupplierSolutions Suite. We released Version 1.0 of
Poet eCatalog Suite in September 1999. In fiscal year 2000, we derived 23% of
our product revenues from sales of our Poet eCatalog Suite. As of December 31,
2000 we have released version 4.1 of our eSupplierSolutions Suite. We face
significant risks inherent in the introduction of this product line. Market
acceptance of the Poet eSupplierSolutions Suite will depend, for example, upon
the market for Internet-based electronic purchasing systems. We cannot predict
the success of this market. We also cannot be certain that the Poet
eSupplierSolutions Suite will meet customers' requirements or expectations or
that our products will be free of significant software defects, which may only
become apparent in longer-term operations. If the Poet eSupplierSolutions Suite
does not meet customers' requirements or expectations, upgrading or enhancing
the product could be costly and time-consuming and may harm our business,
results of operations and financial condition. For more information regarding
these products, see "Business -- Products" and "-- Services."

THE POET OBJECT SERVER SUITE CURRENTLY ACCOUNTS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND IF IT DOES NOT CONTINUE TO BE COMMERCIALLY SUCCESSFUL, OUR FUTURE
REVENUES WILL BE SIGNIFICANTLY HARMED.

     In fiscal year 2000, we derived 69% of our product revenues from sales of
our Poet Object Server Suite. We expect a significant portion of our future
revenues to continue to depend on the continued commercial

                                        24
<PAGE>   27

success of our Poet Object Server Suite product line. We cannot be certain that
the Poet Object Server Suite will continue to receive market acceptance, or that
we will be able to introduce enhanced versions of Poet Object Server Suite on a
timely basis to meet the evolving needs of our customers, maintain compatibility
with other third-party systems or remain competitive. If our Poet Object Server
Suite is not successful, our revenues will be negatively impacted, which could
harm our business, financial condition and results of operations. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Products" and "-- Services."

OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT.

     We commenced operations in March 1995, and, as a result of our limited
operating history, we have limited meaningful historical financial data upon
which to plan revenues and operating expenses. Our ability to forecast
accurately our quarterly revenues is further limited because our software
products have long sales cycles that make it difficult to predict the quarters
in which sales will occur. In addition, the recent launch of our new software
product, the Poet eSupplierSolutions Suite, makes it difficult to accurately
forecast our revenues, as we have no experience with the purchasing patterns of
customers for our new products. We plan our expenses in part on future revenue
projections. Most of our expenses are fixed in the short-term, and we may not be
able to quickly reduce spending if our revenues are lower than projected. If we
do not achieve our expected revenues, our operating results will be below our
expectations and the expectations of investors and market analysts, which could
cause the price of our common stock to decline.

IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN SOFTWARE TECHNOLOGY, OUR EXISTING
PRODUCTS COULD BECOME OBSOLETE.

     The market for our products is characterized by rapid technological change,
frequent new product introductions and technology enhancements, uncertain
product life cycles, changes in customer demands and evolving industry
standards. We cannot be certain that we will be able to enhance our current
products and develop new products on a timely basis to keep pace with
technological developments and to satisfy the increasingly sophisticated
requirements of our customers. New products based on new technologies or new
industry standards can render our existing products obsolete and unmarketable.
Any failure to develop new products or product enhancements will substantially
decrease market acceptance and sales of our present and future products, which
will harm our business and financial results.

IF THE EXTENSIBLE MARKUP LANGUAGE FAILS TO BECOME A STANDARD DATA EXCHANGE
PROTOCOL FOR THE INTERNET, THE MARKETABILITY OF OUR PRODUCTS MAY BE LIMITED.

     Our Poet eSupplierSolutions Suite operates with the eXtensible Markup
Language, or XML, which we expect to be a predominant data exchange protocol, or
a standard format for content structure and the method and means for exchanging
data, for e-commerce on the Internet in the future. Should XML fail to be
adopted as a predominant data exchange protocol for e-commerce on the Internet,
it would seriously impede the marketability of our products and force us to
adapt our products to other data exchange protocols, which would be costly and
may not lead to marketable and competitive products. Our failure to adapt or
develop new products would have a negative impact on our revenues, which would
harm our business, financial condition and results of operations.

WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY, AND IF WE
LOSE KEY PERSONNEL WE MAY BE UNABLE TO REPLACE THEM, WHICH COULD DISRUPT
OPERATIONS AND HARM OUR FINANCIAL CONDITION.

     Our success depends largely upon the skills, experience and performance of
our executive officers and key employees, particularly Dirk Bartels, our Chief
Executive Officer. If we lose one or more of our key employees, our business,
financial condition and results of operations could be harmed. We maintain a key
person life insurance policy covering Mr. Bartels, but not for any other of our
key employees. Our executive officers and all of our employees in the United
States are at-will employees, meaning they are not bound by contract to continue
service with us and may terminate their employment with little notice. Our
executive officers and employees in Germany generally have employment agreements
pursuant to which they provide
                                        25
<PAGE>   28

services for us for an unspecified term and agree to provide six weeks to three
months notice prior to terminating their employment with us. If our officers or
employees terminate their employment on short notice, we may not be able to
replace them on a timely basis, which could disrupt our operations.

     Our future success also depends largely on our ability to continue
attracting and retaining highly skilled personnel, and we face intense
competition from other software companies for qualified personnel. We have
historically experienced significant difficulties in hiring and retaining
qualified personnel in key management positions. For example, over the past
three years, our average annual workforce turnover rate was approximately 30% in
the United States and approximately 19% in Germany, and we may encounter similar
or increased turnover rates in the future. We cannot be certain that we will be
successful in attracting or retaining qualified personnel in the future, which
could harm our business, financial condition and results of operations.

IF WE ARE UNABLE TO EXPAND OUR PROFESSIONAL SERVICES AS WE GROW, WE MAY LOSE
CUSTOMERS.

     Customers who license our software typically engage our professional
services, including consulting, support and training. We believe that growth in
our product sales depends on our ability to provide our customers with these
services and to educate third-party resellers on how to use our products. We
plan to increase the number of service personnel to meet these needs. However,
hiring new service personnel is competitive, and, once hired, such personnel
require training and education over time to reach full productivity. If our
professional services organization is unable to service our customers as we
grow, customers may become dissatisfied with our services and we may lose
customers, which would harm our business.

OUR QUARTERLY RESULTS OFTEN DEPEND ON A SMALL NUMBER OF LARGE ORDERS, AND OUR
QUARTERLY REVENUES MAY BE HARMED IF WE DO NOT COMPLETE ONE OR MORE OF THESE
ORDERS IN ANY QUARTER.

     We derive a significant portion of our software license revenues in each
quarter from a small number of relatively large orders. In each of the last
twelve quarters in the period ended December 31, 2000, two customers accounted
for at least 10% of total revenues in each quarter. Although we do not believe
that the loss of any particular customer would materially harm our business, our
quarterly results of operations could be harmed if we were unable to complete
one or more substantial license sales in that quarter.

THE UNPREDICTABILITY AND SEASONALITY OF OUR QUARTERLY RESULTS MAY ADVERSELY
AFFECT THE TRADING PRICE OF OUR COMMON STOCK.

     We generally ship our products shortly after receipt of an order and
typically do not have a significant backlog of unfulfilled orders. Our software
license revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter, and we cannot predict them with any degree of
certainty. Our revenues and results of operations will vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:

     - the timing of sales of our products and services;

     - the timing of recognizing revenue and deferred revenue under U.S. GAAP;

     - changes in our pricing policies or the pricing policies of our
       competitors;

     - increases in sales and marketing, product development or administration
       expenses;

     - the mix of services provided by us and third-party contractors;

     - our ability to attain and maintain quality levels for our products; and

     - costs related to acquisitions of technology or businesses.

     We also expect to experience seasonality in our results of operations. We
expect the growth rate of our sales to be adversely affected in the third
quarter of each year due to a slowdown in sales in Europe and other foreign
areas during the summer months. In addition, we expect the growth rate of our
sales in the first quarter to be adversely affected due to our customers'
budgeting cycles.
                                        26
<PAGE>   29

     Due to the foregoing factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is likely that in some future quarters, our results of
operations may be below the expectations of public market analysts and
investors. In this event, the price of our common stock may fall.

SALES IN THE E-COMMERCE SOFTWARE MARKET ARE SUBJECT TO FLUCTUATION.

     Although sales to the E-Commerce software market have grown historically,
this market is characterized by large and often sporadic purchases. In addition,
recently, we and other companies in this market, as well as in the software
market generally, have warned of lower-than-expected revenue and declines or
delays in sales orders from customers. Sales activity in this industry depends
upon the stage of completion of expanding network infrastructures, the
availability of funding and the extent that service providers are affected by
regulatory and business conditions in the locale of operations. A decline or
delay in sales orders from this industry could have a material adverse effect on
our business, operating results and financial condition.

WE FACE INTENSE COMPETITION THAT COULD REDUCE OUR MARKET SHARE.

