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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.    
|          
|           |  | For the fiscal year ended December 31,
    2002                                              
|          
|or        
|          
|o          |  | 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



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Poet Holdings, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 94-3221778                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)



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1065 E. Hillsdale Blvd.,
Suite 205

Foster City, California 94404


(650) 212-3100


(Address, including zip code, of
Registrants principal executive offices


and telephone number, including area
code)




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Securities registered pursuant to
Section 12 (b) of the Act:

None




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Securities registered pursuant to
Section 12 (g) of the Act:

Common Stock, $0.001 par value




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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 þ          No o

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. o

The aggregate
market value of voting stock held by non-affiliates of the
Registrant was approximately $6,282,000 as of February 28,
2003, based upon the closing price on the Prime Standard 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.

Indicate by check
mark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ          No o

The aggregate
market value of the voting stock held by non-affiliates of the
Registrant was approximately $9,942,960 as of June 30,
2002, based upon the closing price on the Neuer Markt of the
Frankfurt Stock Exchange reported for such date. The number of
shares outstanding of the Registrants Common Stock on
December 31, 2001 was 10,893,646 shares.



---






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TABLE OF CONTENTS



|                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX                                        
|PART I                                       
|                                              | Item 1. Business                                                                             
|                                              | Item 2. Properties                                                                           
|                                              | Item 3. Legal Proceedings                                                                    
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                      
|                                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                              | Item 6. Selected Consolidated Financial Data                                                 
|                                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 7A. Qualitative and Quantitative Disclosure about Market Risk                           
|                                              | Item 8. Financial Statements and Supplementary Data                                          
|INDEPENDENT AUDITORS REPORT                 
|                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                     
|                                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                                              | Item 14. Controls and Procedures                                                             
|PART IV                                      
|                                              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|SIGNATURES                                   
|POWER OF ATTORNEY                            
|EXHIBIT 10.17.1                              
|EXHIBIT 10.17.2                              
|EXHIBIT 23.1                                 
|EXHIBIT 99.1                                 



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##### Table of Contents



POET HOLDINGS, INC.

FORM 10-K




INDEX

|                                                                         |  |                                                                                           |    |      |    | 
|------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                                         |  |                                                                                           |    | Page
|                                                                         |  |                                                                                           |    |     
|PART I                                                                  
|Item 1.                                                                  |  | Business                                                                                  |    |      | 2  | 
|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                                                      |    |      | 17 | 
|Item 7.                                                                  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 17 | 
|Item 7A.                                                                 |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 37 | 
|Item 8.                                                                  |  | Financial Statements and Supplementary Data                                               |    |      | 38 | 
|Item 9.                                                                  |  | Disagreements on Accounting and Financial
    Disclosure                                  |    |      | 58 | 
|PART III                                                                
|Item 10.                                                                 |  | Directors and Executive Officers of the Registrant                                        |    |      | 58 | 
|Item 14.                                                                 |  | Controls and Procedures                                                                   |    |      | 59 | 
|PART IV                                                                 
|Item 15.                                                                 |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 61 | 
|SIGNATURES                                                               |  |                                                                                           | 64 |     
|Certification of Chief Executive Officer and
    Chief Financial Officer |  |                                                                                           | 65 |     

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PART I

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.






|        |         
|------- | --------
|Item 1. | Business

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 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,
create new electronic sales channels, accelerate and automate
business processes and reduce overhead costs. 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 our customers, software vendors and
original equipment manufacturers, to build efficient, secure,
reliable and high performance applications that are fully
integrated, easy to use and cost efficient. Our open systems
approach, which works with a variety of development tools,
hardware, system 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 and
existing and emerging technology platforms.

The Poet Solution

We are a provider of comprehensive supplier
enablement applications for B2B e-commerce. Our Poet eSupplier
Solutions product family helps enterprises to establish new
business relationships with their partners 
suppliers, intermediaries, customers and buying
organizations  and to efficiently develop new
distribution channels through electronic marketplaces. These
applications address the specific requirements of our customers
who wish to engage in e-commerce. These requirements include,
among others, the creation, management, and aggregation of
comprehensive electronic catalogs and tools for sophisticated
manipulation, customization and distribution, 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. Our applications utilize our object
database management system but can also be deployed with a
relational database system, most notably the Oracle database.

We offer a range of products to address the
various customer requirements, from a small footprint hand held
device all the way to a multi tier, high availability industrial
control system. Our products include FastObjects by Poet, an
award-winning object database designed for management of complex
data in

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embedded systems and industrial applications. Our
database management system, FastObjects by Poet, 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 in computer-aided
systems, such as medical and industrial automation systems. Our
database products uniquely address the needs for a secure,
reliable and high performance data management component with a
low total cost of ownership for those application types.


We are one of the few software companies that
provides 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, XML, Java and electronic catalogs 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 eSupplier Solutions product family 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 expanding the number of system integrators,
software vendors, value added resellers and original equipment
manufacturers that form our indirect sales channel.

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 Simba Technologies Inc. for the creation of an
Open Database Connectivity driver for FastObjects by Poet. In
addition, we intend to enter into joint marketing partnerships
with vendors of complementary products, such as our existing
partnerships with Ariba, Inc. and Commerce One, Inc., Oracle and
SAP AG, developers of complementary business-to-business
e-commerce 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
FastObjects by Poet product line 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 FastObjects by Poet.

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 among
others, the product categorization standards UNSPSC, BMEcat and
eClass4, and numerous operating systems such as

3



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Microsoft Windows, Sun Solaris, HP-UX and Linux.
In addition, we are members of Internet and database standards
organizations including the Object Data Management Group and
Java Data Objects Expert Group.


Products

Our product offerings consist of two customer
solutions, Poet eSupplier Solutions and FastObjects by Poet. Our
Poet eSupplier Solutions product line provides a tool for
businesses to efficiently manage and exchange electronic
catalogs over the Internet for electronic purchasing systems
such as the Ariba Procurement system, the Commerce One
Marketplace System and the SAP Procurement System, among others.
Our FastObjects by Poet offering provides companies with an
object-oriented database management system that can be embedded
as a high performance component into our customers
applications and systems.



| |                                                
| | -----------------------------------------------
| | The Poet eSupplier Solutions Product
    Family

Our Poet eSupplier Solutions product family
consists of applications that provide a comprehensive electronic
catalog system that enables companies of all sizes to seamlessly
conduct B2B e-commerce. These applications provide a turnkey
solution to create electronic catalogs from existing internal
information systems and databases, to manage the processes to
automate customization and distribution and aggregation of these
catalogs, and to provide advanced search functionality on 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 eSupplier Solutions product
family 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. Our eSupplier Solutions offerings include
eSupplierLink, eSupplierWeb, eBuyerCatalog, and eSupplierPort.

Poet eSupplierLink.Poet eSupplierLink is a turnkey solution that gives MRO
(maintenance, repair, and operations) suppliers of any size,
from any industry, regardless of infrastructure or e-commerce
strategy, the ability to easily create, manage and distribute
product catalogs in any format over the Internet. eSupplierLink
delivers measurable business benefits by giving suppliers global
reach and fast time to market without disruptions to their
existing business models and IT infrastructure. It helps create
new electronic sales channels and encourage buyer loyalty by
enabling suppliers to maintain rich content, customize it for
each buyer and distribute it to any eProcurement system or
eMarketplace.

Poet eSupplierWeb.Poet eSupplierWeb offers eMarketmakers and Application Service
Providers (ASP) a hosted, highly scalable solution that
makes it easy for suppliers to create, maintain and distribute
customized eCatalogs over the Internet. eSupplierWeb takes a
unique self-service approach that removes enablement barriers
for suppliers, reduces the administrative burden on
eMarketmakers and ASPs, and encourages stronger, more meaningful
supplier-buyer relationships. eSupplierWeb enables eMarketmakers
to immediately connect thousands of suppliers and achieve early
liquidity for their eMarketplaces. Buyers benefit from the
currency and accuracy of information as well a greater selection
of competitively priced products. Poet eSupplierWeb enables ASPs
to provide comprehensive catalog management functionality to
customers in both vertical and horizontal industries without
requiring them to install and maintain a resident application.
With eSupplierWeb, ASPs can host eCatalogs for their existing
customers, attract new customers, and enhance their strategic
position in B2B e-commerce.

Poet eSupplierPort.Poet eSupplierPort is a hosted, highly scalable solution that
helps buyers optimize their eProcurement system. Poet
eSupplierPort Standard Edition enables buyers to verify,
approve, and customize supplier catalog content before it is
introduced to their eProcurement system. By providing integrated
content validation functionality, the Standard Edition reduces
IT involvement in the procurement process and ensures desired
products are purchased at contractually specified prices. Poet
eSupplierPort Extended Edition incorporates supplier enablement
functionality for buyers to efficiently manage or grow their
supplier group. The Extended Edition makes it possible for
suppliers of all sizes, from any industry, and with virtually
any technical background to create, maintain, and distribute
customized catalogs on a self-service basis. By facilitating
supplier enablement, buyers can increase supplier participation,
promote higher-quality catalogs, and improve the efficiency of
their eProcurement system.

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Poet eBuyerCatalog.Poet eBuyerCatalog is a highly scalable solution that provides
users of procurement systems with a user-friendly search
mechanism. This enhancement to the procurement system offers
hierarchical, full text and phonetic search capabilities to
display and list the articles available for order. Users can
search for products using a wide range of search capabilities
and attributes, compare products, and place the articles into
shopping baskets and send them to the procurement system for
order processing. An efficient search engine is an essential
element of eProcurement systems that will be accepted and used
daily by many thousands of employees. Otherwise, companies run
the risk that their staff will go back to the old method of
ordering from the paper catalog, thus negating the cost savings
that are the key advantage of eProcurement.

The Poet eSupplier Solutions product family
provides users with the following benefits:

Enables Suppliers to Use the Internet More
Efficiently for B2B 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 eSupplier
Solutions product family 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 eSupplier Solutions product
family 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 the 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 eSupplier Solutions product
family 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,
OCI, BMEcat and eClass. cXML and CIF support the compatibility
with the Ariba Operating Resource Management System electronic
purchasing system. 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 used in the German marketplace.
OCI, or Open Catalog Interface, is a standardized interface into
SAPs procurement application. We plan to develop future
versions of the Poet eSupplier Solutions product family 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 eSupplier Solutions product
family has the potential to help establish strong

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business relationships with customers by linking
the companies electronically, which may increase business volume.


We began shipping Version 1.0 of the eSupplier
Solutions (formerly named Poet eCatalog product
family) in September 1999. As of December 31, 2002,
we were shipping version 4.8 of our eSupplier Solutions software
applications.



| |                    
| | -------------------
| | FastObjects by Poet

FastObjects by Poet allows software developers to
build standard applications that require low to zero database
maintenance and administration, high availability, secure access
and storage management and high performance. FastObjects by Poet
supports powerful programming of complex multidimensional data
models, such as those common among Internet applications,
without the performance and programming difficulties often
experienced with relational databases. Since its introduction in
1991 by a predecessor entity, FastObjects by Poet 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 FastObjects by Poet as an integrated data
management engine for a wide variety of products, systems and
applications, including commercial Websites, telecommunications
equipment, medical equipment, industrial 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 of our
subsidiaries, see Statutory Information.

FastObjects by Poet is currently our core product
and continues to represent the basis of our present operations.
The development of FastObjects by Poet was started in 1989 by a
predecessor entity, which began marketing FastObjects by Poet
Version 1.0 in 1991. The latest major version, FastObjects by
Poet 9.0, was released in July 2002. We have licensed our
software to more than 1,000 independent software vendors,
original equipment manufacturers and corporate customers since
1996.

We believe that FastObjects by Poet delivers the
following key benefits to our customers who build applications:

Faster Time to Market.Because data is represented in
FastObjects by Poet 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 FastObjects by Poet reduces
the applications total source code, as well as the time to
program the source code substantially. To further reduce time to
market, FastObjects by Poet eliminates the need to write
database conversion programs for application upgrades and new
applications accessing existing Poet databases.

Low Cost of Ownership.Because FastObjects by Poet needs
virtually no administration and maintenance after being
installed, the product is well suited for applications requiring
a database that is integrated into the application and invisible
to the end-user. Due to these features, FastObjects by Poet 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 FastObjects by Poet 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.FastObjects by Poet
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
FastObjects by Poet enables deployment in a wide variety of
computing environments, reaching from personal computers and
mobile computers to Windows NT and UNIX server
environments. FastObjects by Poet can overcome resource
limitations associated with laptop computers by scaling down
while maintaining the capability to size

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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 Palm, Inc.s Palm device,
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.


Open Systems Approach.FastObjects by Poet is designed as a
platform-independent product capable of working on numerous
standard operating systems. FastObjects by Poet is compatible
with leading operating systems such as Microsoft Windows,
Windriver VxWorks, Sun Solaris, HP-UX and Linux. In addition,
FastObjects by Poet 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.

High Availability.The newest version of FastObjects by Poet provides sophisticated
fail over mechanisms that allow our customers to deploy their
applications into environments where the uninterrupted
availability of the database is mission-critical. Our solution
complements fault tolerant operating system infrastructures.

Security.We have
implemented additional security services for FastObjects by
Poet, that allow our customer to encrypt the database storage
system and the data transport. Our security services go beyond
regular access control and are compatible with emerging
regulations, such as 21 CFR Part 11, a new regulation
issued by the United States Food and Drug administration.

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. Our customers represent a broad
spectrum of enterprises within diverse sectors, including
technology, telecommunications, publishing, defense,
transportation, banking and finance.

See the Consolidated Statements of Operations and
Comprehensive Loss for the detail of our revenues by product,
consulting and training, and support and maintenance. See the
Risk Factor 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 for risks and details associated with
our foreign revenues. See Note 12 of the Notes to
Consolidated Financial Statements for additional information on
segment information, operations by geographic area and
significant customers.

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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         
|
| | Electronic Marketplaces                
|
| | CPGmarket.com                          
| | Eutilia N.V.                           
| | WestEK                                 
| | Mitsubishi Chemical                    
|
| | Software, Technology and Internet      
|
| | ADDISON Software und Service GmbH      
| | Avisium                                
| | AOL (formerly CompuServe Incorporated )
| | Cyra Technologies, Inc.                
| | Digital Zone International A/ S        
| | DVG                                    
| | The ForeFront Group, Inc.              
| | Ganymede Software Inc.                 
| | GSD Software und Datentechnik mbH      
| | Hewlett Packard                        
| | IDS Scheer AG                          
| | IntelliCorp, Inc.                      
| | ipro Consulting GmbH                   
| | Lernout & Hauspie Speech Products N.V. 
| | Mitsubishi Corp.                       
| | On Center Software, Inc.               
| | Pixelpark GmbH                         
| | Philips GmbH                           
| | Pythia Communication & Computer GmbH   
| | Riverton Software                      
| | Schaefer Shop                          
| | Tool, S.A.                             
| | TurboMed EDV GmbH                      

8



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##### Table of Contents





| |                                                                
| | ---------------------------------------------------------------
| | Telecommunications Equipment and Embedded
    Systems          
|
| | AM Communications, Inc.                                        
| | Avaya                                                          
| | Beckman Coulter, Inc.                                          
| | Bosch Telecom GmbH                                             
| | Deutsche Telekom AG                                            
| | Echelon Corporation                                            
| | Ericsson, Inc.                                                 
| | Lucent Technologies Network Systems GmbH                       
| | Lucent Technologies, Inc.                                      
| | Metrohm AG                                                     
| | Nortel Networks                                                
| | The Perkin-Elmer Corporation                                   
| | Rohde & Schwarz International GmbH                             
| | U S West, Inc.                                                 
| | Wandel & Golterman, Inc.                                       
|
| | Health Care                                                    
|
| | Biomèrieux                                                     
| | Immunex                                                        
| | National Board of Medical Examiners                            
|
| | Manufacturing                                                  
|
| | Becton, Dickinson and Company                                  
| | Benteler                                                       
| | Dai Nippon Printing                                            
| | International Truck and Engine Corp.                           
| | Linde                                                          
| | Siemens AG                                                     
| | ThyssenKrupp                                                   
|
| | Other                                                          
|
| | ARINC Incorporated                                             
| | EADS (European Aircraft and Defense Systems,
    formerly DASA)
| | Dassault                                                       
| | Guilbert                                                       
| | National Simulation Center                                     

Selling And Marketing

We market our products primarily through our
direct sales force and indirect sales channels. As of
December 31, 2002, our direct sales force consisted of
21 sales representatives and sales support personnel, 3 of
whom are based in the U.S. and 18 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.

9



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In marketing FastObjects by Poet, 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 can integrate
our database into their own systems.

The Poet eSupplier Solutions product family is
targeted at small, medium and large supplier organizations,
operators of electronic marketplaces, application service
providers, and purchasing departments of Fortune 1000
companies. We sell our Poet eSupplier Solutions product family
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 and external development.
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,
2002, comprised 28 of our 80 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.

We have increasingly utilized external
development resources in Romania through a third party on a time
and material basis. These resources are available at
substantially lower costs than development resources in Germany
and they provide us with more flexibility in adjusting our
resources to changes in the business environment. In fiscal 2002
we spent $700,000 for these resources. As of December 31,
2002, 16 external engineers were working on Poet related
development projects.

Our research and development expenditures,
including purchased software, for fiscal 2002, 2001 and 2000
were $3.9 million, $3.9 million and $4.4 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
    Progress Software Corporation. (which acquired our competitor
    eXcelon Inc.), Versant Corporation, and Objectivity, Inc.;
|
| |  | Other content management companies, such as
    Requisite Technology, Inc., SAQQARA Systems, Inc., and Heiler
    Software AG; 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, and vendors of ERP
    systems like SAP AG and Oracle Corporation.                                                                                

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We believe that our competitive advantages over
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 presently own the U.S. trademarks
POET, FastObjects, and eSupplier
Solutions. Our German subsidiary, Poet Software GmbH, owns
the trademarks POET, FastObjects, and
eSupplier Solutions 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, and
Topic Developer Toolkit from Verity, Inc., a text search engine
that is an optional function of FastObjects by Poet. 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.

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 personnel for whom
competition is intense. Approximately half of our employees hold
university degrees. As of December 31, 2002, the Company
had a total of 80 employees, 94% 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.

Additional Information

Our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge on our website at www.poet.com, on the
website of the Frankfurt

11



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Stock Exchange at http://deutsche-boerse.com, and
on the website of the Securities and Exchange Commission at
www.sec.gov.







|        |           
|------- | ----------
|Item 2. | Properties

Our headquarters, as well as the headquarters of
our subsidiary Poet Software Corporation, are currently located
in a leased facility in Foster City, California, consisting of
approximately 1,778 square feet under a one-year lease,
which expires in December 2003. Prior to that our headquarters
were located San Mateo, California, and consisted of
12,118 square feet under a four-year lease, which was to
expire in April 2004. As part of our restructuring efforts, we
reached a settlement with our former landlord for the lease to
terminate on November 30, 2002. We paid a lease termination
fee of $200,000 as part of the settlement. These expenses have
been recorded as part of the restructuring costs during the year
ended December 31, 2002. For more detail on our
restructuring efforts, please refer to Note 13 to our
consolidated financial statements elsewhere in this report.

Our other primary offices are located in the
cities of Hamburg and Munich, Germany and consist of
approximately 32,850 and 11,250 square feet, respectively.
Our subsidiary, Poet Software GmbH, in which our research and
development efforts are based, operates out of these locations.
As part of our restructuring efforts we reached a settlement
with the landlord of our Munich office space for the lease to
terminate on December 31, 2002, three years earlier than
the December 31, 2005 termination date contained in the
lease. We paid a lease termination fee of $239,000 as part of
the settlement. These expenses have been recorded as part of the
restructuring costs during the year ended December 31,
2002. For more detail on the restructuring, please refer to our
consolidated financial statements and notes thereto included in
Part II, Item 8. In Munich we are now leasing
approximately 3,492 square feet from the same landlord.
This lease will expire on December 31, 2007. The office
lease in Hamburg expires in March 2003. We will move to new
office space in March 2003 near the current office location in
Hamburg. The new office lease consists of approximately
12,600 square feet and the lease will expire in
March 2006.

Aside from our U.S. headquarters in Foster
City, California we have closed all of our former sales and
support offices except for the ones in Foster City, California
and Munich, Germany.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We currently do not have any pending material
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

From our initial public offering on
November 17, 1999 until December 31, 2002, Poets
common stock was quoted on the Neuer Markt of the
Frankfurt Stock Exchange under the symbol POXA.
Prior to this time, there was no public market for our stock.
Since January 1, 2003, after the discontinuation of the
Neuer Markt, our stock has been quoted on the Prime
Standard segment of the Frankfurt Stock Exchange under
ISIN US7304471094. For more detail on the Neuer Markt and
its discontinuation, please refer to the

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information below. The following table sets out
the high and low closing prices for each quarterly period during
the past two fiscal years as reported on the Neuer Markt.


|               |  |                     |      |     |  |  |      | 
|-------------- |  | ------------------- | ---- | --- |  |  | ---- | 
|Fiscal 2002    |  | High                |      | Low
|               |  |                     |      |    
|               |  |                    
|               |  | Stock prices       
|               |  | (in EUROs  close  
|               |  | values as traded on
|               |  | the Neuer Markt)   
|First Quarter  |  |                     | 2.10 |     |  |  | 1.15 | 
|Second Quarter |  |                     | 1.30 |     |  |  | 0.80 | 
|Third Quarter  |  |                     | 0.92 |     |  |  | 0.42 | 
|Fourth Quarter |  |                     | 0.87 |     |  |  | 0.49 | 

|               |  |                     |       |     |  |  |      | 
|-------------- |  | ------------------- | ----- | --- |  |  | ---- | 
|Fiscal 2001    |  | High                |       | Low
|               |  |                     |       |    
|               |  |                    
|               |  | Stock prices       
|               |  | (in EUROs  close  
|               |  | values as traded on
|               |  | the Neuer Markt)   
|First Quarter  |  |                     | 13.18 |     |  |  | 4.90 | 
|Second Quarter |  |                     | 5.06  |     |  |  | 1.77 | 
|Third Quarter  |  |                     | 1.91  |     |  |  | 0.73 | 
|Fourth Quarter |  |                     | 3.05  |     |  |  | 0.78 | 

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. On December 31, 2002, there were approximately 76
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 EURO 2,550 (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
EURO 1.53 million (or the equivalent in a foreign
currency) during any one month. Residents must also report any
direct investment outside Germany if such investment exceeds
EURO 51,000 (or the equivalent in a foreign currency).

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 85% of the turnover in traded shares in Germany. With
a total volume of around 3,800 billion EURO in 2001, the
Frankfurt Stock Exchange has consolidated its position as one of
the worlds largest securities trading centers that is
organized as a stock market, ranking third behind NYSE and
Nasdaq.

The Neuer Markt segment of the Frankfurt Stock
Exchange is a relatively new trading segment that was launched
in March 1997. It was designed for innovative, small to mid-size
companies in high-growth industries or in traditional industries
that meet international standards of transparency and public
access to

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information. 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 financial services providers who prove to have the necessary
professional aptitude for securities business on the 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 halfway 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.



| |                                                               
| | --------------------------------------------------------------
| | Discontinuation of the Neuer Markt as of
    December 31, 2002

On November 19, 2002, the Stock Exchange
Council of the Frankfurt Stock Exchange (Deutsche Boerse)
approved new Stock Exchange Rules and Regulations taking effect
on January 1, 2003. In order to enhance integrity and
attractiveness of the capital market for issuers and investors,
they have created two segments of shares and share equivalent
certificates, based upon different levels of transparency
requirements: The Prime Standard and the General Standard.
Deutsche Boerse has also developed a new index framework based
on the new segments. The new segments will replace the Neuer
Markt, which will discontinue operations on December 31,
2003.

Poet Holdings, Inc. applied for admission to the
Prime Standard of Frankfurt Stock Exchange in November 2002. The
Company was awarded authorization for the Prime Standard segment
effective January 1, 2003. Its listing within the Neuer
Markt was terminated accordingly as of December 31, 2002.
Companies listed in the Prime Standard are required to follow
the Exchange Rules of the Frankfurt Stock Exchange, which are
similar to the Rules & Regulations of the Neuer Markt.
They require quarterly reports in accordance with
internationally accepted accounting standards such as US-GAAP,
holding of an annual analysts conference, and the
submission of a corporate calendar.



| |                   
| | ------------------
| | German Tax Matters

The following is a summary of certain tax matters
arising under German tax law in force of which we are aware on
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 our
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

14



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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 our common
stock, including in particular, the effect of tax laws of any
other jurisdiction. The legislation on the taxation of dividends
and capital gains has been changed for such income incurred
after December 31, 2001. The following synopsis provides a
brief and non-comprehensive overview of the taxation on income
derived after such date.




| |                             
| | ----------------------------
| | Income Taxation of Dividends

Any dividends distributed to German holders are,
in principle, subject to German income tax including a
solidarity surcharge and possibly church tax. However, 50% of
the dividends distributed to German individuals and 100% of the
dividends distributed to a German corporate holder after
December 31, 2001 are exempt of the aforementioned taxes.
An individual German holder will be entitled to a deduction of
50% of income-related expenses proved to the tax authorities or,
alternatively, to a fixed allowance of EURO 51 per calendar
year and a tax exemption known as a savers exemption of EURO
1,550 per calendar year in relation to his or her total
income from capital investments including dividends. Legal
entities may not deduct any expenses related to the
aforementioned tax-free dividends.

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.

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 effected within a twelve-month period after their
acquisition. However, in such case only 50% of the gain is
taxable. Capital gains on the disposal of shares held by a
German corporate holder are tax-exempt.

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

15



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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).




| |                   
| | ------------------
| | 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.



| |                                         
| | ----------------------------------------
| | Equity Compensation Plan
    Information

The following table sets forth certain
information, as of December 31, 2002, concerning shares of
common stock authorized for issuance under all of our equity
compensation plans (shares in thousands).

|                                                           |  |                     |           |                     |  |                             |      |  |  |  |           |    
|---------------------------------------------------------- |  | ------------------- | --------- | ------------------- |  | --------------------------- | ---- |  |  |  | --------- | ---
|                                                           |  |                     |           |                     |  | (c)                        
|                                                           |  |                     |           |                     |  | Number of                  
|                                                           |  |                     |           |                     |  | Securities Remaining       
|                                                           |  | (a)                 |           |                     |  | Available for Future       
|                                                           |  | Number of           |           | (b)                 |  | Issuance Under             
|                                                           |  | Securities to be    |           | Weighted Average    |  | Equity Compensation        
|                                                           |  | Issued Upon         |           | Exercise price of   |  | Plans (Excluding Securities
|                                                           |  | Exercise of Options |           | Outstanding Options |  | Reflected in Column (a))   
|                                                           |  |                     |           |                     |  |                            
|Equity compensation plans approved by shareholders         |  |                     | 965,444   |                     |  | $                           | 8.51 |  |  |  | 1,193,076 | (1)
|Equity compensation plans not approved by
    shareholders |  |                     | 199,287   |                     |  | $                           | 1.22 |  |  |  | 50,713    | (2)
|                                                           |  |                     |           |                     |  |                             |      |  |  |  |           |    
|Total equity compensation plans                            |  |                     | 1,164,731 |                     |  | $                           | 7.27 |  |  |  | 1,243,789 |    
|                                                           |  |                     |           |                     |  |                             |      |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This number includes 316,335 shares of
    common stock available for issuance under the 1999 Employee
    Stock Purchase Plan, 85,000 shares available for issuance
    under the 1999 Director Stock Option Plan, and
    791,741 shares available for issuance under the 1995 Stock
    Option Plan.
|   
|(2) | Reflects shares available for issuance under the
    2001 Nonstatutory Stock Option Plan.                                                                                                                                                                                                              

16



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##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated 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.

|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |       |        | 
|---------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                               |                                             |                                         
|                                               |                                             | Year Ended December 31,                 
|                                               |                                             |                                         
|                                               |                                             | 2002                                     |         | 2001  |        | 2000 |         | 1999   |        | 1998
|                                               |                                             |                                          |         |       |        |      |         |        |        |     
|                                               |                                             |                                         
|                                               |                                             | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data: |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Revenues                                       |                                             | $                                        | 7,480   |       |        | $    | 9,811   |        |        | $    | 12,227  |        |        | $ | 10,614 |       |        | $ | 8,917  |      
|Cost of revenues                               |                                             |                                          | 3,090   |       |        |      | 2,755   |        |        |      | 2,822   |        |        |   | 2,376  |       |        |   | 2,546  |      
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                               | Gross profit                                |                                          |         | 4,390 |        |      |         | 7,056  |        |      |         | 9,405  |        |   |        | 8,238 |        |   |        | 6,371 |       
|Operating expenses:                            |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                               | Selling and marketing                       |                                          |         | 7,275 |        |      |         | 12,808 |        |      |         | 13,092 |        |   |        | 7,591 |        |   |        | 5,922 |       
|                                               | Research and development                    |                                          |         | 3,935 |        |      |         | 3,901  |        |      |         | 4,448  |        |   |        | 3,221 |        |   |        | 2,612 |       
|                                               | General and administrative                  |                                          |         | 2,390 |        |      |         | 3,272  |        |      |         | 3,631  |        |   |        | 1,825 |        |   |        | 1,428 |       
|                                               | Restructuring costs                         |                                          |         | 1,832 |        |      |         |       |        |      |         |       |        |   |        |      |        |   |        |      |       
|                                               | Amortization of deferred stock compensation |                                          |         | 72    |        |      |         | 227    |        |      |         | 444    |        |   |        | 626   |        |   |        | 47    |       
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|                                               |                                             | Total operating expenses                 |         |       | 15,504 |      |         |        | 20,208 |      |         |        | 21,615 |   |        |       | 13,263 |   |        |       | 10,009 | 
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Operating loss                                 |                                             |                                          | (11,114 | )     |        |      | (13,152 | )      |        |      | (12,210 | )      |        |   | (5,025 | )     |        |   | (3,638 | )    
|Other, net                                     |                                             |                                          | 535     |       |        |      | 1,091   |        |        |      | 2,375   |        |        |   | (539   | )     |        |   | (352   | )    
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Net loss                                       |                                             | $                                        | (10,579 | )     |        | $    | (12,061 | )      |        | $    | (9,835  | )      |        | $ | (5,564 | )     |        | $ | (3,990 | )    
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      
|Basic and diluted net loss per share           |                                             | $                                        | (0.97   | )     |        | $    | (1.11   | )      |        | $    | (0.92   | )      |        | $ | (2.64  | )     |        | $ | (2.65  | )    
|                                               |                                             |                                          |         |       |        |      |         |        |        |      |         |        |        |   |        |       |        |   |        |      

|                                                            |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|----------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | -
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2002                    |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                            |  |                         |        |      |  |      |        |      |  |     
|                                                            |  |                        
|                                                            |  | (In thousands)         
|BALANCE SHEET DATA:                                         |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |         |  
|Cash, cash equivalents and short-term investments           |  | $                       | 12,036 |      |  | $    | 21,804 |      |  | $    | 29,168 |  |  | $ | 44,350 |  |  | $ | 4,776   |  
|Working capital                                             |  |                         | 11,026 |      |  |      | 21,154 |      |  |      | 28,927 |  |  |   | 42,585 |  |  |   | 2,809   |  
|Total assets                                                |  |                         | 15,212 |      |  |      | 25,638 |      |  |      | 38,907 |  |  |   | 47,600 |  |  |   | 7,533   |  
|Long-term portion of debt and capital lease
    obligations |  |                         |       |      |  |      |       |      |  |      | 95     |  |  |   | 326    |  |  |   | 2,906   |  
|Redeemable convertible preferred stock                      |  |                         |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 15,996  |  
|Total stockholders equity (deficit)                        |  | $                       | 12,401 |      |  | $    | 22,545 |      |  | $    | 34,382 |  |  | $ | 43,064 |  |  | $ | (15,302 | )






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion on our financial
condition and results of operations should be read in
conjunction with the Selected Consolidated Financial
Data our consolidated financial statements and notes
thereto included elsewhere in 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

17



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##### Table of Contents



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 B2B information
exchange.