     The database and e-commerce markets are intensively competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. We expect competition to persist and
intensify in the future. Principal sources of competition include:

     - in-house development efforts by potential customers;

     - content management companies such as Chrystal Software, Incorporated,
       Vignette Corporation, Inso Corporation, Documentum, Inc., Requisite
       Technology, Inc., SAQQARA Systems, Inc. and Ondisplay, Inc.; and

     - other vendors of software that address the same customer needs, such as
       vendors of object-oriented database management systems, like eXcelon Inc.
       (formerly Object Design, Inc.), Versant Corporation, and Objectivity Inc.

     In the future, we may also face competition from other sources that are
poised to enter the market, including vendors of relational database systems,
such as Microsoft Corporation, IBM, Informix Corporation, Pervasive Software,
Inc. and Oracle Corporation. Many of our current and potential competitors have
longer operating histories and significantly greater financial, technical,
marketing and other resources than we do. They have well-established
relationships with current and potential customers and have the resources to
enable them to more easily adopt aggressive pricing policies to gain market
share or bundle their products in a manner that may discourage users from
purchasing our products. If we are unable to compete successfully against our
current and future competitors, we could experience price reductions, reduced
gross margins and loss of market share, any one of which could materially and
adversely affect our business, operating results and financial condition. See
"Business -- Competition" for more information about our competition.

IF WE FAIL TO MANAGE OUR EXPANSION EFFECTIVELY, WE MAY INCUR SIGNIFICANT LOSSES.

     We have recently expanded our operations rapidly and intend to continue
this expansion into the foreseeable future. This rapid growth places significant
demands on management and operational resources. In order to manage growth
effectively, we need to improve our operational systems, procedures and controls
on a timely basis. If we fail to implement scalable key operational systems
integral to our business as our operations expand, we may incur significant
losses, which could harm our business, financial condition and results of
operations.

THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS DEPENDENT UPON MANY FACTORS WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS INTERNATIONALLY AND
COULD AFFECT OUR PROFITABILITY.

     We market and sell our products in the United States and internationally.
In fiscal year 2000, we generated 50% of our total revenues through product
licenses sold and services rendered to customers located outside of the United
States, primarily in Germany. We intend to substantially expand our
international
                                        27
<PAGE>   30

operations and enter new international markets. Our international operations
are, and will be, subject to a variety of risks associated with conducting
business internationally, many of which are beyond our control. The following
factors may adversely affect our ability to achieve and maintain profitability
and our ability to sell our products internationally:

     - expenses associated with customizing products for foreign countries;

     - dependence on local partners who may not be able to meet the needs of a
       growing international market;

     - greater difficulty in accounts receivable collection and longer
       collection periods;

     - difficulties and costs of staffing and managing foreign operations;

     - unexpected changes in regulatory requirements related to the Internet;
       and

     - limited or unfavorable intellectual property protection.

     Our international sales growth will be limited if we are unable to
establish additional foreign operations, expand international sales channel
management and support organizations, hire additional personnel, customize
products for local markets and establish relationships with additional
distributors and third-party integrators.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS ASSOCIATED WITH CURRENCY
FLUCTUATIONS, WHICH MAKES OUR FUTURE RESULTS OF OPERATIONS DIFFICULT TO PREDICT.

     To date, a majority of our international revenues and costs have been
denominated in foreign currencies, especially in Deutsche Mark and, since the
Deutsche Mark conversion to the euro in January 1999, in euros. We believe that
an increasing portion of our international revenues and costs will be
denominated in foreign currencies in the future. We cannot predict the potential
consequences to our business as a result of the adoption of the euro as a common
currency in parts of Europe. To date, we have not engaged in any foreign
exchange hedging transactions, and we are, therefore, subject to foreign
currency risk, especially with regard to the U.S. dollar and euro exchange
rates.

     The expenses of our subsidiary Poet Software GmbH are denominated in
Deutsche Mark. However, the value of Deutsche Mark is tied to the value of the
euro. As a result, appreciation of the euro relative to the U.S. dollar could
adversely affect our results of operations. Even when foreign currency expenses
substantially offset revenues in the same currency, profits may be diminished
when reported in dollars. Fluctuations in the U.S. dollar relative to the euro
will affect comparisons of our reported results of operations. Due to the
constantly changing currency exposures and the volatility of currency exchange
rates, we could experience currency losses in the future, and we cannot predict
the effect of the exchange rate fluctuations upon our future results of
operations. For more information regarding currency fluctuations, see "Exchange
Rate Information."

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE
ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR COMPETITIVE
POSITION, REDUCE OUR REVENUES AND INCREASE COSTS.

     We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We also
enter into confidentiality or license agreements with our employees, consultants
and customers, and control access to and distribution of our software,
documentation and other proprietary information. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States or Germany.

     In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have never
been involved in any intellectual property litigation, we

                                        28
<PAGE>   31

may be a party to litigation in the future to protect our intellectual property
or as a result of alleged infringement of others' intellectual property. These
claims and any resulting lawsuits could subject us to significant liability for
damages and invalidation of our proprietary rights. Any potential intellectual
property litigation also could force us to do one or more of the following:

     - stop selling, incorporating or using our products or services that use
       the challenged intellectual property;

     - obtain from the owner of the infringed intellectual property right a
       license to sell or use the relevant technology, which license may not be
       available on reasonable terms, or at all; or

     - redesign those products or services that use such technology.

     If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, which would reduce our revenues.

     To date, we have not been notified that our products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement with respect to our current or future
products. We expect that developers of database, content management and
e-commerce software products will increasingly be subject to infringement claims
as the number of products and competitors in our industry segment grows and as
the functionality of products increasingly overlaps. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all. For more information concerning our intellectual property rights,
see "Business -- Proprietary Rights and Licensing."

OUR SOFTWARE PRODUCTS MAY HAVE UNKNOWN DEFECTS, WHICH COULD HARM OUR REPUTATION
OR IMPEDE MARKET ACCEPTANCE OF OUR PRODUCTS.

     Despite testing by us, defects have occurred in the past and may occur in
the future in our software. Complex software like ours may be difficult to
integrate with customers' existing systems and may contain errors or defects
when first introduced or when new versions or enhancements are released.
Although we conduct extensive testing, we may not discover software defects that
affect our current or new products until after they are sold. In addition, any
defect in other software or hardware with which our software interacts could be
mistakenly attributed to our software by our customers or their end-users. These
defects or perceptions of defects could cause our customers and their end-users
to experience service interruptions. Service interruptions could damage our
reputation or increase our product development costs, divert our product
development resources, cause us to lose revenue, or delay market acceptance of
our products, any of which could harm our business, financial condition and
results of operations.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.

     We may be subject to product liability claims for defects in our products.
Although we believe that our product liability coverage is currently adequate,
we did not obtain this insurance until July 1996, and it is limited. A
successful liability claim brought against us in excess of relevant insurance
coverage could be costly, which could harm our business, financial condition and
results of operations.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.

     California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities in California. Any such
                                        29
<PAGE>   32

interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.

     Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, our operating expenses will
likely increase.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES

     As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities. In the event of any future purchases, we
could:

     - issue stock that would dilute our current stockholders' percentage
       ownership;

     - incur debt; or

     - assume liabilities.

     These purchases also involve numerous risks, including:

     - problems combining the purchased operations, technologies or products;

     - unanticipated costs;

     - diversion of management's attention from our core business;

     - adverse effects on existing business relationships with suppliers and
       customers;

     - risks associated with entering markets in which we have no or limited
       prior experience; and

     - potential loss of key employees of purchased organizations.

     We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.

                         RISKS RELATED TO THE INTERNET

OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET FOR E-COMMERCE.

     Our future success in marketing our Poet eSupplierSolutions Suite depends
heavily on the acceptance of the Internet and its widespread use for e-commerce.
If the Internet e-commerce does not continue to grow or grows more slowly than
expected, our business, financial condition and results of operations could be
harmed. Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure and security, slow development of enabling technologies or
insufficient commercial support. In addition, the Internet infrastructure may
not be able to support the demands placed on it by increased usage and bandwidth
requirements. Delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or increased
government regulation could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our products and services to changing or emerging
technologies.

                                        30
<PAGE>   33

WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES RELATED TO THE INTERNET.