From commencement of our operations in March 1995
through December 2002, 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, 2002,
we had an accumulated deficit of $54.5 million, and for the
year ended December 31, 2002, our net loss was
$10.6 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 professional consulting, training and
technical support and maintenance services. The software product
license revenue is substantially derived from the sales of our
FastObjects by Poet product line, and to a lesser extent, from
sales of our Poet eSupplier Solutions product line. Product
revenue generated from our FastObjects by Poet product line was
$3.1 million and $4.1 million for years ended
December 31, 2002 and December 31, 2001, respectively.
Product revenue generated from our Poet eSupplier Solutions
product line was $1.3 million and $2.3 million for
years ended December 31, 2002 and December 31, 2001,
respectively.

Substantially all of our customers enter into
maintenance and support agreements upon the commercial release
of each customers application that includes licensed Poet
products. Since 1996, we have had an average renewal rate of
maintenance and support contracts of approximately 70%.

Historically, we have been dependent on a few key
customers. 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.

During the quarter ended September 30, 2002,
we implemented a restructuring plan to reduce our overall
workforce, especially with our United States subsidiary, Poet
Software Corporation. As part of the plan, we switched from
direct sales in the U.S. and Canada to indirect sales channels
by entering into an exclusive reseller agreement for the U.S.
and Canada with FastObjects, Inc., which was founded in October
2002 by David Guinther, our former Vice President of North
American Field Operations  FastObjects. Our
subsidiary, Poet Software Corp., purchased an interest in
FastObjects, Inc., for $300,000 consisting of non-voting
preferred stock. We also decreased the size of our management
team from eight executives on December 31, 2001 to three
executives on December 31, 2002. The actions resulted in
severance and related costs and facility and equipment costs
that totaled $1.8 million for fiscal 2002. We anticipate
the downsizing process to be completed by April 30, 2003.
As part of the restructuring plan, we also reduced our overall
workforce by 43% from 139 employees on June 30, 2002
to 80 employees on December 31, 2002. Severance and
related costs associated with these reductions totaled
$1.2 million. In connection with the downsizing of

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##### Table of Contents



Poet Software Corporation and reduction in
overall workforce, certain facilities leases were terminated and
property and equipment sold. Charges relating to lease
terminations and property and equipment amounted to $676,000.
For more detail on our restructuring see the notes to our
consolidated financial statements included in Item 8.


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
stock compensation within stockholders equity of
$1.6 million through December 31, 2002. We recorded
amortization of deferred stock compensation of $72,000, $227,000
and $444,000 during 2002, 2001, and 2000, respectively. The
amortization expense relates to options awarded to employees in
all operating expense categories. Deferred stock compensation
was fully amortized as of December 31, 2002.



| |                                                                         
| | ------------------------------------------------------------------------
| | Comparison of Results for the Years Ended
    December 31, 2002 and 2001



| |               
| | --------------
| | Total Revenues

Total revenues decreased 23.8% to
7.5 million in the year ended December 31, 2002, from
$9.8 million in the year ended December 31, 2001.

Product revenue.Our
product revenues are comprised primarily of sales of FastObjects
by Poet (FO) and Poet eSupplier Solutions
(ESS) product lines. Product revenues decreased
31.3% to $4.4 million, or 59.1% of total revenues, for the
year ended December 31, 2002, from $6.4 million, or
65.6% of total revenues, in the year ended December 31,
2001. The decrease in product revenues was primarily
attributable to a $1 million decrease in revenue from sales
of the FO product line and a $0.9 million decrease in the
Poet ESS product line. The decrease in product revenues was
mainly due to weakening economic conditions in the United States
and Europe.

Consulting and training
revenues.Consulting and training
revenues decreased 12.3% to $1.3 million, or 17.5% of total
revenues, in the year ended December 31, 2002, from
$1.5 million, or 15.2% of total revenues, in the year ended
December 31, 2001. As consulting services are typically
sold together with products the decrease in attributable
revenues was primarily due to the decrease in related product
sales.

Support and maintenance
revenues.Support and maintenance
revenues decreased 7.1% to $1.8 million, or 23.4% of total
revenues, in the year ended December 31, 2002, from
$1.9 million, or 19.2% of total revenues, in the year ended
December 31, 2001. The decrease is primarily attributable
to a decrease in related license revenues which in turn is
mainly attributable to the assignment of existing support and
maintenance contracts of FastObjects customers in October 2002
to our reseller, FastObjects, Inc. (for more information on
FastObjects, Inc., see the notes to our consolidated financial
statements included in Item 8).



| |                 
| | ----------------
| | Cost of Revenues

Cost of product
revenue.Cost of software product
revenues increased 59.4% to $443,000 in the year ended
December 31, 2002, from $278,000 in the year ended
December 31, 2001. Cost of product revenues includes the
cost of licensing third-party software incorporated into our
products and the costs of packaging and distributing our
products. As a percentage of product revenues, cost of product
revenues increased to 10.0% in the year ended December 31,
2002, from 4.3% in the year ended December 31, 2001. The
increase was attributable primarily to an increase in costs
related to our eSupplier Solutions product family, which
reflects the amortization cost related to the purchase of
software incorporated into our eSupplier Solutions product
family and the write down of inventory due to inventory
obsolescence.

Cost of consulting and training
revenues.Cost of consulting and
training revenues remained almost at $1.3 million for the
year ended December 31, 2002, from $1.3 million for
the year ended December 31, 2001 and, thus remained
basically unchanged. As a percentage of consulting and training
revenues, cost of consulting and training revenues increased to
97.7% in the year ended December 31, 2002, from 84.9% in
the year ended December 31, 2001, due to our fixed
consulting costs in connection with decreased consulting and
training revenues.

19



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##### Table of Contents



Cost of support and maintenance
revenues.Cost of support and
maintenance revenues increased 13.1% to $1.4 million for
the year ended December 31, 2002, from $1.2 million
for the year ended December 31, 2001 as a result of
increased personnel and related compensation. As a percentage of
support and maintenance revenues, cost of support and
maintenance revenues increased to 78.2% in the year ended
December 31, 2002, from 64.2% in the year ended
December 31, 2001. 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 is computed by deducting cost of
product revenue, cost of consulting and training revenues, cost
of support and maintenance revenues and the related amortization
of deferred stock compensation from net revenues.

Gross profit decreased 37.8% to $4.4 million
in the year ended December 31, 2002, from $7.1 million
in the year ended December 31, 2001. The decrease in gross
profit was primarily attributable to a decrease in total
revenues. Gross profit as a percentage of total revenues
decreased to 58.7% in the year ended December 31, 2002,
from 71.9% in the year ended December 31, 2001. The
decrease in gross profit percentage was primarily due to a
decrease in total revenues.



| |                   
| | ------------------
| | Operating Expenses

Selling and
marketing.Selling and marketing
expenses decreased 43.2% to $7.3 million in the year ended
December 31, 2002, from $12.8 million in the year
ended December 31, 2001. The decrease was primarily
attributable to a) a significant reduction of personnel and
related expenses as part of our restructuring efforts in the
second half of fiscal 2002 and b) a decrease in spending on
marketing programs.

Research and
development.Research and development
expenses remained basically unchanged, increasing 0.9% to
$3.9 million in the year ended December 31, 2002, from
$3.9 million in the year ended December 31, 2001.

General and
administrative.General and
administrative expenses decreased 27.0% to $2.4 million in
the year ended December 31, 2002, from $3.3 million in
the year ended December 31, 2001. The decrease was
primarily attributable to the decrease in workforce.

Restructuring costs.During the quarter ended
September 30, 2002, the Company approved and implemented a
plan to reduce its overall workforce and downsize its United
States subsidiary, Poet Software Corporation. The actions
resulted in severance and related costs and facility and
equipment costs that totaled $1.8 million for fiscal 2002.

Amortization of deferred stock compensation.This 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 $1.6 million through
December 31, 2002. We recorded amortization of deferred
compensation of $72,000 and $227,000 during 2002 and 2001,
respectively. The deferred stock compensation was fully
amortized as of December 31, 2002.

Total other income (expense), net.Other income, net decreased 49.6% to
income of $608,000 in the year ended December 31, 2002,
from other income, net $1.2 million in the year ended
December 31, 2001. The decrease in other income, net was
primarily attributable to a decrease in interest income as a
result of lower average cash and equivalent balances in the
fiscal year ended December 31, 2002, as well as the overall
decrease in interest rates on investment balances.



| |                                                                         
| | ------------------------------------------------------------------------
| | Comparison of Results for the Years Ended
    December 31, 2001 and 2000



| |               
| | --------------
| | Total Revenues

Total revenues decreased 19.8% to
$9.8 million in the year ended December 31, 2001, from
$12.2 million in the year ended December 31, 2000.

20



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##### Table of Contents



Product revenue.Our
product revenues are comprised primarily of sales of the
FastObjects by Poet (FO) and Poet eSupplier Solutions (ESS)
product lines. Product revenues decreased 29.4% to
$6.4 million, or 65.6% of total revenues, for the year
ended December 31, 2001, from $9.1 million, or 74.5%
of total revenues, in the year ended December 31, 2000. The
decrease in product revenues was primarily attributable to a
$2.2 million decrease in revenue from sales of the FO
product line and a $0.7 million decrease in the Poet
Content Management Suite (CMS) product line. The decrease in
revenues generated by the FO product line was primarily due to
weakening economic conditions in the United States and Europe
compounded by the events of September 11, 2001. 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 increased 9.9% to $1.5 million, or 15.2% of total
revenues, in the year ended December 31, 2001, from
$1.4 million, or 11.1% of total revenues, in the year ended
December 31, 2000. The increase in consulting and training
revenues was primarily attributable to consulting services
performed in relation to our ESS product line in 2001 that did
not occur in 2000.

Support and maintenance
revenues.Support and maintenance
revenues increased 7.3% to $1.9 million, or 19.2% of total
revenues, in the year ended December 31, 2001, from
$1.8 million, or 14.4% of total revenues, in the year ended
December 31, 2000. The increase was 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 decreased 18.0% to $278,000 in the year ended
December 31, 2001 from $339,000 in the year ended
December 31, 2000. The decrease was primarily attributable
to decreased license fees. As a percentage of product revenues,
cost of product revenues increased to 4.3% in the year ended
December 31, 2001, from 3.7% in the year ended
December 31, 2000. The percentage increase was primarily
due to our fixed product costs in connection with decreased
license fees.

Cost of consulting and training
revenues.Cost of consulting and
training revenues increased 6.1% to $1.3 million for the
year ended December 31, 2001, from $1.2 million for
the year ended December 31, 2000 as a result of increased
consulting and training revenues. As a percentage of consulting
and training revenues, cost of consulting and training revenues
decreased to 85% in the year ended December 31, 2001, from
88.0% in the year ended December 31, 2000, due to higher
utilization of consulting and training personnel.

Cost of support and maintenance
revenues.Cost of support and
maintenance revenues decreased 6.1% to $1.2 million for the
year ended December 31, 2001, from $1.3 million for
the year ended December 31, 2000 as a result of decreased
personnel and related compensation. As a percentage of support
and maintenance revenues, cost of support and maintenance
revenues decreased to 64.2% in the year ended December 31,
2001, from 73.4% in the year ended December 31, 2000. The
decrease in cost of support and maintenance revenues as a
percentage of support and maintenance revenues was primarily
attributable to the decrease in personnel and related
compensation in conjunction with an increase in support and
maintenance revenue.



| |             
| | ------------
| | Gross Profit

Gross profit decreased 25% to $7.1 million
in the year ended December 31, 2001, from $9.4 million
in the year ended December 31, 2000. The decrease in gross
profit was primarily attributable to a decrease in product
revenues, which generate a higher profit margin than service
revenues. Gross profit as a percentage of total revenues
decreased to 71.9% in the year ended December 31, 2001,
from 76.9% in the year ended December 31, 2000. The
decrease in gross profit percentage was primarily due to a
decrease in product revenue.

21



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##### Table of Contents





| |                   
| | ------------------
| | Operating Expenses

Selling and
marketing.Selling and marketing
expenses decreased 2.2% to $12.8 million in the year ended
December 31, 2001, from $13.1 million in the year
ended December 31, 2000. The decrease was primarily
attributable to a decrease of $0.7 million in marketing
expenses partially offset by an increase in sales expenses of
$0.4 million. The increase in the selling related expenses
was primarily attributable to an increase in sales personnel and
related compensation for the first six months of fiscal 2001,
partially offset by a decrease in sales personnel and related
compensation in the last six months of fiscal 2001. The decrease
in marketing expenses was primarily attributable to a decrease
in spending on marketing programs.

Research and
development.Research and development
expenses decreased 12.3% to $3.9 million in the year ended
December 31, 2001, from $4.4 million in the year ended
December 31, 2000. The decrease in research and development
expenses resulted primarily from a decrease in the number of
outside consultants hired to perform research and development.

General and
administrative.General and
administrative expenses decreased 9.9% to $3.3 million in
the year ended December 31, 2001, from $3.6 million in
the year ended December 31, 2000. The decrease was
primarily attributable to a decrease in fees paid to outside
professional service providers.

Amortization of deferred stock
compensation.This 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. The amortization of deferred stock
compensation decreased to $227,000 during 2001 from $444,000 in
2000.