     New Internet legislation or regulation, or the application of existing laws
and regulations to the Internet and e-commerce, could harm our business,
financial condition and results of operations. We are subject to regulations
applicable to businesses generally and laws or regulations directly applicable
to communications over the Internet and access to e-commerce. Although there are
currently few laws and regulations directly applicable to e-commerce, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust, taxation and characteristics and quality of
products and services. For example, the United States Congress recently enacted
Internet laws regarding children's privacy, copyrights and the transmission of
sexually explicit material. In addition, the European Union recently enacted its
own Internet privacy regulations. The burden of compliance with any additional
laws or regulations regarding the Internet may decrease the growth of the
Internet or e-commerce, which could, in turn, decrease the demand for our
products and services and increase our costs of doing business.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

     We are exposed to market risk related to fluctuations in interest rates and
in foreign currency exchange rates:

     Interest Rate Exposure. Our exposure to market risk due to fluctuations in
interest rates relates primarily to cash and cash equivalents, short-term
investments and long-term investments, which consists primarily of investments
in commercial paper and money market accounts, and reported at an aggregate fair
market value of $33.2 million as of December 31, 2000. These securities are
subject to interest rate risk inasmuch as their fair value will fall if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10% from the levels prevailing at December 31, 2000, for
example, the fair value of the portfolio would not decline by a material amount.
We do not use derivative financial instruments to mitigate the risks inherent in
these securities. However, we do attempt to reduce such risks by generally
limiting the maturity date of such securities to no more than three months,
placing investments with high credit quality issuers and limiting the amount of
credit exposure with any one issuer. In addition, we believe that we currently
have the ability to hold these investments until maturity and, therefore,
believe that reductions in the value of such securities attributable to
short-term fluctuations in interest rates would not materially affect our
financial position, results of operations or cash flows.

     Foreign Currency Exchange Rate Exposure. Our exposure to market risk due to
fluctuations in foreign currency exchange rates relates primarily to the
inter-company balance with our German subsidiary. Although we transact business
in various foreign countries, settlement amounts are usually based on U.S.
dollars, Deutsche Mark or the euro. Transaction gains or losses have not been
significant in the past and there is no hedging activity on Deutsche Mark, the
euro or other currencies. Based on the inter-company balance of $1.6 million at
December 31, 2000, a hypothetical 10% adverse change in Deutsche Mark against
U.S. dollars would not result in a material foreign exchange loss. Consequently,
we do not expect that reductions in the value of such inter-company balances or
of other accounts denominated in foreign currencies resulting from even a sudden
or significant fluctuation in foreign exchange rates would have a direct
material impact on our financial position, results of operations or cash flows.

     Notwithstanding the foregoing, analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of our
investments and accounts and the indirect effects of such fluctuations could
have a material adverse effect on our business, financial condition and results
of operations. For example, international demand for our products is affected by
foreign currency exchange rates. In addition, interest rate fluctuations may
affect the buying patterns of our customers. Furthermore, interest rate and
currency exchange rate fluctuations have broad influence on the general
condition of the U.S., foreign and global economies that could have a material
adverse effect on us.

                                        31
<PAGE>   34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              POET HOLDINGS, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  33
Consolidated Balance Sheets.................................  34
Consolidated Statements of Operations.......................  35
Consolidated Statements of Stockholders' Equity (Deficit)...  36
Consolidated Statements of Cash Flows.......................  37
Notes to Financial Statements...............................  38
</TABLE>

                                        32
<PAGE>   35

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Poet Holdings, Inc.:

     We have audited the accompanying consolidated balance sheets of Poet
Holdings, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations and comprehensive loss,
stockholders' deficiency and cash flows for each of the three years in the
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Poet Holdings,
Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for the each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.

                                          DELOITTE & TOUCHE LLP

San Jose, California
January 26, 2001

                                        33
<PAGE>   36

                      POET HOLDINGS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets:
  Cash and equivalents......................................  $ 18,747    $ 35,039
  Short term investments....................................    10,421       9,311
  Accounts receivable (net of allowances of $478 and $134 in
     2000 and 1999, respectively)...........................     3,751       2,125
  Inventories and other current assets......................       438         320
                                                              --------    --------
          Total current assets..............................    33,357      46,795
Property, furniture and equipment, net......................     1,308         581
Long term investments.......................................     4,003          --
Other assets................................................       239         224
                                                              --------    --------
          Total assets......................................  $ 38,907    $ 47,600
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $  1,252    $    933
  Accrued liabilities.......................................     1,891       2,149
  Deferred revenue..........................................     1,043         845
  Current portion of debt (including capital lease
     obligations)...........................................       244         283
                                                              --------    --------
          Total current liabilities.........................     4,430       4,210
                                                              --------    --------
Long term obligation........................................        95         326
Commitments and contingencies (Note 9)
Stockholders' equity:
  Preferred stock, $0.001 par value; 3,000,000 shares
     authorized; no shares outstanding......................        --          --
  Common stock, $0.001 par value; 100,000,000 shares
     authorized
     Shares outstanding: 2000 -- 10,818,867;
      1999 -- 10,547,106....................................        11          11
  Additional paid in capital................................    66,217      65,582
  Deferred stock compensation...............................      (353)       (927)
  Accumulated deficit.......................................   (31,893)    (22,058)
  Accumulated other comprehensive income....................       400         456
                                                              --------    --------
          Total stockholders' equity........................    34,382      43,064
                                                              --------    --------
          Total liabilities and stockholders' equity........  $ 38,907    $ 47,600
                                                              ========    ========
</TABLE>

                See notes to consolidated financial statements.
                                        34
<PAGE>   37

                      POET HOLDINGS, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Revenues:
  Product ($0, $1,571 and $1,429 in 2000, 1999 and 1998,
     respectively from a preferred stockholder).............  $  9,114    $ 7,812    $ 5,668
  Consulting and training ($0, $10 and $180 in 2000, 1999
     and 1998, respectively from a preferred stockholder)...     1,358      1,505      1,819
  Support and maintenance ($0, $74 and $756 in 2000, 1999
     and 1998, respectively from a preferred stockholder)...     1,755      1,297      1,430
                                                              --------    -------    -------
          Total revenues....................................    12,227     10,614      8,917
                                                              --------    -------    -------
Operating expenses:
  Cost of product...........................................       339        295        295
  Cost of consulting and training...........................     1,195      1,052      1,184
  Cost of support and maintenance...........................     1,288      1,029      1,067
  Selling and marketing.....................................    13,092      7,591      5,922
  Research and development..................................     4,448      3,221      2,612
  General and administrative................................     3,631      1,825      1,428
  Amortization of deferred stock compensation(*)............       444        626         47
                                                              --------    -------    -------
          Total operating expenses..........................    24,437     15,639     12,555
                                                              --------    -------    -------
Operating loss..............................................   (12,210)    (5,025)    (3,638)
                                                              --------    -------    -------
Other income (expense):
  Interest expense..........................................       (38)    (1,114)      (382)
  Interest income and other, net............................     2,460        567         45
                                                              --------    -------    -------
  Total other income (expense), net.........................     2,422       (547)      (337)
                                                              --------    -------    -------
Loss before income taxes....................................    (9,788)    (5,572)    (3,975)
Income tax benefit (expense)................................       (47)         8        (15)
                                                              --------    -------    -------
Net loss....................................................  $ (9,835)   $(5,564)   $(3,990)
                                                              ========    =======    =======
Other comprehensive income (loss)...........................       (56)       315       (155)
                                                              --------    -------    -------
Comprehensive loss..........................................  $ (9,891)   $(5,249)   $(4,145)
                                                              ========    =======    =======
Basic and diluted net loss per share (Note 1)...............  $  (0.92)   $ (2.64)   $ (2.65)
Shares used in computing basic and diluted net loss per
  share.....................................................    10,653      2,109      1,507
</TABLE>

---------------

(*) Amortization of deferred stock compensation

<TABLE>
<S>                                                           <C>     <C>     <C>
Cost of consulting of training..............................  $ 51    $ 73    $--
Cost of support and maintenance.............................    20      24      2
Selling and marketing.......................................   197     294     12
Research and development....................................   127     155     18
General and administrative..................................    49      80     15
                                                              ----    ----    ---
                                                              $444    $626    $47
                                                              ====    ====    ===
</TABLE>

                See notes to consolidated financial statements.
                                        35
<PAGE>   38

                      POET HOLDINGS, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                                                        OTHER           TOTAL
                                        COMMON STOCK                                                COMPREHENSIVE   STOCKHOLDERS'
                                     -------------------   PAID IN   DEFERRED STOCK   ACCUMULATED      INCOME          EQUITY
                                       SHARES     AMOUNT   CAPITAL    COMPENSATION      DEFICIT        (LOSS)       (DEFICIENCY)
                                     ----------   ------   -------   --------------   -----------   -------------   -------------
<S>                                  <C>          <C>      <C>       <C>              <C>           <C>             <C>
Balances at January 1, 1998........   1,505,901    $ 1     $   989      $              $(12,504)        $ 296         $(11,218)
Exercise of Series A common stock
  options..........................      63,249                 14                                                          14
Deferred stock compensation........                          1,284       (1,284)                                            --
Amortization of deferred stock
  compensation.....................                                          47                                             47
Net Loss...........................                                                      (3,990)                        (3,990)
Foreign currency translation
  adjustment.......................                                                                      (155)            (155)
                                     ----------    ---     -------      -------        --------         -----         --------
Balances at December 31, 1998......   1,569,150      1       2,287       (1,237)        (16,494)          141          (15,302)
Exercise of Series A common stock
  options and warrants.............     142,900                124                                                         124
Common stock issued upon conversion
  of debt..........................     275,106      1       4,507                                                       4,508
Imputed loan discount..............                            348                                                         348
Conversion of preferred stock and
  Series B common stock to Series A
  common stock.....................   4,981,957      5      16,467                                                      16,472
Series A common stock issued for
  cash upon the initial public
  offering, net of issuance
  costs............................   3,570,000      4      41,533                                                      41,537
Series A common stock issued upon
  net exercise of warrants.........       7,993                                                                             --
Deferred stock compensation........                            316         (316)                                            --
Amortization of deferred stock
  compensation.....................                                         626                                            626
Net loss...........................                                                      (5,564)                        (5,564)
Foreign currency translation
  adjustment.......................                                                                       315              315
                                     ----------    ---     -------      -------        --------         -----         --------
Balances at December 31, 1999......  10,547,106     11      65,582         (927)        (22,058)          456           43,064
Exercise of common stock options
  and warrants.....................     271,761     --         765                                                         765
Amortization and reversals of
  deferred stock compensation......                           (130)         574                                            444
Net loss...........................                                                      (9,835)                        (9,835)
Foreign currency translation
  adjustment.......................                                                                       (38)             (38)
Unrealized loss on investments.....                                                                       (18)             (18)
                                     ----------    ---     -------      -------        --------         -----         --------
Balances at December 31, 2000......  10,818,867    $11     $66,217      $  (353)       $(31,893)        $ 400         $ 34,382
                                     ==========    ===     =======      =======        ========         =====         ========
</TABLE>