Total other income (expense),
net.Other income, net decreased 51%
to income of $1.2 million in the year ended
December 31, 2001, from income of $2.4 million in the
year ended December 31, 2000. The decrease in income was
primarily attributable to a decrease in interest income as a
result of lower average cash and equivalent balances in the
fiscal year ended December 31, 2001, as well as the overall
decrease in interest rates on investment balances.



| |                                    
| | -----------------------------------
| | 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, 2002, we had
$9.1 million in cash and equivalents, $3.0 million in
short term investments and $11.0 million in working
capital. As of December 31, 2001, we had $10.9 million
in cash and equivalents, $10.9 million in short term
investments, and $21.2 million in working capital. The
decrease in working capital was primarily due to operational
expenditures.

Net cash used in operating activities was
$9.4 million in 2002, $10.9 million in 2001 and
$10.3 million in 2000. Net cash used in operating
activities in each period primarily reflects the net losses in
each period. Net cash used in operating activities in 2002
primarily reflects the net loss (less non-cash expenses) and the
increase in accounts payable and accrued liabilities, the
decrease in accounts receivable partially offset by the decrease
in deferred revenues. Net cash used in operating activities in
2001 primarily reflects the net loss (less non-cash expenses)
and the decrease in accounts receivable. Net cash used in
operating activities in 2000 primarily reflects the net loss
(less non-cash expenses) and the increase in accounts receivable.

Net cash provided by investing activities was
$7.5 million in 2002. Net cash provided by investing
activities was $3.2 million in 2001 and net cash used was
$6.5 million in 2000. Investing activities includes fixed
asset acquisitions of $218,000, $555,000 and $1.3 million
during 2002, 2001 and 2000, respectively. Also included in
investing activities was the net maturity of $8.2 million
of short and long-term investments during 2002 compared to net
maturities of $3.8 million during 2001 and net acquisitions
of $5.1 million of short and long-term investments during
2000. In addition, in 2002 we purchased an interest (consisting
of non-voting preferred stock) in FastObjects, Inc. for
$300,000, and invested another $157,000 to acquire a minority
stake

22



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##### Table of Contents



in Innovative Publikationen GmbH, a privately
held German company. For more information on FastObjects, Inc.
and our investment in it, see the notes to our consolidated
financial statements included in Item 8.


Net cash used in financing activities was $35,000
in 2002, $117,000 in 2001 and $455,000 in 2000. Our financing
activities in fiscal year 2002 used cash primarily to repay debt
and provided cash primarily through the issuance of common stock
issued under our stock plans.

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 service provider. The loan was
due on December 31, 2000. In November 2000, the note
agreement was amended calling for an immediate interest payment
of 230,000 DM ($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.

Capital expenditures were $218,000, $555,000, and
$1.3 million for the years 2002, 2001 and 2000,
respectively. Our capital expenditures consisted of purchases of
operating resources to manage our operations, including
property, furniture, and equipment. For 2003 we currently expect
to make aggregate investments in capital expenditures in the
amount of approximately $300,000, which will be financed largely
through working capital. Approximately 90% of these investments
will be made in Europe and 10% in North America.

In 1997, our subsidiary Poet Software GmbH
entered into a loan agreement with IKB Deutsche Industriebank in
the amount of EURO 767,000 ($804,000 based on the
U.S. Dollar/ EURO exchange rate at December 31, 2002.)
The note matured on March 15, 2002. The principal balance
of the IKB Deutsche Industriebank AG loan at December 31,
2001 of EURO 64,000 ($57,000 based on the U.S. Dollar/
German Deutsche Mark exchange rate at December 31, 2001)
and all related interest was paid in full in February, 2002. The
guarantee that we had given to secure this loan was returned to
us in March of 2002.

We also had non-cancelable operating leases for
office space, and to a lesser extent, equipment and automobiles
of $1.4 million at December 31, 2002 that are payable
through 2007.

We expect to incur significant operating
expenses, particularly selling and marketing and research and
development expenses, for the foreseeable future in order to
execute our business plan. We anticipate that such operating
expenses will constitute a material use of our cash resources.
As a result, our net cash flows will depend heavily on the level
of future sales and our ability to manage operating expenses. In
addition, we may utilize cash resources to fund acquisitions of,
or investments in, complementary businesses, technologies or
product lines. Although management is of the opinion that our
cash resources together with our anticipated cash flows from
operations will be sufficient to meet our working capital
requirements for at least the next 12 months, changes in
customer demand may cause unanticipated fluctuations in our cash
resources. See Note 1 and Note 2 in our Notes to
Consolidated Financial Statements for additional information on
our cash and equivalents and investments.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Summary Disclosures About Contractual
    Obligations and Commercial Commitments

The following summarizes our contractual
obligations at December 31, 2002, and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods:

|                             |                                    |                |       |           |  |       |     |       |  |  |     |     |  |  |     |     | 
|---------------------------- | ---------------------------------- | -------------- | ----- | --------- |  | ----- | --- | ----- |  |  | --- | --- |  |  | --- | --- | 
|                             |                                    |                |       | Less than |  | 1-3   |     | 4-5  
|Contractual Cash Obligations |                                    | Total          |       | 1 Year    |  | Years |     | Years
|                             |                                    |                |       |           |  |       |     |      
|                             |                                    |               
|                             |                                    | (In thousands)
|Operating Leases             |                                    |                | 1,398 |           |  |       | 559 |       |  |  | 633 |     |  |  | 206 |    
|                             |                                    |                |       |           |  |       |     |       |  |  |     |     |  |  |     |    
|                             | Total Contractual Cash Obligations |                | $     | 1,398     |  |       | $   | 559   |  |  | $   | 633 |  |  | $   | 206 | 
|                             |                                    |                |       |           |  |       |     |       |  |  |     |     |  |  |     |    



| |                             
| | ----------------------------
| | Critical Accounting Policies

Our discussion and analysis of financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). The preparation of these
financial statements

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requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an
ongoing basis, we evaluate our estimates, including those
related to revenue recognition, sales warranties and allowance
for doubtful accounts, long-lived assets, income taxes, and
contingencies. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable
under the circumstances. However, the actual results could
differ from those estimates.


We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

Our revenue recognition policy is significant
because our revenue is a key component of our results of
operations. In addition, our revenue recognition determines the
timing of certain expenses, such as commissions and royalties.
Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter.
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.



| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts

We record an allowance for doubtful accounts for
all specific receivables that we judge to be unlikely for
collection. We also record an additional allowance for doubtful
accounts based on size and age of all receivable balances
against which we have not established a specific reserve. We
periodically review these allowances, analyzing each
customers payment history and information regarding
customers creditworthiness known to us.



| |                         
| | ------------------------
| | Restructuring Activities

Beginning in the third quarter of 2002, we have
undertaken significant restructuring initiatives that have
required us to develop formalized plans for exiting our North
American operations. These plans require us to utilize
significant estimates related to expenses for severance and
outplacement costs, lease cancellations, long-term asset write
downs, and other restructuring costs. Given the significance of,
and the timing of the execution of such activities, this process
is complex and involves periodic reassessments of estimates made
at the time of the original plans. The accounting for
restructuring costs and asset impairments requires us to record
provisions and charges when we have a formal and committed plan.
Our policies require us to continually evaluate the adequacy of
the remaining liabilities under our restructuring initiatives.
As the Company continues to evaluate the business, there may be
additional charges for new restructuring activities as well as
changes in estimates to amounts previously recorded



| |             
| | ------------
| | Income Taxes

We have a history of operating losses. These
losses generated a sizable net operating loss carry-forward in
excess of $28.6 million as of December 31, 2002.
Generally accepted accounting principles in the United States of
America require that we record a valuation allowance against the
deferred tax asset associated with this net operating loss
carry-forward if it is more likely than not that we
will not be able to utilize it to offset future taxes. Due to
the size of the net operating loss carry-forward in relation to
our history of unprofitable

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operations, we have a full valuation allowance
against this net deferred tax asset. We currently provide for
income taxes only to the extent that we expect to pay cash taxes
(primarily state taxes and minimum taxes). It is possible,
however, that we could be profitable in the future at levels
which cause management to conclude that it is more likely than
not that we will realize all or a portion of the net operating
loss carry-forward. Upon reaching such a conclusion, we would
immediately record the estimated net realizable value of the
deferred tax asset at that time and would then provide for
income taxes at a rate equal the relevant current local tax
rates rather than the 0% rate currently being used. Subsequent
revisions to the estimated net realizable value of the deferred
tax asset could cause the provision for income taxes to vary
significantly from period to period, although our cash tax
payments would remain unaffected until the benefit of the net
operating loss carry-forward is utilized.


The above listing is not intended to be a
comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP, with no need for
managements judgment in their application. There are also
areas in which managements judgment in selecting any
available alternative would not produce a materially different
result. See our audited consolidated financial statements and
notes thereto included elsewhere in this Annual Report which
contain accounting policies and other disclosures required by
GAAP.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In July 2001, the FASB issued
SFAS No. 141, Business Combinations
(SFAS 141) and SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 requires all business
combinations to be accounted for using the purchase method of
accounting and is effective for all business combinations
initiated after June 30, 2001. The adoption of
SFAS 141 did not have a material effect on the
Companys operating results or financial condition.

SFAS 142 requires goodwill to be tested for
impairment under certain circumstances, and written off when
impaired, rather than being amortized as previous standards
required. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS 142 did
not have a material effect on the Companys operating
results or financial condition.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of
SFAS No. 121. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB No. 30,
Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a
business. However, it retains the requirement in APB No. 30
to report separately discontinued operations and extends that
reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Companies are
required to adopt SFAS No. 144 for fiscal years
beginning after December 15, 2001, but early adoption is
permitted. We adopted SFAS No. 144 on January 1,
2002. The adoption of SFAS 144 did not have a material
effect on the Companys operating results or financial
condition.

In November 2001, the FASB issued an announcement
on the topic of Income Statement characterization of
Reimbursements Received for Out of Pocket Expense Incurred
(EITF-01-14), which was subsequently incorporated in
Emerging Issues Task Force (EITF) No. 01-14.
EITF-01-14 requires companies to characterize reimbursements
received for out of pocket expenses as revenues in the statement
of operations. Historically, the Company has netted
reimbursements received for out of pocket expenses against the
related expenses in the accompanying consolidated statements of
operations. EITF-01-14 has been applied in financial reporting
periods beginning after December 15, 2001 and comparative
financial statements for the prior year have been reclassified
to comply with the guidance in EITF-01-14. EITF-01-14 did not
have a material effect on total consulting and training revenues
or the consulting and training gross margin

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percentages and had no effect on net loss as it
increased both consulting and training revenues and cost of
consulting and training.


In November 2002, the EITF reached a consensus on
Issue No. 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables. The EITF concluded that
revenue arrangements with multiple elements should be divided
into separate units of accounting if the deliverables in the
arrangement have value to the customer on a standalone basis, if
there is objective and reliable evidence of the fair value of
the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by the Company. The
provisions of EITF Issue No. 00-21 are applicable to
agreements entered into in fiscal periods beginning after
June 15, 2003. We are currently determining what effect, if
any, the provisions of EITF Issue No. 00-21 will have on
our operating results or financial condition.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under
that guarantee. We adopted the disclosure requirements of
FIN 45 in the fourth quarter of fiscal 2002 . The
recognition and measurement provisions will be applied to
guarantees issued or modified after December 31, 2002. We
do not expect the adoption of the recognition and measurement
provisions to have a material effect on our operating results or
financial condition.

During July 2002, President George W. Bush signed
the Sarbanes-Oxley Act of 2002 (the Act) into law.
The Act prescribes, among other items, sweeping corporate
governance and oversight changes, new reporting responsibilities
for internal controls, and requires our Chief Executive Officer
and Chief Financial Officer to certify the accuracy of filed
reports. The various provisions of the Act have phase-in
provisions and become effective at different times in the
future. Subsequent to the signing of the Act into law, we have
been actively engaged in defining policies and procedures that
will bring the Company into compliance with the provisions of
the Act. Although the Act contains significant changes to
corporate governance, places greater emphasis on internal
controls, and requires certification of financial statements, we
do not expect the provisions of the Act to have a material
impact upon our financial condition or the results of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses
financial accounting and reporting for costs associated with
exit or disposal activities. The provisions of
SFAS No. 146 require that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred rather than when an entity commits to
an exit plan as previously required. SFAS No. 146 also
requires that such a liability be measured at its fair value and
subsequent changes to the liability be measured using the
credit-adjusted risk-free rate used when the liability was
initially recorded. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after
December 31, 2002 and may affect the timing and amount of
future restructuring.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure which
amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, and provides alternative methods
of transition for a voluntary change to
SFAS No. 123s fair value method of accounting
for stock-based employee compensation. SFAS No. 148
also amends the disclosure requirements of
SFAS No. 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
of the effects of an entitys accounting policy with
respect to stock-based compensation on reported net income and
earnings per share in annual and interim financial statements.
The transition guidance and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending
after December 15, 2002 with earlier application permitted
in certain circumstances. The interim disclosures are effective
for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The
disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation,
regardless of whether the compensation is accounted for using
the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25. As allowed by
SFAS No. 123, the Company will continue to utilize the
accounting method prescribed by APB Opinion No. 25 and has
adopted the disclosure requirements of SFAS No. 148.

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In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which
addresses consolidation by business enterprises of entities that
are not controllable through voting interests or in which the
equity investors do not bear the residual economic risks. These
entities have been commonly referred to as special purpose
entities. The underlying principle behind the new
Interpretation is that if a business enterprise has a
controlling financial interest in an entity, defined in the
guidance as a variable interest entity, the assets, liabilities,
and results of the activities of the variable interest entity
should be included in consolidated financial statements with
those of the business enterprise. The Interpretation explains
how to identify variable interest entities and how an enterprise
should assess its interest in an entity to decide whether to
consolidate that entity. The Company will apply the provisions
of FIN 46 prospectively for all variable interest entities
created after January 31, 2003. For variable interest
entities created before January 31, 2003, we will be
required to consolidate all entities in which we are deemed to
be the primary beneficiary beginning in the third quarter of
fiscal 2003. We are currently determining what effect, if any,
the provisions of FIN 46 will have on our operating results
or financial condition.

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RISK FACTORS

Risks Related To Our Business

In addition to other information in this
Form 10-K, the following risk factors should be carefully
considered in evaluating our business because such factors
currently may have a significant impact on our business,
operating results and financial condition. As a result of the
risk factors set forth below and elsewhere in this
Form 10-K, and the risks discussed in our other Securities
and Exchange Commission filings, actual results could differ
materially from those projected in any forward-looking
statements.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | The Continuing Economic Slowdown,
    Particularly in Information Technology Spending, Will Adversely
    Impact Our Business.

Our business has been adversely impacted by the
economic slowdown, particularly the decline in information
technology spending. Moreover, the economic uncertainty has been
accentuated by the events of September 11, 2001 and the
Iraq crisis. We expect the economic slowdown to continue to
adversely impact our business for at least the next quarter and
perhaps longer. Our ability to forecast the timing and amount of
our sales has been substantially reduced by the economic
slowdown. The adverse impacts from the slowdown include longer
sales cycles, lower average selling prices and reduced bookings
and revenues.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | 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. We cannot be certain that we can achieve
revenue growth 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, 2002, we had an accumulated
deficit of $54.5 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 Do Not Effectively Manage Future
    Growth, Our Business Will Suffer

Even after giving effect to our restructuring
efforts, the scope of our operations and our workforce has
expanded significantly over a relatively short period. Our
ability to compete effectively and to manage future expansion of
our operations, if any, will require us to continue to improve
our financial and management controls, reporting systems and
procedures on a timely basis, and expand, train and manage our
employee workforce.

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 and retain qualified sales personnel.

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. Hiring and retaining service personnel is competitive,
and such personnel require training and education over time to
reach and maintain 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.

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| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail to Meet the Continued Listing
    Requirements of the Frankfurt Stock Exchange, Our Common Stock
    Could Be Delisted and the Liquidity of Our Common Stock Would
    Decline.

Our common stock was listed on the Neuer Markt
until December 31, 2002. In order to enhance the integrity
and attractiveness of the capital market for issuers and
investors, Deutsche Boerse has created two segments of shares
and share equivalent certificates, based upon different levels
of transparency requirements: the Prime Standard and the General
Standard. These new segments are intended to replace the Neuer
Markt. Consequently, Neuer Markt will discontinue operations
December 31, 2003. Effective January 1, 2003 our
common stock has been admitted to the Prime Standard of Deutsche
Boerse and will have to comply with Frankfurt Stock Exchange
Rules & Regulations and most stringent transparency
criteria.

However, Deutsche Boerses intention is to
constantly improve the quality of the legal framework of the
Frankfurt Stock Exchange and to respond closely to the needs of
capital market participants. To further its objective of
restoring investors confidence, Deutsche Boerse might
impose minimum per share trading price requirements for
companies listed in the Prime Standard or impose additional
legal requirements not yet disclosed. If we are not able to
comply with Frankfurt Stock Exchange Rules &
Regulations, our common stock might be delisted from, and
excluded from trading on, the Prime Standard. Delisting could
reduce the ability of holders of our common stock to purchase or
sell shares as quickly and as inexpensively as they have done
historically. Failure to obtain listing on another market or
exchange may make it more difficult for traders to sell our
securities. Broker-dealers may be less willing or able to sell
or make a market in our common stock. Not maintaining a listing
on a major stock market may result in a decrease in the trading
price of our common stock due to a decrease in liquidity,
reduced analyst coverage and less interest by institutions and
individuals in investing in our common stock.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2002 and 2001, 65% and 55%, 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.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the Future, We May Need to Raise
    Additional Capital in Order to Remain Competitive in the
    Electronic Commerce Industry. This Capital May Not Be Available
    on Acceptable Terms, if at All.

Although our existing cash and equivalents and
short-term investment balances are expected to decline further
during fiscal 2003, we believe that our existing balances
together with our anticipated cash flow from operations will be
sufficient to meet our working capital and operating resource
expenditure requirements for at least the next 12 months.
Given the significant changes in our business and results of
operations in fiscal 2002, the decline in cash and equivalents
and investment balances may be greater than presently
anticipated. After fiscal 2003, we may need to raise additional
funds and we cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. If we cannot
raise funds on acceptable terms, if and when needed, we may not
be able to develop or enhance our products and services, take
advantage of future opportunities, grow our business or respond
to competitive pressures or unanticipated requirements, which
could seriously harm our business.



| |                                                           
| | ----------------------------------------------------------
| | We Depend on Strategic Relationships with
    Our Partners

Our ability to maintain and develop strategic
relationships with vendors, resellers and technology partners is
fundamental to the success of our company. If our current or
future strategic partners are not able to

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successfully develop, resell or market our
products, our business could be seriously harmed. We currently
have marketing relationships with companies including Ariba,
Inc., Commerce One, Inc. and SAP AG. There is no guarantee that
these alliances will be successful in creating a larger market
for our product offerings or result in additional business for
our company. If these relationships are not successful, our
business, operating results and financial position could be
seriously harmed.




| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Our Future Revenue is Dependent upon Our
    Ability to Successfully Increase Sales of Our Poet
    eSupplierSolutions Product Family.

We expect that our future financial performance
will depend significantly on revenue from our Poet eSupplier
Solutions product family. We released Version 1.0 of Poet
eCatalog Suite in September 1999. In fiscal 2002, we derived 33%
of our revenue from Poet eSupplier Solutions product family, a
decrease from 36% of product revenue from fiscal 2001. As of
December 31, 2002 we have released version 4.8 of Poet
eSupplier Solutions product family. We face significant risks
inherent in the introduction of this product line. Market
acceptance of the Poet eSupplier Solutions product family 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 eSupplier
Solutions product family 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 eSupplier Solutions product family 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.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Some of Our Customers are Small Emerging
    Growth Companies that May Represent Credit Risks.

Some of our customers include small emerging
growth companies. Many of these companies have limited operating
histories, are operating at a loss and have limited access to
capital. With the significant slowdown in the global economy in
the past years and uncertainty relating to the prospects for
near-term global economic growth, some of these customers may
represent a credit risk. If our customers experience financial
difficulties or fail to experience commercial success, we may
have difficulty collecting on our accounts receivable balances.



| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The FastObjects by Poet Product Family
    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 2002, we derived 70% of our
product revenues from sales of our FastObjects by Poet product
line. We expect a significant portion of our future revenues to
continue to depend on the continued commercial success of our
FastObjects by Poet product line. We cannot be certain that the
FastObjects by Poet product line will continue to receive market
acceptance, or that we will be able to introduce enhanced
versions of FastObjects by Poet product line on a timely basis
to meet the evolving needs of our customers, maintain
compatibility with other third-party systems or remain
competitive. If our FastObjects by Poet product line 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 eSupplier
Solutions product family, makes it difficult to accurately
forecast our revenues, as we have limited 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,

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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 eSupplier Solutions product family
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 Jochen Witte, 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 do not maintain a life insurance policy for any of
our employees. 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 employees in Germany generally have
employment agreements pursuant to which they provide services to
us for an unspecified term and agree to provide six weeks to
three months notice prior to terminating their employment with
us to the end of any calendar quarter. Two of our executive
officers have employment agreements pursuant to which they
provide services to us for an unspecified term and agree to
provide six months notice prior to terminating their employment
with us. The employment agreement with one executive officer has
a fixed term through October 2004. 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. In the current economic environment the competition
for such personnel is significantly less intense than in the
past two years. However, this situation may change if and when
the economic environment starts to strengthen. In such an
environment 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.

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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Results Often Depend on a Small Number
    of Large Orders, and Our 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 fiscal 2002, 10% of our revenues
came from our two most significant customers. Although we do not
believe that the loss of any particular customer would
materially harm our business, our quarterly and annual results
of operations could be harmed if we are 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.

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.

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| |                                                                    
| | -------------------------------------------------------------------
| | 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 Requisite
    Technology, Inc., SAQQARA Systems, Inc., and Heiler Software
    AG; and                                                                                                                                               
|
| |  | other vendors of software that address the same
    customer needs, such as vendors of object-oriented database
    management systems, like Progress Software Corporation (which
    acquired our competitor eXcelon 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., SyBase, Inc., and Oracle Corporation, or vendors of ERP
systems like SAP AG or 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.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2002, we generated
64% of our total revenues through product licenses sold and
services rendered to customers located outside of the United
States, primarily in Germany compared to 53% in fiscal 2001. To
a substantial extent this increase is due to our restructuring
efforts in the second half of 2002 (for more detail on our
restructuring, see the notes to our consolidated financial
statements included in Item 8). 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 maintain and manage our foreign operations
effectively, 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.

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| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 EURO. As a result of our restructuring efforts we
believe that an increasing portion of our international revenues
and costs will be denominated in foreign currencies, especially
in EURO 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 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 or losses increased 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
Foreign Currency Exchange Rate Exposure in
Item 7A.



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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

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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 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.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We May Incur Difficulties in Meeting
    Shareholders Quorum Requirements Due to Our Special Listing
    Situation.

A significant number of our shares are being held
by German shareholders. German banks are not obligated to assist
companies, that are not incorporated under German law, in
distributing shareholder meeting

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materials or proxy cards to those companys
shareholders. Unless these shareholders have contacted us and
provided us with their contact information we have no way to
communicate with those shareholders through the German banking
system. Also German shareholders are typically not familiar with
the proxy based voting system used by US based companies.
Due to these substantial difficulties in contacting our German
shareholders we may have significant difficulties in achieving
shareholder quorum.




| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our Reported Results May Be Adversely
    Affected by Changes in Accounting Principles Generally Accepted
    in the United States of America.

We prepare our financial statements in conformity
with accounting principles generally accepted in the United
States of America (GAAP). GAAP is subject to interpretation by
the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board (FASB), the Securities and
Exchange Commission and various bodies formed to interpret and
create appropriate accounting policies. A change in these
policies or interpretations can have a significant effect on our
reported results, and may even affect the reporting of
transactions completed prior to the announcement of a change.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Compliance with Changing Regulation of
    Corporate Governance and Public Disclosure May Result in
    Additional Expenses.

Changing laws, regulations and standards relating
to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, and new SEC regulations, are
creating uncertainty for companies such as ours. We are
committed to maintaining high standards of corporate governance
and public disclosure. As a result, we intend to invest all
reasonably necessary resources to comply with evolving
standards, and this investment will result in increased general
and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance
activities.

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
eSupplier Solutions product family 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.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | 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

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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 equivalents, short-term investments and long-term
investments, which consists primarily of EURO time deposits,
U.S. government securities, investments in commercial
paper, and money market accounts, and are reported at an
aggregate fair market value of $12.0 million as of
December 31, 2002. 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, 2002, 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 our EURO time deposits and the inter-company
balance with our German subsidiary.

As a result of our restructuring efforts during
the second half of 2002 and the downsizing of our
U.S. operations we anticipate most of our future losses to
be incurred by our European operations in EURO. Therefore, we
have decided to transfer up to 80% of our cash and equivalents
and short-term investments into EURO. This action may result in
significant exchange rate gains or losses due to our reporting
in U.S. dollars.

Although we transact business in various foreign
countries, settlement amounts are usually based on
U.S. dollars or the EURO. Transaction gains or losses have
not been significant in the past and there is no hedging
activity on the EURO or other currencies. Based on the
inter-company balance of $2.5 million at December 31,
2002, a hypothetical 10% adverse change in the EURO 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.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

POET HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                 |  |      |    | 
|---------------------------------------------------------------- |  | ---- | -- | 
|                                                                 |  | Page
|                                                                 |  |     
|Independent Auditors Report                                     |  |      | 39 | 
|Consolidated Balance Sheets                                      |  |      | 40 | 
|Consolidated Statements of Operations and
    Comprehensive Loss |  |      | 41 | 
|Consolidated Statements of Stockholders
    Equity              |  |      | 42 | 
|Consolidated Statements of Cash Flows                            |  |      | 43 | 
|Notes to Consolidated Financial Statements                       |  |      | 44 | 

38



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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 subsidiaries (the
Company) as of December 31, 2002 and 2001, and
the related consolidated statements of operations and
comprehensive loss, stockholders equity and cash flows for
each of the three years in the period ended December 31,
2002. Our audits also included the consolidated financial
statement schedule listed in Item 15(a)2. These
consolidated financial statements and the consolidated financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial
statement schedule 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 the Company at
December 31, 2002 and 2001, and the results of its
operations and its cash flows for the each of the three years in
the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects the information set therein.

DELOITTE & TOUCHE LLP

San Jose, California

January 25, 2003


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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                             |                            |        |         |        |   |        |         |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                                           |                                                                                             |                           
|                                           |                                                                                             | December 31,              
|                                           |                                                                                             |                           
|                                           |                                                                                             | 2002                       |        | 2001   
|                                           |                                                                                             |                            |        |        
|                                           |                                                                                             |                           
|                                           |                                                                                             | (In thousands,            
|                                           |                                                                                             | except share and          
|                                           |                                                                                             | par value amounts)        
|ASSETS                                    
|Current assets:                            |                                                                                             |                            |        |         |        |   |        |        
|                                           | Cash and equivalents                                                                        |                            | $      | 9,055   |        |   | $      | 10,905  |       
|                                           | Short term investments                                                                      |                            |        | 2,981   |        |   |        | 10,899  |       
|                                           | Accounts receivable (net of allowances of $227
    and $508 in 2002 and 2001, respectively) |                            |        | 1,532   |        |   |        | 1,993   |       
|                                           | Inventories and other current assets                                                        |                            |        | 269     |        |   |        | 450     |       
|                                           |                                                                                             |                            |        |         |        |   |        |        
|                                           |                                                                                             | Total current assets       |        |         | 13,837 |   |        |         | 24,247 | 
|Property and equipment, net                |                                                                                             |                            | 541    |         |        |   | 1,074  |        
|Other assets                               |                                                                                             |                            | 834    |         |        |   | 317    |        
|                                           |                                                                                             |                            |        |         |        |   |        |        
|Total assets                               |                                                                                             | $                          | 15,212 |         |        | $ | 25,638 |        
|                                           |                                                                                             |                            |        |         |        |   |        |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|                                          
|Current liabilities:                       |                                                                                             |                            |        |         |        |   |        |        
|                                           | Accounts payable                                                                            |                            | $      | 513     |        |   | $      | 582     |       
|                                           | Accrued liabilities                                                                         |                            |        | 1,154   |        |   |        | 1,564   |       
|                                           | Restructuring accruals                                                                      |                            |        | 725     |        |   |        |        |       
|                                           | Deferred revenue                                                                            |                            |        | 419     |        |   |        | 890     |       
|                                           | Current portion of long-term obligations                                                    |                            |        |        |        |   |        | 57      |       
|                                           |                                                                                             |                            |        |         |        |   |        |        
|                                           |                                                                                             | Total current liabilities  |        |         | 2,811  |   |        |         | 3,093  | 
|                                           |                                                                                             |                            |        |         |        |   |        |        
|Commitments (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: 2002  10,893,646;
    2001  10,876,912                                |                            |        | 11      |        |   |        | 11      |       
|                                           | Additional paid-in capital                                                                  |                            |        | 66,291  |        |   |        | 66,331  |       
|                                           | Deferred stock compensation                                                                 |                            |        |        |        |   |        | (126    | )     
|                                           | Accumulated deficit                                                                         |                            |        | (54,533 | )      |   |        | (43,954 | )     
|                                           | Accumulated other comprehensive income                                                      |                            |        | 632     |        |   |        | 283     |       
|                                           |                                                                                             |                            |        |         |        |   |        |        
|                                           |                                                                                             | Total stockholders equity |        |         | 12,401 |   |        |         | 22,545 | 
|                                           |                                                                                             |                            |        |         |        |   |        |        
|Total liabilities and stockholders equity |                                                                                             | $                          | 15,212 |         |        | $ | 25,638 |        
|                                           |                                                                                             |                            |        |         |        |   |        |        