                See notes to consolidated financial statements.
                                        36
<PAGE>   39

                      POET HOLDINGS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss....................................................  $ (9,835)   $(5,564)   $(3,990)
  Adjustments to reconcile net loss to net cash used for
     operating activities:
     Depreciation and amortization..........................       559      1,365        585
     Amortization of deferred stock compensation............       444        626         47
     Gain on sale of short-term investments.................       (18)        --         --
  Changes in assets and liabilities:
     Accounts receivable....................................    (1,693)      (681)      (430)
     Inventories and other current assets...................      (127)        30       (158)
     Other assets...........................................       (27)        (4)        37
     Accounts payable and accrued liabilities...............       201      1,638         73
     Deferred revenue.......................................       213     (1,326)     1,251
                                                              --------    -------    -------
          Net cash used for operating activities............   (10,283)    (3,916)    (2,585)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, furniture and equipment............    (1,300)      (501)      (199)
  Loan receivable issued....................................    (2,394)        --         --
  Loan receivable payments received.........................     2,288         --         --
  Purchases of short-term and long-term investments.........   (60,824)    (9,311)        --
  Proceeds from sales and maturities of short-term
     investments............................................    55,712         --         --
                                                              --------    -------    -------
          Net cash used in investing activities.............    (6,518)    (9,812)      (199)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings................................................        --      3,912      1,338
  Repayments of debt........................................      (310)    (2,151)       (91)
  Preferred stock issued....................................        --        475      4,964
  Common stock issued, net of issuance costs................       765     41,661         14
                                                              --------    -------    -------
          Net cash provided by financing activities.........       455     43,897      6,225
Effect of exchange rate changes on cash and equivalents.....        54         94       (190)
                                                              --------    -------    -------
Increase (decrease) in cash and equivalents.................   (16,292)    30,263      3,251
Cash and equivalents -- beginning of year...................    35,039      4,776      1,525
                                                              --------    -------    -------
Cash and equivalents -- end of year.........................  $ 18,747    $35,039    $ 4,776
                                                              ========    =======    =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid.............................................  $     42    $   128    $    28
                                                              ========    =======    =======
  Taxes paid................................................  $     19    $    14    $    11
                                                              ========    =======    =======
NON-CASH FINANCING AND INVESTMENT ACTIVITIES:
  Deferred stock compensation...............................  $   (130)   $   316    $ 1,284
                                                              ========    =======    =======
  Conversion of notes payable into Series D preferred
     stock..................................................  $     --    $    --    $ 1,025
                                                              ========    =======    =======
  Conversion of notes payable into Series A common stock....  $     --    $ 3,900    $    --
                                                              ========    =======    =======
</TABLE>

                See notes to consolidated financial statements.
                                        37
<PAGE>   40

                      POET HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

     Business -- The principal business activities of Poet Holdings, Inc. (the
Company) and its subsidiaries are the design and marketing of innovative data
management software and solutions that allow organizations to share, manage and
manipulate complex information and to facilitate effective business-to-business
processes and information exchange over the Internet. Our database management
system utilizes and supports complex, multidimensional data models and standard
Internet programming languages. Our Internet solutions provide our customers
with the ability to author, manipulate and electronically distribute complex
business documents based on advanced exchange protocols using the Internet as a
new means to increase customer relationships, accelerate business processes and
reduce costs, thereby facilitating effective business-to-business information
exchange. The Company was incorporated in the state of Delaware in November
1994.

     Consolidation -- The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation.

     Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.

     Inventories -- Inventories, consisting primarily of manuals and magnetic
media, are stated at the lower of cost (first-in, first-out (FIFO) basis), or
market value.

     Investments -- Investments with original maturities greater than three
months and less than one year are classified as short-term investments.
Investments with original maturities one year and greater are classified as
long-term investments. The Company accounts for investments in accordance with
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
The Company's policy is to protect the value of its investment portfolio and to
minimize principal risk by earning returns based on current interest rates.
While the Company's practice is to hold debt securities to maturity, the Company
has classified all debt securities as available-for-sale securities, as the sale
of such securities may be required prior to maturity to implement management
strategies. The carrying value of all securities is adjusted to fair market
value, with unrealized gains or losses being excluded from earnings and reported
as a separate component or stockholder's equity. Cost is based on the specific
identification method for purposes of computing realized gains and losses.

     Other Assets -- In June 2000, we entered into an unsecured note agreement
loaning 2.5 million euros (approximately $2,356,000 based upon the U.S.
dollar/euro exchange rate on December 31, 2000) to a services provider. The loan
bears interest at 11% per annum and is due on December 31, 2000. In November
2000, the note agreement was amended calling for an immediate interest payment
of 230,000 DM (approximately $111,000 based upon the U.S. dollar/German Deutsche
Mark exchange rate on December 31, 2000) and for the payment of the principal in
full by the end of December 2000. The note was paid in full in December 2000.

     Property, Furniture and Equipment -- Property, furniture and equipment are
stated at cost. Depreciation is computed generally on a straight-line basis over
the estimated useful lives of the assets which range from three-to-seven years.
Leasehold improvements and assets acquired under capital lease are amortized on
a straight-line basis over the shorter of the lease term or the estimated useful
lives of the asset.

     Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of -- The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is

                                        38
<PAGE>   41
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

     Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional development costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software to
be Sold, Leased, or Otherwise Marketed. Because the Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.

     Revenue Recognition -- The Company's revenue recognition policy is
consistent with Statement of Position No. 97-2, as amended. License revenues are
comprised of fees for the Company's software products. Revenue from license fees
is recognized when an agreement has been signed, delivery of the product has
occurred, no significant Company obligations remain, the fee is fixed or
determinable, collectibility is probable and vendor-specific objective evidence
exists to allocate a portion of the total fee to any undelivered elements of the
arrangement. For electronic delivery, the software is considered to have been
delivered when the Company has provided the customer with the access codes that
allow for immediate possession of the software. If the fee due from the customer
is not fixed or determinable, revenue is recognized as payments become due from
the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected.

     Support and maintenance arrangements do not provide for specified upgrade
rights and provide technical support and the right to unspecified upgrades on an
if-and-when-available basis. Revenue from support arrangements is recognized on
a straight-line basis over the life of the related agreement, which is typically
one year. If support, consulting services or training are included in an
arrangement that includes a license agreement, amounts related to support,
consulting services, training and the licenses are allocated based on
vendor-specific objective evidence. Vendor-specific objective evidence for
support, professional services and license agreements is based on the price when
such elements are sold separately, or, when not sold separately, the price is
established by management, who have the relevant authority. Where discounts are
offered on multiple element arrangements, a proportionate amount of that
discount is applied to each element included in the arrangement based on each
element's fair value. Consulting and training revenue is recognized when
provided to the customer. Revenues from custom development projects are
recognized on the percentage of completion basis. Customer advances and billed
amounts due from customers in excess of revenue recognized are recorded as
deferred revenue.

     Cost of Revenues -- Cost of product revenues includes cost of production
and related materials. Cost of support and maintenance revenues includes payroll
and other costs associated with product maintenance and escrow services. Costs
of consulting and training principally includes payroll and related costs.

     Financial Statement Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of assets, liabilities, revenues, and expenses as of the date
and for the period presented. Actual amounts could differ from those estimates.

     Concentrations of Credit Risk -- Financial instruments which potentially
could subject the Company to a concentration of credit risk principally consist
of accounts receivable. The Company sells the majority of its products to
companies in North America and Europe. To reduce credit risk, management
performs ongoing credit evaluations of its significant customers' financial
condition and maintains reserves for potential credit losses.

                                        39
<PAGE>   42
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

     Financial Instruments -- The Company's financial instruments include cash
and cash equivalents, short-term investments and long-term investments. At
December 31, 2000 and 1999, the fair value of these financial instruments
approximated their financial statement carrying amounts.