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |        |        | 
|----------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                  |                                              |                                         
|                                                                  |                                              | Year Ended December 31,                 
|                                                                  |                                              |                                         
|                                                                  |                                              | 2002                                     |         | 2001  |        | 2000
|                                                                  |                                              |                                          |         |       |        |     
|                                                                  |                                              |                                         
|                                                                  |                                              | (In thousands, except per share amounts)
|Revenues:                                                         |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  | Product                                      |                                          | $       | 4,421 |        |      | $       | 6,435  |        |   | $       | 9,114  |       
|                                                                  | Consulting and training                      |                                          |         | 1,309 |        |      |         | 1,493  |        |   |         | 1,358  |       
|                                                                  | Support and maintenance                      |                                          |         | 1,750 |        |      |         | 1,883  |        |   |         | 1,755  |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Total revenues                                                    |                                              |                                          | 7,480   |       |        |      | 9,811   |        |        |   | 12,227  |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Operating expenses:                                               |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  | Cost of product                              |                                          |         | 443   |        |      |         | 278    |        |   |         | 339    |       
|                                                                  | Cost of consulting and training              |                                          |         | 1,279 |        |      |         | 1,268  |        |   |         | 1,195  |       
|                                                                  | Cost of support and maintenance              |                                          |         | 1,368 |        |      |         | 1,209  |        |   |         | 1,288  |       
|                                                                  | Selling and marketing                        |                                          |         | 7,275 |        |      |         | 12,808 |        |   |         | 13,092 |       
|                                                                  | Research and development                     |                                          |         | 3,935 |        |      |         | 3,901  |        |   |         | 4,448  |       
|                                                                  | General and administrative                   |                                          |         | 2,390 |        |      |         | 3,272  |        |   |         | 3,631  |       
|                                                                  | Restructuring costs                          |                                          |         | 1,832 |        |      |         |       |        |   |         |       |       
|                                                                  | Amortization of deferred stock compensation* |                                          |         | 72    |        |      |         | 227    |        |   |         | 444    |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  |                                              | Total operating expenses                 |         |       | 18,594 |      |         |        | 22,963 |   |         |        | 24,437 | 
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Operating loss                                                    |                                              |                                          | (11,114 | )     |        |      | (13,152 | )      |        |   | (12,210 | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Other income (expense):                                           |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  | Interest expense                             |                                          |         | (2    | )      |      |         | (19    | )      |   |         | (38    | )     
|                                                                  | Interest income and other, net               |                                          |         | 608   |        |      |         | 1,206  |        |   |         | 2,460  |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  | Total other income, net                      |                                          |         | 606   |        |      |         | 1,187  |        |   |         | 2,422  |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Loss before income taxes                                          |                                              |                                          | (10,508 | )     |        |      | (11,965 | )      |        |   | (9,788  | )     
|Income tax expense                                                |                                              |                                          | (71     | )     |        |      | (96     | )      |        |   | (47     | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Net loss                                                          |                                              | $                                        | (10,579 | )     |        | $    | (12,061 | )      |        | $ | (9,835  | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Other comprehensive income (loss)                                 |                                              |                                          | 349     |       |        |      | (117    | )      |        |   | (56     | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Comprehensive loss                                                |                                              | $                                        | (10,230 | )     |        | $    | (12,178 | )      |        | $ | (9,891  | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share (Note 1)                     |                                              | $                                        | (0.97   | )     |        | $    | (1.11   | )      |        | $ | (0.92   | )     
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|Shares used in computing basic and diluted net
    loss per share |                                              |                                          | 10,886  |       |        |      | 10,829  |        |        |   | 10,653  |       
|*Amortization of deferred stock compensation                      |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  | Cost of consulting and training              |                                          | $       | 9     |        |      | $       | 24     |        |   | $       | 51     |       
|                                                                  | Cost of support and maintenance              |                                          |         | 3     |        |      |         | 11     |        |   |         | 20     |       
|                                                                  | Selling and marketing                        |                                          |         | 31    |        |      |         | 100    |        |   |         | 197    |       
|                                                                  | Research and development                     |                                          |         | 21    |        |      |         | 66     |        |   |         | 127    |       
|                                                                  | General and administrative                   |                                          |         | 8     |        |      |         | 26     |        |   |         | 49     |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       
|                                                                  |                                              | $                                        | 72      |       |        | $    | 227     |        |        | $ | 444     |       
|                                                                  |                                              |                                          |         |       |        |      |         |        |        |   |         |       

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------------- | ---------- | ---------- |  | -------------- | -- | ------------ |  | ----------------- | ------ | ------------- |  | ------ | ---- | - |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |              
|                                                                |  | Common Stock                      |            | Additional |  |                |    |              |  | Accumulated Other |        | Total        
|                                                                |  |                                   |            | Paid-in    |  | Deferred Stock |    | Accumulated  |  | Comprehensive     |        | Stockholders
|                                                                |  | Shares                            |            | Amount     |  | Capital        |    | Compensation |  | Deficit           |        | Income (Loss) |  | Equity
|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |       
|                                                                |  |                                  
|                                                                |  | (In thousands, except share data)
|Balances at January 1, 2000                                     |  |                                   | 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  |  
|Common stock issued under stock plans, net of
    cancellations |  |                                   | 58,045     |            |  |                |   |              |  |                   | 114    |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   | 114     |  
|Amortization of deferred stock compensation                     |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        | 227  |   |  |   |         |   |  |   |      |   |  |   | 227     |  
|Net loss                                                        |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   | (12,061 | ) |  |   |      |   |  |   | (12,061 | )
|Foreign currency translation adjustment                         |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   | (103 | ) |  |   | (103    | )
|Unrealized loss on investments                                  |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   | (14  | ) |  |   | (14     | )
|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balances at December 31, 2001                                   |  |                                   | 10,876,912 |            |  |                | 11 |              |  |                   | 66,331 |               |  |        | (126 | ) |  |   | (43,954 | ) |  |   | 283  |   |  |   | 22,545  |  
|Common stock issued under stock plans, net of
    cancellations |  |                                   | 16,734     |            |  |                |   |              |  |                   | 14     |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   | 14      |  
|Amortization and reversals of deferred stock
    compensation   |  |                                   |            |            |  |                |    |              |  |                   | (54    | )             |  |        | 126  |   |  |   |         |   |  |   |      |   |  |   | 72      |  
|Net loss                                                        |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   | (10,579 | ) |  |   |      |   |  |   | (10,579 | )
|Foreign currency translation adjustment                         |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   | 346  |   |  |   | 346     |  
|Unrealized loss on investments                                  |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   | 3    |   |  |   | 3       |  
|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balances at December 31, 2002                                   |  |                                   | 10,893,646 |            |  | $              | 11 |              |  | $                 | 66,291 |               |  | $      | 0    |   |  | $ | (54,533 | ) |  | $ | 632  |   |  | $ | 12,401  |  
|                                                                |  |                                   |            |            |  |                |    |              |  |                   |        |               |  |        |      |   |  |   |         |   |  |   |      |   |  |   |         |  

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |         |        |  
|----------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ---- | ---- | ------- | ------- | ----- | - | ------- | ------- | ------ | -
|                                                            |                                                                                 |                                         
|                                                            |                                                                                 | Year Ended December 31,                 
|                                                            |                                                                                 |                                         
|                                                            |                                                                                 | 2002                                     |         | 2001    |      | 2000
|                                                            |                                                                                 |                                          |         |         |      |     
|                                                            |                                                                                 |                                         
|                                                            |                                                                                 | (In thousands)                          
|Cash flows from operating activities:                       |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Net Loss                                                    |                                                                                 | $                                        | (10,579 | )       |      | $    | (12,061 | )       |       | $ | (9,835  | )      
|                                                            | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                          |         |         |      |      |         |         |       |   |         |         |       
|                                                            | Depreciation and amortization                                                   |                                          |         | 742     |      |      |         | 746     |       |   |         | 559     |       
|                                                            | Restructuring expenses non-cash                                                 |                                          |         | 134     |      |      |         |        |       |   |         |        |       
|                                                            | Amortization of deferred stock compensation                                     |                                          |         | 72      |      |      |         | 227     |       |   |         | 444     |       
|                                                            | Amortization of investment discounts                                            |                                          |         | (236    | )    |      |         | (265    | )     |   |         | (18     | )     
|                                                            | Changes in assets and liabilities:                                              |                                          |         |         |      |      |         |         |       |   |         |         |       
|                                                            |                                                                                 | Accounts receivable                      |         |         | 720  |      |         |         | 1,658 |   |         |         | (1,693 | )
|                                                            |                                                                                 | Inventories and other current assets     |         |         | 106  |      |         |         | (24   | ) |         |         | (127   | )
|                                                            |                                                                                 | Other assets                             |         |         | 126  |      |         |         | (95   | ) |         |         | (27    | )
|                                                            |                                                                                 | Accounts payable and accrued liabilities |         |         | 82   |      |         |         | (943  | ) |         |         | 201    |  
|                                                            |                                                                                 | Deferred revenue                         |         |         | (512 | )    |         |         | (143  | ) |         |         | 213    |  
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Net cash used in operating activities                       |                                                                                 |                                          | (9,345  | )       |      |      | (10,900 | )       |       |   | (10,283 | )      
|Cash flows from investing activities:                       |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|                                                            | Purchases of property and equipment                                             |                                          |         | (218    | )    |      |         | (555    | )     |   |         | (1,300  | )     
|                                                            | Purchases of short-term and long-term investments                               |                                          |         | (18,486 | )    |      |         | (25,313 | )     |   |         | (60,824 | )     
|                                                            | Proceeds from sales and maturities of short-term
    investments                |                                          |         | 26,637  |      |      |         | 29,087  |       |   |         | 55,712  |       
|                                                            | Loan receivable issued                                                          |                                          |         |        |      |      |         |        |       |   |         | (2,394  | )     
|                                                            | Investments in FastObjects, Inc. and other                                      |                                          |         | (478    | )    |      |         |        |       |   |         |        |       
|                                                            | Loan receivable payments received                                               |                                          |         |        |      |      |         |        |       |   |         | 2,288   |       
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Net cash provided by (used in) investing
    activities     |                                                                                 |                                          | 7,455   |         |      |      | 3,219   |         |       |   | (6,518  | )      
|Cash flows from financing activities:                       |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|                                                            | Repayments of debt                                                              |                                          |         | (67     | )    |      |         | (231    | )     |   |         | (310    | )     
|                                                            | Common stock issued, net of issuance costs                                      |                                          |         | 32      |      |      |         | 114     |       |   |         | 765     |       
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Net cash provided by (used in) financing
    activities     |                                                                                 |                                          | (35     | )       |      |      | (117    | )       |       |   | 455     |        
|Effect of exchange rate changes on cash and
    equivalents |                                                                                 |                                          | 75      |         |      |      | (44     | )       |       |   | 54      |        
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Decrease in cash and equivalents                            |                                                                                 |                                          | (1,850  | )       |      |      | (7,842  | )       |       |   | (16,292 | )      
|Cash and equivalents  beginning of year                    |                                                                                 |                                          | 10,905  |         |      |      | 18,747  |         |       |   | 35,039  |        
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Cash and equivalents  end of year                          |                                                                                 | $                                        | 9,055   |         |      | $    | 10,905  |         |       | $ | 18,747  |        
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Supplemental disclosure of cash flow information:           |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|                                                            | Interest paid                                                                   |                                          | $       | 2       |      |      | $       | 14      |       |   | $       | 42      |       
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|                                                            | Taxes paid                                                                      |                                          | $       | 57      |      |      | $       | 79      |       |   | $       | 19      |       
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|Non-cash financing and investment activities:               |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        
|                                                            | Deferred stock compensation                                                     |                                          | $       |        |      |      | $       |        |       |   | $       | (130    | )     
|                                                            |                                                                                 |                                          |         |         |      |      |         |         |       |   |         |        

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended December 31, 2002, 2001 and
2000


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 with a remaining
maturity of three months or less when purchased 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 purchased with original maturities greater than
three months and with maturities less than one year from the
balance sheet date are classified as short-term investments.
Investments with maturities one year or greater from the balance
sheet date are classified as long-term investments. The Company
accounts for investments in accordance with (Statement of
Financial Accounting Standards) 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 of
stockholders equity. Cost is based on the specific
identification method for purposes of computing realized gains
and losses.

Property and
Equipment Property and
equipment are stated at cost. Depreciation is generally computed
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.

Marketing and Advertising
Costs Marketing and
advertising costs are expensed as incurred. Advertising expenses
were immaterial for all years presented.

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 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

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POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

established, at which time any additional
development costs would be capitalized in accordance with
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.

Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Such
estimates include, but are not limited to, allowances for
uncollectible accounts receivable, depreciation and
amortization, taxes and contingencies. Actual results could
differ from those estimates.

Concentration of Credit
Risk Financial instruments
which may potentially subject us to concentrations of credit
risk consist principally of cash equivalents, short-term
investments and accounts receivable. At December 31, 2002,
our short-term investments are in federal agency obligations.
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
estimated credit losses. No individual customer accounted for
more than 10% of revenues in 2002, 2001 or 2000.

Financial
Instruments The carrying
amounts of certain of our financial instruments including cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate fair value due to

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POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

their short maturities. Short-term investments
comprise available-for-sale securities which are carried at fair
value.

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 amounted to
$174,000 in 2002, and were not material in 2001 and 2000.

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.

SFAS No. 123, Accounting for
Stock-Based Compensation, requires the disclosure of pro
forma net loss and net loss per share had we adopted the fair
value method. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ
from our stock option awards. These models also require
subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the
calculated values.

Our calculations were made using the
Black-Scholes option pricing model with the following weighted
average assumptions:

|                        |  |                    |      |                              |  |      |      |      |  |      |      |      |  |  |       |  |  |  |      |  |  |  |      | 
|----------------------- |  | ------------------ | ---- | ---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ----- |  |  |  | ---- |  |  |  | ---- | 
|                        |  |                    |      |                             
|                        |  | Stock Option Plans |      | Employee Stock Purchase Plan
|                        |  |                    |      |                             
|                        |  | 2002               |      | 2001                         |  | 2000 |      | 2002 |  | 2001 |      | 2000
|                        |  |                    |      |                              |  |      |      |      |  |      |      |     
|Risk-free interest rate |  |                    | 2.5% |                              |  |      | 4.2% |      |  |      | 5.9% |      |  |  | 2.09% |  |  |  | 3.3% |  |  |  | 6.0% | 
|Volatility              |  |                    | 131% |                              |  |      | 138% |      |  |      | 146% |      |  |  | 131%  |  |  |  | 138% |  |  |  | 146% | 
|Dividend yield          |  |                    | 0.0% |                              |  |      | 0.0% |      |  |      | 0.0% |      |  |  | 0.0%  |  |  |  | 0.0% |  |  |  | 0.0% | 

The expected life of options under the
Companys Stock Option Plans and the Companys ESPP
plan were estimated at 12 months following the vesting and
at 6 months, respectively. The Companys first ESPP

46



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POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase was in 2000. The Companys
calculations are based on a single option valuation approach and
forfeitures are recognized as they occur (in thousands, except
per share data).

|                                                                                         |  |      |        |      |  |      |        |  |  |   |        | 
|---------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                                         |  | 2002 |        | 2001 |  | 2000
|                                                                                         |  |      |        |      |  |     
|Net loss  as reported                                                                   |  | $    | 10,579 |      |  | $    | 12,061 |  |  | $ | 9,835  | 
|Add: Stock-based compensation expense determined
    using fair value method, net of tax |  |      | 2,772  |      |  | $    | 5,327  |  |  |   | 5,096  | 
|Less: Stock-based compensation included in the
    net loss                              |  |      | 72     |      |  |      | 227    |  |  |   | 444    | 
|                                                                                         |  |      |        |      |  |      |        |  |  |   |        | 
|Net loss  pro forma                                                                     |  |      | 13,279 |      |  |      | 17,161 |  |  |   | 14,487 | 
|                                                                                         |  |      |        |      |  |      |        |  |  |   |        | 
|Basic and diluted earnings per common
    share  as reported                            |  | $    | 0.97   |      |  | $    | 1.11   |  |  | $ | 0.92   | 
|Basic and diluted earnings per common
    share  pro forma                              |  | $    | 1.22   |      |  | $    | 1.58   |  |  | $ | 1.36   | 

Comprehensive Income
(loss) Comprehensive
income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events
and circumstances from non-owner sources and is presented in our
Statements of Operations

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 July
2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations
(SFAS 141) and Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets
(SFAS 142).SFAS 141 requires all business
combinations to be accounted for using the purchase method of
accounting and is effective for all business combinations
initiated after June 30, 2001. The adoption of
SFAS 141 did not have a material effect on the
Companys operating results or financial condition.

SFAS 142 requires goodwill to be tested for
impairment under certain circumstances, and written off when
impaired, rather than being amortized as previous standards
required. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for
entities with fiscal years beginning after March 15, 2001
provided that the first interim period financial statements have
not been previously issued. The adoption of SFAS 142 did
not have a material effect on the Companys operating
results or financial condition.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of
SFAS No. 121. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB No. 30,
Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business.
However, it retains the requirement in APB No. 30 to
report separately discontinued operations and extends that
reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. We adopted
SFAS No. 144 on January 1, 2002. The adoption of
SFAS 144 did not have a material effect on the
Companys operating results or financial condition.

In November 2001, the FASB issued an announcement
on the topic of Income Statement characterization of
Reimbursements Received for Out of Pocket Expense Incurred
(EITF-01-14), which was

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POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subsequently incorporated in Emerging Issues Task
Force (EITF) No. 01-14. EITF-01-14
requires companies to characterize reimbursements received for
out of pocket expenses as revenues in the statement of
operations. Historically, the Company has netted reimbursements
received for out of pocket expenses against the related expenses
in the accompanying consolidated statements of operations.
EITF-01-14 has been applied in financial reporting
periods beginning after December 15, 2001 and comparative
financial statements for the prior year have been reclassified
to comply with the guidance in EITF-01-14.
EITF-01-14 did not have a material effect on total
consulting and training revenues or the consulting and training
gross margin percentages and had no effect on net loss as it
increased both consulting and training revenues and cost of
consulting and training.

In November 2002, the EITF reached a consensus on
Issue No. 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables. The EITF concluded that
revenue arrangements with multiple elements should be divided
into separate units of accounting if the deliverables in the
arrangement have value to the customer on a standalone basis, if
there is objective and reliable evidence of the fair value of
the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by the Company. The
provisions of EITF Issue No. 00-21 are applicable to
agreements entered into in fiscal periods beginning after
June 15, 2003. We are currently determining what effect, if
any, the provisions of EITF Issue No. 00-21 will have on
our operating results or financial condition.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. We adopted the
disclosure requirements of FIN 45 in the fourth quarter of
fiscal 2002. The recognition and measurement provisions will be
applied to guarantees issued or modified after December 31,
2002. We are currently determining what effect, if any, the
adoption of the recognition and measurement provisions of
FIN 45 will have on our operating results or financial
condition.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses
financial accounting and reporting for costs associated with
exit or disposal activities. The provisions of
SFAS No. 146 require that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred rather than when an entity commits to
an exit plan as previously required. SFAS No. 146 also
requires that such a liability be measured at its fair value and
subsequent changes to the liability be measured using the
credit-adjusted risk-free rate used when the liability was
initially recorded. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after
December 31, 2002. There will be no impact from initial
adoption of this standard on our consolidated financial position
or results of operations.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure which
amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, and provides alternative methods
of transition for a voluntary change to
SFAS No. 123s fair value method of accounting
for stock-based employee compensation. SFAS No. 148
also amends the disclosure requirements of
SFAS No. 123 and APB Opinion No. 28,
Interim Financial Reporting, to require disclosure
of the effects of an entitys accounting policy with
respect to stock-based compensation on reported net income and
earnings per share in annual and interim financial statements.
The transition guidance and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending
after December 15, 2002 with earlier application permitted
in certain circumstances. The interim disclosures are effective
for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The
disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation,
regardless of whether the compensation is accounted for using
the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25. As allowed by
SFAS No. 123, the Company will continue to

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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

utilize the accounting method prescribed by APB
Opinion No. 25 and has adopted the disclosure requirements
of SFAS No. 148.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which
addresses consolidation by business enterprises of entities that
are not controllable through voting interests or in which the
equity investors do not bear the residual economic risks. These
entities have been commonly referred to as special purpose
entities. The underlying principle behind the new
Interpretation is that if a business enterprise has a
controlling financial interest in an entity, defined in the
guidance as a variable interest entity, the assets, liabilities,
and results of the activities of the variable interest entity
should be included in consolidated financial statements with
those of the business enterprise. The Interpretation explains
how to identify variable interest entities and how an enterprise
should assess its interest in an entity to decide whether to
consolidate that entity. The Company will apply the provisions
of FIN 46 prospectively for all variable interest entities
created after January 31, 2003. For variable interest
entities created before January 31, 2003, we will be
required to consolidate all entities in which we were deemed to
be the primary beneficiary beginning in the third quarter of
fiscal 2003. We are currently determining what effect, if any,
the provisions of FIN 46 will have on our operating results
or financial condition.

2.     Investments

Short-term investments include the following
available-for-sale securities at December 31, 2002
(in thousands).

|                                   |                                     |           |       |            |  |            |   |            |  |   |   |   |  |   |       |        | 
|---------------------------------- | ----------------------------------- | --------- | ----- | ---------- |  | ---------- | - | ---------- |  | - | - | - |  | - | ----- | ------ | 
|                                   |                                     |           |       | Gross      |  | Gross      |   |           
|                                   |                                     | Amortized |       | Unrealized |  | Unrealized |   | Estimated 
|                                   |                                     | Cost      |       | Gains      |  | Loss       |   | Fair Value
|                                   |                                     |           |       |            |  |            |   |           
|Money market funds                 |                                     | $         | 2,345 |            |  | $          |  |            |  | $ |  |   |  | $ | 2,345 |       
|Commercial paper                   |                                     |           | 625   |            |  |            |  |            |  |   |  |   |  |   | 625   |       
|U.S. government agencies           |                                     |           | 2,978 |            |  |            | 3 |            |  |   |  |   |  |   | 2,981 |       
|EURO time deposit                  |                                     |           | 5,857 |            |  |            |   |            |  |   |   |   |  |   | 5,857 |       
|                                   |                                     |           |       |            |  |            |   |            |  |   |   |   |  |   |       |       
|                                   | Total available for sale securities |           | $     | 11,805     |  |            | $ | 3          |  |   | $ |  |  |   | $     | 11,808 | 
|                                   |                                     |           |       |            |  |            |   |            |  |   |   |   |  |   |       |       
|Included in cash and equivalents   |                                     |           | 8,827 |            |  |            |  |            |  |   |  |   |  |   | 8,827 |       
|Included in short-term investments |                                     |           | 2,978 |            |  |            | 3 |            |  |   |  |   |  |   | 2,981 |       
|                                   |                                     |           |       |            |  |            |   |            |  |   |   |   |  |   |       |       
|                                   | Total available for sale securities |           | $     | 11,805     |  |            | $ | 3          |  |   | $ |  |  |   | $     | 11,808 | 
|                                   |                                     |           |       |            |  |            |   |            |  |   |   |   |  |   |       |       

Short-term investments include the following
available-for-sale securities at December 31, 2001
(in thousands).

|                                   |                                     |           |        |            |  |            |   |            |  |   |     |     |   |   |        |        | 
|---------------------------------- | ----------------------------------- | --------- | ------ | ---------- |  | ---------- | - | ---------- |  | - | --- | --- | - | - | ------ | ------ | 
|                                   |                                     |           |        | Gross      |  | Gross      |   |           
|                                   |                                     | Amortized |        | Unrealized |  | Unrealized |   | Estimated 
|                                   |                                     | Cost      |        | Gains      |  | Loss       |   | Fair Value
|                                   |                                     |           |        |            |  |            |   |           
|Money market funds                 |                                     | $         | 1,143  |            |  | $          |  |            |  | $ |    |     |   | $ | 1,143  |       
|Commercial paper                   |                                     |           | 12,983 |            |  |            | 4 |            |  |   | (6  | )   |   |   | 12,981 |       
|U.S. government agencies           |                                     |           | 6,920  |            |  |            | 4 |            |  |   | (16 | )   |   |   | 6,908  |       
|                                   |                                     |           |        |            |  |            |   |            |  |   |     |     |   |   |        |       
|                                   | Total available for sale securities |           | $      | 21,046     |  |            | $ | 8          |  |   | $   | (22 | ) |   | $      | 21,032 | 
|                                   |                                     |           |        |            |  |            |   |            |  |   |     |     |   |   |        |       
|Included in cash and equivalents   |                                     |           | 10,139 |            |  |            |   |            |  |   | (6  | )   |   |   | 10,133 |       
|Included in short-term investments |                                     |           | 10,907 |            |  |            | 8 |            |  |   | (16 | )   |   |   | 10,899 |       
|                                   |                                     |           |        |            |  |            |   |            |  |   |     |     |   |   |        |       
|                                   | Total available for sale securities |           | $      | 21,046     |  |            | $ | 8          |  |   | $   | (22 | ) |   | $      | 21,032 | 
|                                   |                                     |           |        |            |  |            |   |            |  |   |     |     |   |   |        |       

49



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2002 and 2001 the Company
had $228,000 and $772,000 of cash and equivalents excluded from
the total available for sale securities balances shown.

3.     Property and
Equipment, Net

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

|                                          |       |              |        |       |  |   |        |       | 
|----------------------------------------- | ----- | ------------ | ------ | ----- |  | - | ------ | ----- | 
|                                          |       |             
|                                          |       | December 31,
|                                          |       |             
|                                          |       | 2002         |        | 2001 
|                                          |       |              |        |      
|Computer equipment and software           |       | $            | 1,902  |       |  | $ | 2,925  |      
|Office equipment, furniture and fixtures  |       |              | 807    |       |  |   | 882    |      
|Leasehold improvements                    |       |              |       |       |  |   | 150    |      
|                                          |       |              |        |       |  |   |        |      
|                                          | Total |              |        | 2,709 |  |   |        | 3,957 | 
|Accumulated depreciation and amortization |       |              | (2,168 | )     |  |   | (2,883 | )    
|                                          |       |              |        |       |  |   |        |      
|Property and equipment, net               |       | $            | 541    |       |  | $ | 1,074  |      
|                                          |       |              |        |       |  |   |        |      

4.     Accrued
Liabilities

Accrued liabilities consist of (in thousands):

|                     |       |              |     |       |  |   |     |       | 
|-------------------- | ----- | ------------ | --- | ----- |  | - | --- | ----- | 
|                     |       |             
|                     |       | December 31,
|                     |       |             
|                     |       | 2002         |     | 2001 
|                     |       |              |     |      
|Compensation         |       | $            | 267 |       |  | $ | 544 |      
|Professional fees    |       |              | 223 |       |  |   | 397 |      
|Payroll tax accruals |       |              | 198 |       |  |   | 224 |      
|Other                |       |              | 466 |       |  |   | 399 |      
|                     |       |              |     |       |  |   |     |      
|                     | Total |              | $   | 1,154 |  |   | $   | 1,564 | 
|                     |       |              |     |       |  |   |     |      

5.     Long-Term
Obligations

In 1997, our subsidiary Poet Software GmbH
entered into a loan agreement with IKB Deutsche
Industriebank in the amount of EURO 767,000 ($804,000 based
on the U.S. dollar/ EURO exchange rate at December 31,
2002). The note matured on March 15, 2002. The principal
balance of the IKB Deutsche Industriebank AG loan at
December 31, 2001 of EURO 64,000 (approximately $57,000
based on the U.S. dollar/ German Deutsche Mark exchange
rate at December 31, 2001) and all related interest was
paid in full in February, 2002. The guarantee that we had given
to secure this loan was returned to us in March of 2002.

6.     Stockholders
Equity



| |         
| | --------
| | Warrants

During 1999, warrants to
purchase 35,000 shares of Series A common stock
at an exercise price of $7.04 per share were issued to a
strategic partner. The warrants to the strategic partner were to
expire on April 30, 2004. The value of these warrants was
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 were exercised
in fiscal 2000.

50



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 existing investors in the
Company in connection with the Companys bridge financing.
The estimated fair value of the warrants of $82,639 was recorded
as interest expense in 1998. The warrants expire September 2003.
The value of these warrants was 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 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 September 13,
2003. The value of these warrants was estimated using the
Black-Scholes option pricing model with the following
assumptions: expected life, the term of the option, risk-free
interest rates of 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
(1995 Plan) authorizes the grant of options to
purchase up to 1,927,319 shares 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 three or 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
in November, 1999 with 150,000 shares of common stock
initially reserved. The option grants under the Directors
Plan are automatic and non-discretionary. The Directors
Plan provides for an initial grant of options to each outside
director of 40,000 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 10,000 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.

51



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys 2001 Nonstatutory Stock Option
Plan authorizes the grant of options to purchase up to
250,000 shares of common stock. Nonstatutory stock options
may be granted 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 three or
four year period and expire ten years from the date of the grant.

|                                                      |  |             |           |          |  |   |       | 
|----------------------------------------------------- |  | ----------- | --------- | -------- |  | - | ----- | 
|                                                      |  |             |           | Weighted
|                                                      |  |             |           | Average 
|                                                      |  | Options     |           | Exercise
|Activity under the Stock Option Plans are as follows: |  | Outstanding |           | Price   
|                                                      |  |             |           |         
|Balances, January 1, 2000                             |  |             | 774,479   |          |  | $ | 6.71  | 
|Granted (Weighted average fair value of $37.36)       |  |             | 635,420   |          |  | $ | 36.60 | 
|Exercised                                             |  |             | (203,957  | )        |  | $ | 1.69  | 
|Cancelled                                             |  |             | (156,463  | )        |  | $ | 17.23 | 
|                                                      |  |             |           |          |  |   |       | 
|Balances, December 31, 2000                           |  |             | 1,049,479 |          |  | $ | 24.21 | 
|Granted (Weighted average fair value of $3.08)        |  |             | 625,252   |          |  | $ | 2.43  | 
|Exercised                                             |  |             | (7,593    | )        |  | $ | 1.24  | 
|Cancelled                                             |  |             | (398,394  | )        |  | $ | 22.80 | 
|                                                      |  |             |           |          |  |   |       | 
|Balances, December 31, 2001                           |  |             | 1,268,744 |          |  | $ | 14.06 | 
|Granted (Weighted average fair value of $0.93)        |  |             | 729,250   |          |  | $ | 0.92  | 
|Exercised                                             |  |             | (5,000    | )        |  | $ | 0.55  | 
|Cancelled                                             |  |             | (827,763  | )        |  | $ | 12.14 | 
|                                                      |  |             |           |          |  |   |       | 
|Balances, December 31, 2002                           |  |             | 1,164,731 |          |  | $ | 7.27  | 
|                                                      |  |             |           |          |  |   |       | 