     Income Taxes -- Income taxes are accounted for using an asset and liability
approach to account for deferred income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

     Foreign Currency Translation -- All assets and liabilities of operations
outside the United States are translated into U.S. dollars from their functional
currency, which is the local currency, at year-end exchange rates. Income and
expense items are translated at the average exchange rate for the year. Gains
and losses resulting from translation are included in other comprehensive income
loss. Gains and losses on foreign currency transactions have been reflected in
the statements of operations and were not material in 2000 and 1999.

     Certain Significant Risks and Uncertainties -- The Company operates in the
software industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company in terms of its
future financial position, results of operations or cash flows; ability to
increase revenues, the hiring, training and retention of key employees;
development of sales distribution capabilities; market acceptance of the
Company's products under development; fundamental changes in the technology
underlying the Company's software products; litigation or other claims against
the Company; adverse changes in international market conditions; successful and
timely completion of product development efforts; product introductions by
competitors and the ability to obtain additional financing.

     Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.

     Net Loss per Common Share -- Basic net loss per common share excludes
dilution and is computed by dividing net loss by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase). Diluted net loss per common share was the same as basic net loss
per common share for all periods presented since the effect of any potentially
dilutive securities is excluded as they are anti-dilutive because of the
Company's net losses.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1999, the Securities Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The
implementation of SAB No. 101 in 2000 had no effect on the Company's financial
statements.

     In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of SFAS 133," which delayed the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for
Poet's fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
consolidated balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company has completed its evaluation of the impact of reporting SFAS 133 and has
concluded that its adoption as of January 1, 2001 will not have a material
effect on its consolidated financial statements.

                                        40
<PAGE>   43
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

     In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB No. 25." Interpretation No. 44 is
effective July 1, 2000. The Interpretation clarifies the application of Opinion
25 for various issues, specifically: the definition of an employee, the criteria
for determining whether a plan qualifies as a non-compensatory plan, the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. The adoption of Interpretation
No. 44 did have a material impact on our financial position or results of
operations.

 2. INVESTMENTS

     Short-term and long-term investments include the following
available-for-sale securities at December 31, 2000 (in thousands). Gross
unrealized gains and losses were immaterial at December 31, 1999:

<TABLE>
<CAPTION>
                                                           GROSS        GROSS
                                             AMORTIZED   UNREALIZED   UNREALIZED   ESTIMATED
                                               COST        GAINS         LOSS      FAIR VALUE
                                             ---------   ----------   ----------   ----------
<S>                                          <C>         <C>          <C>          <C>
Money market funds.........................   $ 3,878        $--         $ --       $ 3,878
Commercial paper...........................    22,032         9                      22,041
U.S. government agencies...................     4,030        --           (27)        4,003
                                              -------        --          ----       -------
          Total available for sale
            securities.....................   $29,940        $9          $(27)      $29,922
                                              =======        ==          ====       =======
Included in cash and cash equivalents......    15,494         4                      15,498
Included in short-term investments.........    10,416         5                      10,421
Included in long-term investments..........     4,030        --           (27)        4,003
                                              -------        --          ----       -------
          Total available for sale
            securities.....................   $29,940        $9          $(27)      $29,922
                                              =======        ==          ====       =======
</TABLE>

 3. PROPERTY, FURNITURE AND EQUIPMENT, NET

     Property, furniture and equipment, net, consist of (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Computer equipment and software..........................  $ 2,618    $ 1,594
Office equipment, furniture and fixtures.................      853        722
Leasehold improvements...................................       95         22
                                                           -------    -------
          Total..........................................    3,566      2,338
Accumulated depreciation and amortization................   (2,258)    (1,757)
                                                           -------    -------
Property, furniture and equipment, net...................  $ 1,308    $   581
                                                           =======    =======
</TABLE>

                                        41
<PAGE>   44
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

 4. ACCRUED LIABILITIES

     Accrued liabilities consist of (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ----------------
                                                              2000      1999
                                                             ------    ------
<S>                                                          <C>       <C>
Compensation...............................................  $  738    $  545
Professional fees..........................................     476       192
Payroll tax accruals.......................................     317       241
Stock issuance costs.......................................      --       774
Other......................................................     360       397
                                                             ------    ------
          Total............................................  $1,891    $2,149
                                                             ======    ======
</TABLE>

 5. LONG-TERM OBLIGATIONS

     Long-term obligations consists of (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              2000     1999
                                                              -----    -----
<S>                                                           <C>      <C>
Term bank loan..............................................  $ 336    $ 580
Capital lease obligations (see Note 9)......................      2       22
Other.......................................................      1        7
                                                              -----    -----
          Total.............................................  $ 339    $ 609
                                                              =====    =====
Current portion.............................................   (244)    (283)
                                                              -----    -----
          Total long-term obligations.......................  $  95    $ 326
                                                              -----    -----
</TABLE>

     The Company received $3.9 million from the issuance of a convertible note
to TBG in January 1999. The amount is due on December 31, 2003 and the interest
rate is 6% per annum. The holder may convert the entire principal amount of the
note at approximately $19 per share, excluding accrued interest, into Series A
common stock. No interest accrued until June 30, 2000. The imputed interest of
$348,000 has been amortized to interest expense over the term of the note. In
connection with this loan, TBG agreed not to charge the Company any
discretionary prepayment penalties or contingent payments at the end of the
terms of the three notes. On September 13, 1999 the Company and TBG executed an
amendment to the TBG loan agreement whereby the principal debt amount of $3.9
million was converted into 275,106 shares of Series A common stock. The result
of this conversion was a reduction in debt of $3.7 million and a non-recurring
charge of $809,000 to operations during the quarter ended September 30, 1999.
The non-recurring charge represents the fair value of the securities transferred
in the conversion in excess of the fair value of the securities issued pursuant
to the original conversion date.

     In 1998, the Company received bridge financing from certain stockholders of
the Company. The outstanding financing and accrued interest was repaid in 1998
by issuing 145,583 shares of Series D preferred stock amounting to $7.04 per
share to the various lenders. Total bridge financing and accrued interest
converted totaled $1,025,000 as of the exchange date. See Note 6 for significant
terms of the Series D preferred stock.

     In 1997, Poet Software GmbH entered into a long-term loan agreement with
IKB Deutsche Industriebank of 1,500,000 DM (approximately $723,000 at December
31, 2000). The note bears interest at 7% per year on the amount outstanding.
Repayments are due quarterly at 125,000 DM starting on June 15, 1999 and ending
on March 15, 2002. The loan is secured by a guarantee from the Company.

                                        42
<PAGE>   45
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

 6. STOCKHOLDERS' EQUITY

  Initial Public Offering

     In November 1999, the Company completed its initial public offering of
3,000,000 shares of common stock. In December 1999, the Company sold an
additional 570,000 shares of common stock upon exercise of the Green Shoe. In
total, the Company generated net proceeds from the sale of stock at the IPO and
Green Shoe of $41.5 million.

  Authorized Shares

     On September 10, 1999, the Board of Directors approved an increase in the
authorized shares of common stock to 30,000,000 shares and creation of new
undesignated preferred stock totaling 3,000,000 shares. On July 17, 2000, the
stockholders approved an increase in the authorized shares of common stock to
100,000,000 shares.

  Redeemable Convertible Preferred Stock

     On November 4, 1999, holders of 100% of the Series A, B, C and D redeemable
convertible preferred stock and Series B common stock consented to the
conversion of all outstanding shares of Series A, B, C, and D redeemable
convertible preferred stock and Series B common stock into Series A common stock
upon the completion of the initial public offering regardless of the offering
price per share. Upon completion of the Company's initial public offering on
November 17, 1999, all shares of Series A, B, C and D redeemable convertible
preferred stock and 1,361,173 shares of Series B common stock were converted to
shares of Series A common stock in accordance with their existing terms. All
shares of Series A common stock were then redesignated as undesignated common
stock upon the consummation of the initial public offering. All shares were
converted on a one-to-one basis. The Statement of Stockholders' Equity (Deficit)
has been retroactively restated to reflect the Series B common stock conversion.

  Warrants

     During 1999, warrants to purchase 35,000 and 8,523 shares, respectively, of
Series A common stock at an exercise price of $7.04 per share were issued to a
strategic partner and a service provider for services rendered, respectively.
The warrants expire on April 30, 2004 and upon the closing of the Company's
initial public offering, respectively. The value of these warrants has been
estimated using the Black-Scholes option pricing model with the following
assumptions: expected life, the term of the option, risk-free interest rate of
4.7%, 80% volatility and no dividends during the expected term. The fair value
of such warrants at the date of issuance was insignificant. The warrants issued
to the service provider were exercised prior to the Company's initial public
offering.

     During 1998, warrants to purchase 49,710 shares of Series D redeemable
convertible preferred stock at an exercise price of $7.04 per share were issued
to current investors in the Company in connection with the Company's bridge
financing. The estimated fair value of the warrants of $82,639 has been recorded
as interest expense in 1998. The warrants expire September 2003. The value of
these warrants has been estimated using the Black-Scholes option pricing model
with the following assumptions: expected life, the term of the option, risk-free
interest rate of 5.5%, 50% volatility and no dividends during the expected term.

     In connection with a capital lease agreement in 1995, the Company granted a
warrant to purchase up to 7,291 shares of Series B redeemable convertible
preferred stock at $2.15 per share. Such warrant allows for a net exercise by
the holder. The warrant expires on May 31, 2002. In connection with a line of
credit in 1996, the Company granted warrants to purchase up to 6,555 shares of
Series C redeemable convertible preferred stock at $5.72 per share. The warrants
expire on July 25, 2003 and September 13, 2003. The value of these

                                        43
<PAGE>   46
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

warrants has been estimated using the Black-Scholes option pricing model with
the following assumptions: expected life, the term of the option, risk-free
interest rate of 6.8% in 1995, and 6.5% and 6.6% in 1996, 50% volatility and no
dividends during the expected term. The fair value of such warrants at the date
of issuance was insignificant.

  Stock Option Plans

     The Company's 1995 Stock Option Plan authorizes the grant of options to
purchase up to 1,710,942 shares (including 300,000 shares approved in 2000 by
the stockholders) of common stock. The number of shares reserved under the plan
will automatically be increased on January 1st of each year, in an amount equal
to two percent of the shares outstanding on that date. Incentive stock options
may be granted to employees and nonstatutory stock options to employees,
consultants and directors. Stock options are granted with an exercise price at
fair market value at the date of grant. Options generally vest over a four year
period and expire ten years from the date of the grant.

     The Company's 1999 Directors' Stock Option Plan ("Directors' Plan") became
effective upon the closing of the company's initial public offering with 150,000
shares of common stock initially reserved. The option grants under the
Director's Plan are automatic and non-discretionary. The Director's Plan
provides for an initial grant of options to each outside director of 20,000
shares of common stock on the later of the effective date of the Directors' Plan
or the date on which an individual first becomes an outside director. The
initial grant vests 25% one year after the date of the grant and an additional
25% each anniversary of the date of grant thereafter, provided that the optionee
continues to serve as an outside director. Additionally, each outside director
will automatically be granted 5,000 shares of common stock on each date the
outside director is re-elected by the Company's stockholders, provided that the
outside director has served on the board of the directors for at least six
months. Each subsequent option grant shall vest 100% four years after the date
of grant.

<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                                                             AVERAGE
                                                                OPTIONS      EXERCISE
                                                              OUTSTANDING     PRICE
                                                              -----------    --------
<S>                                                           <C>            <C>
ACTIVITY UNDER THE PLANS ARE AS FOLLOWS:
Balances January 1, 1998....................................     448,828      $ 0.39
Granted (Weighted average fair value of $0.13)..............     366,250      $ 0.55
Exercised...................................................     (63,249)     $ 0.22
Cancelled or Repurchased....................................    (180,491)     $ 0.38
                                                               ---------      ------
Balances December 31, 1998..................................     571,338      $ 0.51
Granted (Weighted average fair value of $7.28)..............     602,000      $ 8.99
Exercised...................................................    (135,565)     $ 0.47
Cancelled or Repurchased....................................    (263,294)     $ 1.68
                                                               ---------      ------
Balances December 31, 1999..................................     774,479      $ 6.71
Granted (Weighted average fair value of $37.36).............     635,420      $36.60
Exercised...................................................    (203,957)     $ 1.69
Cancelled or Repurchased....................................    (156,463)     $17.23
                                                               ---------      ------
Balances December 31, 2000..................................   1,049,479      $24.21
                                                               =========      ======
</TABLE>

                                        44
<PAGE>   47
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

     Additional information regarding options outstanding as of December 31,
2000 is as follows:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                           OPTIONS VESTED
                  -------------------------------------------------    -------------------------------
   RANGE OF                      WEIGHTED AVERAGE       WEIGHTED                           WEIGHTED
   EXERCISE         NUMBER          REMAINING           AVERAGE                            AVERAGE
    PRICES        OUTSTANDING    CONTRACTUAL LIFE    EXERCISE PRICE    NUMBER VESTED    EXERCISE PRICE
   --------       -----------    ----------------    --------------    -------------    --------------
<S>               <C>            <C>                 <C>               <C>              <C>
$ 0.55 -  0.70       103,658           7.52             $  0.60            82,446          $  0.59
  1.00 -  5.00        80,740           8.50                4.32            33,159             4.24
 11.12 - 13.49       380,541           9.13               12.46            91,145            12.68
 14.39 - 18.72       320,020           9.70               14.88               750            15.16
     65.17        123,020...           9.10               65.17             9,830            65.17
    180.19            41,500           9.18              180.19               312           180.19
                   ---------                                              -------
    Total          1,049,479           9.09             $ 24.21           217,642          $ 24.76
</TABLE>

     In 2000 no stock options were issued at less than the estimated fair value
at grant date. In 1999, 211,000 stock options with a weighted average exercise
price of $2.91 and a weighted average fair value of $8.81 were issued at less
than the estimated fair value at grant date.

     At December 31, 1999, options to purchase 170,848 shares were vested and
exercisable with a weighted average price of $0.53. At December 31, 2000,
536,308 shares were available for future grant under the Plans. Unvested common
shares issued under the Plans of 27,200 and 36,273 are subject to repurchase at
the original issuance price by the Company at December 31, 2000 and 1999,
respectively.

  Deferred Stock Compensation

     In connection with grants of certain stock options, the Company recorded
deferred stock compensation of $0 and $316,000 in 2000 and 1999, respectively,
for the difference between the estimated fair value for accounting purposes and
the stock price as determined by the Board of Directors on the date of grant.
This amount is being amortized to expense using an accelerated recognition
approach over the vesting period of the related stock options, generally four
years. Amortization of deferred stock compensation for the years ended December
31, 2000, 1999 and 1998 was $444,000, $626,000 and 47,000, respectively.

  Employee Stock Purchase Plan

     The Company's 1999 Employee Stock Purchase Plan (the "ESPP") became
effective upon the closing of the Company's initial public offering with 100,000
shares initially reserved. Under the ESPP, eligible employees may purchase
common stock through payroll deductions not exceeding 15% of any employee's
compensation and limited to a total of 1,000 shares in any offering period, and
in no event may an employee purchase more that $25,000 worth of stock,
determined at the fair market value of the shares at the time such option is
granted, in one year. The number of shares reserved for issuance under the ESPP
will automatically be increased on January 1st of each year, in an amount equal
to one percent of the shares outstanding on that date. The price at which common
stock may be purchased is equal to 85% of the fair market value of the common
stock on the first day or the last day of the applicable offering period,
whichever is lower.

  Additional Stock Purchase Information

     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
loss as if the Company had adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock-based awards by companies
to employees is calculated using the fair value method. This method requires
subjective assumptions, including expected time to exercise, which greatly
affect the calculated values. The Company's

                                        45
<PAGE>   48
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 12 months following
vesting; stock volatility of 146% in 2000, 156% in 1999 and 0% in 1998; risk
free interest rates, 5.3% to 6.6% in 2000, 4.7% to 6.1% in 1999 and 5.3% to 5.6%
in 1998; and no dividends during the expected term. The Company's calculations
are based on a single option valuation approach and forfeitures are recognized
as they occur. If the computed fair value of the 2000, 1999 and 1998 awards
through the Company's option plans and ESPP plan had been amortized to expense
over the vesting period of the awards, pro forma net loss would have been
$14,487,000 in 2000, $5,837,000 in 1999 and $4,003,000 in 1998.

 7. NET LOSS PER SHARE

     The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                        -----------------------------
                                                         2000       1999       1998
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Net loss (numerator), basic and diluted...............  $(9,835)   $(5,564)   $(3,990)
Shares (denominator):
  Weighted average common shares outstanding..........   10,702      2,138      1,547
  Weighted average common shares outstanding subject
     to repurchase....................................      (49)       (29)       (40)
                                                        -------    -------    -------
Shares used in computing basic and diluted net loss
  per share...........................................   10,653      2,109      1,507
                                                        -------    -------    -------
Net loss per share basic and diluted..................  $ (0.92)   $ (2.64)   $ (2.65)
                                                        =======    =======    =======
</TABLE>

     For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                  ------------------------------------
                                                     2000         1999         1998
                                                  ----------    --------    ----------
<S>                                               <C>           <C>         <C>
Redeemable Convertible Preferred Stock..........          --          --     4,910,935
Shares of common stock subject to repurchase....      27,200      36,273        20,771
Outstanding options.............................   1,049,479     774,479       571,338
Warrants........................................      55,739      86,406        63,556
                                                  ----------    --------    ----------
          Total.................................   1,132,418     897,158     5,566,600
                                                  ==========    ========    ==========
Weighted average exercise price of options......  $    24.21    $   6.71    $     0.51
                                                  ==========    ========    ==========
Weighted average exercise price of warrants.....  $     6.88    $   6.96    $     6.34
                                                  ==========    ========    ==========
</TABLE>

                                        46
<PAGE>   49
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

 8. INCOME TAXES

     The Company's net deferred tax assets are comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       1999       1998
                                                       --------    -------    -------
<S>                                                    <C>         <C>        <C>
Net deferred tax assets and liabilities:
Net operating loss carryforwards.....................  $ 12,526    $ 8,706    $ 6,457
Other temporary timing differences...................       818        308        283
                                                       --------    -------    -------
                                                         13,344      9,014      6,740
                                                       --------    -------    -------
Valuation allowance..................................   (13,344)    (9,014)    (6,740)
                                                       ========    =======    =======
Net deferred tax assets..............................  $     --    $    --    $    --
                                                       ========    =======    =======
</TABLE>

     Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to an evaluation of the likelihood of the
realization of its deferred tax assets, as of December 31, 2000, 1999 and 1998,
the Company has fully reserved its net deferred tax assets of $13,344,000,
$9,014,000 and $6,740,000, respectively.

     The Company's effective tax rate differs from the expected benefit at the
federal statutory tax rate as follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Federal statutory tax rate..................................  (35.0)%  (35.0)%  (35.0)%
State taxes, net of federal benefit.........................   (6.0)    (6.0)    (6.0)
Other.......................................................    1.2      0.8      1.5
Change in valuation allowance...............................   39.8     40.2     39.5
                                                              =====    =====    =====
Effective tax rate..........................................      0%       0%       0%
                                                              =====    =====    =====
</TABLE>

     At December 31, 2000, the Company has net operating loss carryforwards of
approximately $16,185,000, $7,465,000 and $13,176,000 available to offset future
federal, California and foreign taxable income, respectively. Federal
carryforwards expire beginning in 2009 through 2020 and the California
carryforwards expire beginning 2000 through 2005.

     Due to an ownership change that occurred in 1996, approximately $3,321,000
and $1,331,000 of federal and California loss carryforwards, respectively, that
can be used to offset future taxable income are subject to an annual limitation
of approximately $983,000 for both federal and California purposes.
Additionally, due to an ownership change that occurred in 1999, approximately
$11,816,000 and $5,191,000 of federal and California loss carryforwards,
respectively, that can be used to offset future taxable income are subject to a
subsequent annual limitation of approximately $4,666,000 for both federal and
California purposes. However, the utilization of net operating loss
carryforwards generated in or before 1999 cannot exceed $4,666,666 annually. The
extent to which the loss carryforwards incurred since 1999 can be used to offset
future taxable income and tax liabilities may be limited depending on any future
ownership changes within any subsequent three year period. The Company's foreign
tax losses may be carried forward indefinitely.

     Foreign losses before income taxes for the years ended December 31, 2000,
1999 and 1998 were $5,104,000, $1,338,000 and $1,434,000, respectively.

                                        47
<PAGE>   50
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

 9. COMMITMENTS AND CONTINGENCIES

  Leases

     The Company leases certain equipment under capital leases and its
facilities under non-cancelable operating lease agreements. Equipment under
capital leases had a net book value of $0 and $22,000 at December 31, 2000 and
1999, respectively (net of accumulated amortization of $268,000 and $246,000,
respectively). Leases expire at various dates from May 2001 through December
2005.

     Future minimum rental commitments under capital leases for fiscal year 2001
and thereafter are $2,000.

     Future minimum rental commitments under non-cancelable operating leases for
office space, and to a lesser extent, equipment and automobiles, as of December
31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             OPERATING
                 YEAR ENDING DECEMBER 31,                     LEASES
                 ------------------------                    ---------
<S>                                                          <C>
2001.......................................................   $1,356
2002.......................................................    1,179
2003.......................................................    1,107
2004.......................................................      377
2005.......................................................       22
Thereafter.................................................       --
                                                              ------
          Total minimum lease payments.....................   $4,041
                                                              ======
</TABLE>

     Rent expense was $1,150,000, $1,025,000 and $836,000 for the fiscal years
ended December 31, 2000, 1999 and 1998, respectively.

10. DISPOSITION OF PRODUCT LINE

     In September 2000, the Company sold the Content Management Suite (CMS)
product line to Sorman Information AB, Vaxjo, a Swedish company in exchange for
future royalties through September, 2003. The agreement provides that Sorman
will assume the intellectual property rights for CMS worldwide except for the
United States, Canada and South Korea and the obligations associated with the
European CMS customer base. Sorman has a six month exclusive option to assume
the intellectual property rights for the United States and Canada and the
corresponding obligations associated with the United States and Canadian
customer base. As of December 31, 2000, Sorman had not exercised the exclusive
option. No CMS revenue was immediately generated as a result of this sale.
Through December 31, 2000, no royalties have been earned by the company under
this arrangement.

11. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

     The Company operates in one reportable segment, the development and
marketing of software products that allow businesses to share and manage complex
information enabled by the Company's database

                                        48
<PAGE>   51
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

management system. The Company principally operates in the U.S. and Germany. The
following is a summary of operations within geographic areas (in thousands):

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000       1999       1998
                                                         -------    -------    ------
<S>                                                      <C>        <C>        <C>
Revenues(1):
  United States........................................  $ 6,136    $ 6,006    $5,768
  Germany..............................................    6,091      4,608     3,149
                                                         -------    -------    ------
                                                         $12,227    $10,614    $8,917
                                                         =======    =======    ======
</TABLE>

---------------
(1) Revenues are broken out geographically by the ship-to location of the
    customer.

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               2000      1999     1998
                                                              -------    -----    -----
<S>                                                           <C>        <C>      <C>
Long-lived assets:
  United States.............................................  $  496     $221     $246
  Germany...................................................     812      360      292
                                                              ------     ----     ----
          Total.............................................  $1,308     $581     $538
                                                              ======     ====     ====
</TABLE>

     During 1996 the Company entered into product licensing and service
agreements with Novell, Inc. a preferred stockholder. Revenues from the
preferred stockholder are detailed on the consolidated statements of operations.
The Company does not specifically identify and account for the related costs of
revenues by customer. The Company believes that costs and the related gross
margin of its revenues to the preferred stockholder are similar to costs and
gross margin to unaffiliated customers.

     On September 30, 1999, the Company and Novell, Inc. ("Novell") amended
their licensing agreement whereby the Company has no further obligations to
Novell to deliver any additional products or services or refund monies
previously paid, and Novell has no obligations to make any further payments to
the Company. As a result of this amendment, previously deferred revenues of
$309,000 were recognized as revenue in September 1999.

12. QUARTERLY RESULTS -- UNAUDITED

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                             ----------------------------------------------
                                             MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,
                                               2000         2000        2000         2000
                                             ---------    --------    ---------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>          <C>         <C>          <C>
Net revenues...............................   $ 2,771     $ 2,662      $ 3,293     $ 3,501
Gross profit...............................   $ 2,189     $ 1,959      $ 2,622     $ 2,634
Net income.................................   $(1,748)    $(2,787)     $(2,548)    $(2,752)
Net income per share:
  Basic and Diluted........................   $ (0.17)    $ (0.26)     $ (0.24)    $ (0.26)
Shares used in computing per share amounts:
  Basic and Diluted........................    10,574      10,618       10,691      10,746
</TABLE>

                                        49
<PAGE>   52
                      POET HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                             ----------------------------------------------
                                             MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,
                                               1999         1999        1999         1999
                                             ---------    --------    ---------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>          <C>         <C>          <C>
Net revenues...............................   $ 2,378     $ 2,538      $ 2,787     $ 2,911
Gross profit...............................   $ 1,810     $ 1,955      $ 2,201     $ 2,273
Net income.................................   $(1,046)    $(1,328)     $(1,924)    $(1,266)
Net income per share:
  Basic and Diluted........................   $ (0.16)    $ (0.20)     $ (0.29)    $ (0.15)
Shares used in computing per share amounts:
  Basic and Diluted........................     6,467       6,534        6,639       8,669
</TABLE>

13. LEGAL MATTERS

     None.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     Not Applicable.

                                        50
<PAGE>   53

                                    PART III

     Certain information required by Part III is incorporated by reference from
our definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for our fiscal 2000
Annual Meeting of Stockholders (the "Proxy Statement").

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information regarding our executive
officers and directors as of March 1, 2001:

<TABLE>
<CAPTION>
                NAME                   AGE                           POSITION
                ----                   ---                           --------
<S>                                    <C>    <C>
Dirk Bartels.........................  42     President, Chief Executive Officer and Director
Gert Kohler(1)(2)....................  51     Director
Jerome Lecoeur(1)(2).................  43     Director
Herbert May..........................  51     Director
Robert Helgerth......................  43     Vice President of Sales and Marketing, Europe and
                                              General Manager
David Guinther.......................  42     Vice President of Sales
Michael Hogan........................  37     Vice President of Corporate Development
Volker Smid..........................  42     Vice President of Marketing, U.S.A.
Jorg Tewes...........................  36     Vice President of Development and General Manager
Jochen Witte.........................  40     Chief Financial Officer, Executive Vice President of
                                              European Operations and General Manager
Jerry Wong...........................  49     Executive Vice President of U.S. Operations and Vice
                                              President of Finance
</TABLE>

---------------
(1) Member of audit committee.

(2) Member of compensation committee.

     Dirk Bartels is a co-founder of Poet Holdings, Inc. and has served as
President and Chief Executive Officer since we commenced our operations in March
1995. Prior to that time, Mr. Bartels served as a General Manager of our
subsidiary Poet Software GmbH. Mr. Bartels has served as a director of our
company since March 1995 and has acted as our Chairman of the Board since
December 1996. Mr. Bartels received a Master of Science in Computer Science from
the Technical University in Berlin, Germany.

     Gert Kohler has served as a director of Poet Holdings, Inc. since March
1995 and has served as a member of the compensation committee since January 1999
and as a member of the audit committee since September 1999. Dr. Kohler has been
a Managing Director of 3i Europe PLC, a venture capital and private equity
company, since February 2000. Prior to this, Dr. Kohler was a Managing Director
with Technologieholding, a venture capital company, from October 1987 to
February 2000. Dr. Kohler holds Masters degrees in Solid State Physics and in
Mathematics from the University of Stuttgart, a Masters degree in Operational
Research from the University of Grenoble, and a Ph.D. in Mathematics from
Institute de Recherche Mathematique Applique in France and a Master of Science
in Business Administration from Institute d'Administration Enterprise in France.

     Jerome Lecoeur has served as a director of Poet Holdings, Inc. since April
1995. Mr. Lecoeur has been an Investment Manager with INNOVACOM, a venture
capital company, since February 1991. Mr. Lecoeur holds a Masters in Economics
and a graduate degree in Marketing from the University of Paris.

     Dr. Herbert May has served as a director of Poet Holdings, Inc. since
November 2000. Dr. May has held several leading positions at Alcatel in both
Stuttgart and Paris. His last position at Alcatel was Head of the Business
Systems division. In 1994, Dr. May acting in the position of CEO took a leading
role in establishing DeTeSystems in Frankfurt. In 1995, he was appointed to the
Board of Deutsche Telekom AG, where he was responsible for large business
customers, multimedia and systems solutions. Today, Dr. May manages his own

                                        51
<PAGE>   54

consulting and investment company and is a member of the Advisory Board of
several IT and Multimedia companies.

     Robert Helgerth has served as Vice President of Sales and Marketing Europe
at our subsidiary Poet Software GmbH since November 1999. From November 1994 to
October 1999, Mr. Helgerth served as Director of the Commercial PC group for
Compaq Computer GmbH. Prior to that, Mr. Helgerth was Sales Director for Sequent
Germany GmbH, a member of the executive team at Dataplan and Field Office
Manager and Sales Representative at Nixdorf Computer.

     David Guinther has served as Vice President of Sales at our subsidiary Poet
Software Corporation since July 1999. He served as our District Manager of
Northern California from March 1997 to December 1998 and as our Director of
Sales from January 1999 to June 1999. Prior to joining our company, Mr. Guinther
served as Regional Sales Manager at ONTOS Inc., a component-based technology
solutions provider, from August 1996 to February 1997 and as Manager of
Strategic Initiatives at Sybase, Inc., a software company, from February 1993 to
July 1996. Mr. Guinther received a Bachelor of Business Administration and a
Master of Science in Business from the University of Wisconsin in Madison.

     Michael Hogan has served as Vice President of Corporate Development at our
subsidiary Poet Software Corporation since April 1997. From March 1994 to April
1997, Mr. Hogan served as director of Business Development at Novell, Inc., a
directory-enabled networking software provider. Mr. Hogan received a Bachelor of
Science from the College of Holy Cross.

     Volker Smid has served as Vice President of Marketing at our subsidiary
Poet Software Corporation since March 2000. His previous experience includes a
two-year period as Executive Director of the "New Economy" Business Unit with
Eric Salmon & Partners in Paris, France and, prior to that, in a number of
positions in the software and healthcare sector in Hamburg (Germany).

     Jorg Tewes has served as Vice President of Engineering at our subsidiary
Poet Software GmbH since January 1995 and as our Vice President of Development
and General Manager since September 1997. Mr. Tewes received a Masters degree in
Computer Science from the Technical University in Berlin, Germany.

     Jochen Witte is a co-founder of Poet Holdings and has served as our Chief
Financial Officer and Executive Vice President of European Operations since we
commenced operations in 1995. Mr. Witte has also served as our Executive Vice
President of European Operations since July 1999. From March 1995 to July 1999,
Mr. Witte served as one of our directors. Mr. Witte holds a Master of Science in
Business Administration from the Technical University in Berlin, Germany.

     Jerry Wong has served as our Vice President of Finance since March 1997 and
has served as our Executive Vice President of U.S. Operations since July 1999.
Mr. Wong also served at our subsidiary Poet Software Corporation as Controller
from July 1995 to January 1996 and as Vice President of Finance from February
1996 to March 1997. From January 1993 to July 1995, Mr. Wong served as the
Controller at Blyth Software Inc., a software and service provider. Mr. Wong
received a Bachelor of Science in Business Administration from the University of
San Francisco.

     Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this section is incorporated by reference from
the information in the sections entitled "Election of Directors -- Directors'
Compensation," "Executive Compensation" and "Stock Price Performance Graph" in
the Proxy Statement.

                                        52
<PAGE>   55

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors -- Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this section is incorporated by reference from
the information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this Form 10-K

          (1) Financial Statements:

          Reference is made to the Index to Financial Statements of Poet
     Holdings, Inc. under Item 8 in Part II of this Form 10-K.

          (2) Financial Statement Schedules:

          The following financial statement schedule of Poet Holdings, Inc. for
     the years ended December 31, 1998, December 31, 1999, and December 31, 2000
     is filed as part of this Annual Report and should be read in conjunction
     with the Financial Statements of Poet Holdings, Inc.

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Schedule II Valuation and Qualifying Accounts...............   53
</TABLE>

          (3) Exhibits:

          The exhibits listed below are required by Item 601 of Regulation S-K.
     Each management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this Form 10-K has been identified.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                     DESCRIPTION OF DOCUMENT
-------                    -----------------------
<S>      <C>
         None.
</TABLE>

     (b) We filed a report on Form 8-K on March 1, 2000, which contained (1) an
ad hoc notice filed with the Frankfurt Stock Exchange, (2) a copy of a slide
presentation at an analysts conference and (3) a press release announcing our
fourth quarter results.

     We filed a report on Form 8-K on July 7, 2000, which contained a press
release announcing our preliminary second quarter revenues.

     We filed a report on Form 8-K on July 27, 2000, which contained a press
release announcing our second quarter results.

     We filed a report on Form 8-K on October 27, 2000, which contained a press
release announcing our third quarter results.

     We filed a report on Form 8-K on October 30, 2000, which contained a press
release announcing the sale of our Content Management Suite product line.

     We filed a report on Form 8-K on January 31, 2001, which contained (1) an
ad hoc notice filed with the Frankfurt Stock Exchange and (2) a press release
announcing our fourth quarter revenues.

                                        53
<PAGE>   56

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
                            ----------------------------------------------------------------------------------
                             BALANCE AT                         REVERSALS TO
                            BEGINNING OF    CHARGED TO COSTS     COSTS AND                      BALANCE AT END
       DESCRIPTION             PERIOD         AND EXPENSES        EXPENSES      (DEDUCTIONS)      OF PERIOD
       -----------          ------------    ----------------    ------------    ------------    --------------
                                                              (IN THOUSANDS)
<S>                         <C>             <C>                 <C>             <C>             <C>
Allowance for doubtful
  accounts:
  2000....................      134               391                --           <47>               478
  1999....................       65                96                --           <27>               134
  1998....................       57                28                --           <20>                65
</TABLE>

                                        54
<PAGE>   57

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 2, 2001.

                                          Poet Holdings, Inc.
                                          (Registrant)

                                          By:       /s/ DIRK BARTELS
                                            ------------------------------------
                                                        Dirk Bartels
                                               President and Chief Executive
                                                           Officer

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dirk Bartels and Jerry Wong, and each of
them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

<TABLE>
<CAPTION>
                  SIGNATURE                                  TITLE                         DATE
                  ---------                                  -----                         ----
<C>                                            <C>                                   <S>
              /s/ DIRK BARTELS                   President and Chief Executive       April 2, 2001
---------------------------------------------   Officer Executive Vice President
                                                  of U.S. Operations and Vice
                                                          President of

               /s/ JERRY WONG                               Finance                  April 2, 2001
---------------------------------------------

               /s/ GERT KOHLER                              Director                 April 2, 2001
---------------------------------------------

             /s/ JEROME LECOEUR                             Director                 April 2, 2001
---------------------------------------------

             /s/ DR. HERBERT MAY                            Director                 April 2, 2001
---------------------------------------------
</TABLE>

                                        55