Additional information regarding options
outstanding as of December 31, 2002 is as follows:

|                         |  |                     |           |                  |  |                |      |        |  |                |        |  |  |  |         |  |  |   |        | 
|------------------------ |  | ------------------- | --------- | ---------------- |  | -------------- | ---- | ------ |  | -------------- | ------ |  |  |  | ------- |  |  | - | ------ | 
|                         |  |                     |           |                  |  |               
|                         |  | Options Outstanding |           |                 
|                         |  |                     |           | Options Vested  
|                         |  |                     |           | Weighted         |  |                |      |       
|                         |  |                     |           | Average          |  | Weighted       |      |        |  | Weighted      
|                         |  | Number              |           | Remaining        |  | Average        |      | Number |  | Average       
|Range of Exercise Prices |  | Outstanding         |           | Contractual Life |  | Exercise Price |      | Vested |  | Exercise Price
|                         |  |                     |           |                  |  |                |      |        |  |               
|$0.50-1.14               |  |                     | 496,569   |                  |  |                | 8.98 |        |  | $              | 0.72   |  |  |  | 104,772 |  |  | $ | 0.71   | 
|1.19-1.47                |  |                     | 247,467   |                  |  |                | 8.72 |        |  |                | 1.29   |  |  |  | 80,002  |  |  |   | 1.19   | 
|3.07-7.36                |  |                     | 114,935   |                  |  |                | 7.48 |        |  |                | 4.98   |  |  |  | 82,369  |  |  |   | 5.01   | 
|11.12-18.72              |  |                     | 283,586   |                  |  |                | 7.26 |        |  |                | 13.47  |  |  |  | 205,660 |  |  |   | 13.24  | 
|65.17                    |  |                     | 5,250     |                  |  |                | 7.10 |        |  |                | 65.17  |  |  |  | 4,135   |  |  |   | 65.17  | 
|180.19                   |  |                     | 16,924    |                  |  |                | 7.19 |        |  |                | 180.19 |  |  |  | 14,307  |  |  |   | 180.19 | 
|Total                    |  |                     | 1,164,731 |                  |  |                | 8.32 |        |  | $              | 7.27   |  |  |  | 491,245 |  |  | $ | 12.52  | 

At December 31, 2001 and 2000, options to
purchase 423,610 and 217,642 shares were vested and
exercisable with weighted average exercise prices of $22.71 and
$24.76, respectively. At December 31, 2002,
927,454 shares were available for future grant under the
Plans.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

In connection with grants of certain stock
options, the Company recorded deferred stock compensation of
$316,000 in 1999 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. Deferred
compensation is being amortized to expense using an accelerated
recognition approach over the vesting period of the related
stock options, generally four years.

52



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | 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 in November, 1999
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 than
$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.

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 except for per share data):

|                                                                     |  |                         |         |      |  |      |         |   |  |   |        |  
|-------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                     |  |                        
|                                                                     |  | Year Ended December 31,
|                                                                     |  |                        
|                                                                     |  | 2002                    |         | 2001 |  | 2000
|                                                                     |  |                         |         |      |  |     
|Net loss (numerator), basic and diluted                              |  | $                       | (10,579 | )    |  | $    | (12,061 | ) |  | $ | (9,835 | )
|                                                                     |  |                         |         |      |  |      |         |   |  |   |        |  
|Shares (denominator):                                                |  |                         |         |      |  |      |         |   |  |   |        |  
|Weighted average common shares outstanding                           |  |                         | 10,887  |      |  |      | 10,844  |   |  |   | 10,702 |  
|Weighted average common shares outstanding
    subject to repurchase |  |                         | (1      | )    |  |      | (15     | ) |  |   | (49    | )
|                                                                     |  |                         |         |      |  |      |         |   |  |   |        |  
|Shares used in computing basic and diluted net
    loss per share    |  |                         | 10,886  |      |  |      | 10,829  |   |  |   | 10,653 |  
|                                                                     |  |                         |         |      |  |      |         |   |  |   |        |  
|Net loss per share basic and diluted                                 |  | $                       | (0.97   | )    |  | $    | (1.11   | ) |  | $ | (0.92  | )
|                                                                     |  |                         |         |      |  |      |         |   |  |   |        |  

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:

|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|-------------------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2002                    |           | 2001 |  | 2000
|                                             |  |                         |           |      |  |     
|Shares of common stock subject to repurchase |  |                         |          |      |  |      | 4,940     |  |  |   | 27,200    | 
|Outstanding options                          |  |                         | 1,164,731 |      |  |      | 1,268,744 |  |  |   | 1,049,479 | 
|Warrants                                     |  |                         | 55,739    |      |  |      | 55,739    |  |  |   | 55,739    | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Total                                        |  |                         | 1,220,470 |      |  |      | 1,329,423 |  |  |   | 1,132,418 | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of options   |  | $                       | 7.27      |      |  | $    | 14.06     |  |  | $ | 24.21     | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Weighted average exercise price of warrants  |  | $                       | 6.88      |      |  | $    | 6.88      |  |  | $ | 6.88      | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 

53



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Income
Taxes

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

|                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2002                    |         | 2001 |  | 2000
|                                         |  |                         |         |      |  |     
|Net deferred tax assets and liabilities: |  |                         |         |      |  |      |         |   |  |   |         |  
|Net operating loss carryforwards         |  | $                       | 24,144  |      |  | $    | 17,540  |   |  | $ | 12,526  |  
|Other temporary timing differences       |  |                         | 616     |      |  |      | 968     |   |  |   | 818     |  
|                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|                                         |  |                         | 24,760  |      |  |      | 18,508  |   |  |   | 13,344  |  
|Valuation allowance                      |  |                         | (24,760 | )    |  |      | (18,508 | ) |  |   | (13,344 | )
|                                         |  |                         |         |      |  |      |         |   |  |   |         |  
|Net deferred tax assets                  |  | $                       |        |      |  | $    |        |   |  | $ |        |  
|                                         |  |                         |         |      |  |      |         |   |  |   |         |  

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, 2002, 2001 and 2000, the Company has fully
reserved its net deferred tax assets of $24,760,000, $18,508,000
and $13,344,000, respectively.

The Companys income taxes (benefit)
consisted of the following current tax amounts (in thousands):

|        |  |                         |    |      |  |      |    |  |  |   |    | 
|------- |  | ----------------------- | -- | ---- |  | ---- | -- |  |  | - | -- | 
|        |  |                        
|        |  | Year Ended December 31,
|        |  |                        
|        |  | 2002                    |    | 2001 |  | 2000
|        |  |                         |    |      |  |     
|State   |  | $                       | 71 |      |  | $    | 71 |  |  | $ | 47 | 
|Foreign |  |                         |   |      |  |      | 25 |  |  |   |   | 
|        |  |                         |    |      |  |      |    |  |  |   |    | 
|Total   |  | $                       | 71 |      |  | $    | 96 |  |  | $ | 47 | 
|        |  |                         |    |      |  |      |    |  |  |   |    | 

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

|                                    |  |                         |       |      |  |      |       |    |  |  |       |   
|----------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                    |  |                        
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2002                    |       | 2001 |  | 2000
|                                    |  |                         |       |      |  |     
|Federal statutory tax rate          |  |                         | (35.0 | )%   |  |      | (35.0 | )% |  |  | (35.0 | )%
|State taxes, net of federal benefit |  |                         | (6.0  | )    |  |      | (6.0  | )  |  |  | (6.0  | ) 
|Other                               |  |                         | 0.0   |      |  |      | 1.0   |    |  |  | 1.2   |   
|                                    |  |                         |       |      |  |      |       |    |  |  |       |   
|Change in valuation allowance       |  |                         | 41.0  |      |  |      | 40.0  |    |  |  | 39.8  |   
|                                    |  |                         |       |      |  |      |       |    |  |  |       |   
|Effective tax rate                  |  |                         | 0     | %    |  |      | 0     | %  |  |  | 0     | % 
|                                    |  |                         |       |      |  |      |       |    |  |  |       |   

At December 31, 2002, the Company has net
operating loss carryforwards of $28,563,000, $13,334,000 and
$25,937,000 available to offset future federal, California and
foreign taxable income, respectively. Federal carryforwards
expire beginning in 2008 through 2022 and the California
carryforwards expire beginning 2004 through 2012.

Due to an ownership change that occurred in 1996,
$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,
$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
$4,666,000 for both federal and California purposes. However,
the utilization of net operating loss

54



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, 2001 and 2000 were $6,109,000,
$6,185,000 and $5,104,000, respectively.

9.     Lease
Commitments

The Company leases certain equipment under
capital leases and its facilities under non-cancelable operating
lease agreements. At December 31, 2002, the Company had no
capital lease obligations.

Future minimum rental commitments under
non-cancelable operating leases for office space, and to a
lesser extent for equipment and automobiles, as of
December 31, 2002 are as follows (in thousands):

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|Year Ending December 31,     |  |  
|                             |  |  
|2003                         |  | $ | 559   | 
|2004                         |  |   | 333   | 
|2005                         |  |   | 300   | 
|2006                         |  |   | 129   | 
|2007                         |  |   | 77    | 
|                             |  |   |       | 
|Total minimum lease payments |  | $ | 1,398 | 
|                             |  |   |       | 

Rent expense was $1,257,000, $1,385,000 and
$1,150,000 for the fiscal years ended December 31, 2002,
2001 and 2000, respectively.

10.     Reseller
Agreement for FastObjects by Poet for the U.S.A. and
Canada

In the fourth quarter of fiscal 2002, we changed
our means of selling and marketing FastObjects by Poet from
direct to indirect sales channels. As part of our restructuring
efforts we entered into an exclusive reseller agreement for
U.S.A. and Canada with FastObjects, Inc. The reseller agreement
has an initial term of four years. We have the right to
terminate the reseller agreement anytime if FastObjects, Inc.
fails to meet certain minimum royalty payments to us.

FastObjects, Inc. was founded by our former Vice
President of North American Field Operations-FastObjects in
October 2002. Our subsidiary, Poet Software Corp., purchased
1,999,999 shares of non-voting preferred stock of
FastObjects, Inc. for $300,000.

In addition we agreed to provide a loan to
FastObjects, Inc. of $300,000 to be funded in March 2003.

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

55



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|              |  |                         |       |      |  |      |       |  |  |   |        | 
|------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|              |  |                        
|              |  | Year Ended December 31,
|              |  |                        
|              |  | 2002                    |       | 2001 |  | 2000
|              |  |                         |       |      |  |     
|Revenues(1):  |  |                         |       |      |  |      |       |  |  |   |        | 
|United States |  | $                       | 2,697 |      |  | $    | 4,658 |  |  | $ | 6,136  | 
|Germany       |  |                         | 4,783 |      |  |      | 5,153 |  |  |   | 6,091  | 
|              |  |                         |       |      |  |      |       |  |  |   |        | 
|              |  | $                       | 7,480 |      |  | $    | 9,811 |  |  | $ | 12,227 | 
|              |  |                         |       |      |  |      |       |  |  |   |        | 



---



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

|                   |  |      |     |      |  |   |       | 
|------------------ |  | ---- | --- | ---- |  | - | ----- | 
|                   |  | 2002 |     | 2001
|                   |  |      |     |     
|Long-lived assets: |  |      |     |      |  |   |       | 
|United States      |  | $    | 6   |      |  | $ | 356   | 
|Germany            |  |      | 535 |      |  |   | 718   | 
|                   |  |      |     |      |  |   |       | 
|Total              |  | $    | 541 |      |  | $ | 1,074 | 
|                   |  |      |     |      |  |   |       | 

12.     Restructuring
Costs

During the quarter ended September 30, 2002,
the Company approved and implemented a plan to reduce its
overall workforce, especially with respect to its United States
subsidiary, Poet Software Corporation. As part of the plan, the
Company switched from selling directly in the U.S. and Canada to
indirect sales channels. The Company also decreased the size of
its management team from eight executives on December 31,
2001 to three executives on December 31, 2002. These
actions resulted in severance and related costs and facility and
equipment costs that totaled $1.8 million for fiscal 2002.
The Company anticipates the wind-down process to be completed by
April 30, 2003.

As part of the restructuring plan, the Company
reduced its overall workforce by 43% from 139 employees on
June 30, 2002 to 80 employees by December 31, 2002.
Severance and related costs associated with these reductions
totaled $1.2 million.

In connection with the downsizing of Poet
Software Corporation and reduction in overall workforce, certain
facilities leases were terminated and property and equipment
sold. Charges relating to lease terminations and the sale of
property and equipment amounted to $676,000.

At December 31, 2002, we had $725,000
accrued as a current liability on our balance sheet for
restructuring charges. The following table sets forth an
analysis of the components of the fiscal 2002 restructuring
charge and the payments made against the accrual through
December 31, 2002 (in thousands):

|                             |  |               |       |          |  |          |      |                 |  |                |      |   |  |   |     |  |  |   |     | 
|---------------------------- |  | ------------- | ----- | -------- |  | -------- | ---- | --------------- |  | -------------- | ---- | - |  | - | --- |  |  | - | --- | 
|                             |  |               |       |          |  |          |      |                 |  | Estimated     
|                             |  |               |       |          |  |          |      |                 |  | Remaining Cash
|                             |  |               |       |          |  |          |      | Accrual Balance |  | Payments at   
|                             |  | Restructuring |       | Non-cash |  | Cash     |      | at December 31, |  | December 31,  
|                             |  | Costs         |       | Charges  |  | Payments |      | 2002            |  | 2002          
|                             |  |               |       |          |  |          |      |                 |  |               
|Severance and related costs  |  | $             | 1,156 |          |  | $        |     |                 |  | $              | (878 | ) |  | $ | 278 |  |  | $ | 278 | 
|Facility and equipment costs |  |               | 676   |          |  |          | (134 | )               |  |                | (95  | ) |  |   | 447 |  |  |   | 447 | 
|                             |  |               |       |          |  |          |      |                 |  |                |      |   |  |   |     |  |  |   |     | 
|                             |  | $             | 1,832 |          |  | $        | (134 | )               |  | $              | (973 | ) |  | $ | 725 |  |  | $ | 725 | 
|                             |  |               |       |          |  |          |      |                 |  |                |      |   |  |   |     |  |  |   |     | 

Payments on the remaining severance and
facilities costs of $725,000 extend through April, 2003.

56



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##### Table of Contents



POET HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Quarterly
Financial Data  Unaudited

|                                            |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |        |  
|------------------------------------------- | ------------------ | ---------------------------------------- | ------ | -------- | - | ------------- | ------ | ------------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                            |                    |                                         
|                                            |                    | Three Months Ended                      
|                                            |                    |                                         
|                                            |                    | March 31,                                |        | June 30, |   | September 30, |        | December 31,
|                                            |                    | 2002                                     |        | 2002     |   | 2002          |        | 2002        
|                                            |                    |                                          |        |          |   |               |        |             
|                                            |                    |                                         
|                                            |                    | (In thousands, except per share amounts)
|Net revenues                                |                    | $                                        | 2,168  |          |   | $             | 1,961  |              |   | $ | 1,705  |        |   | $ | 1,646  |       
|Gross profit                                |                    | $                                        | 1,405  |          |   | $             | 1,055  |              |   | $ | 931    |        |   | $ | 999    |       
|Net loss*                                   |                    | $                                        | (2,399 | )        |   | $             | (2,821 | )            |   | $ | (4,239 | )      |   | $ | (1,119 | )     
|Net loss per share:                         |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |       
|                                            | Basic and Diluted* |                                          | $      | (0.22    | ) |               | $      | (0.26        | ) |   | $      | (0.39  | ) |   | $      | (0.10  | )
|Shares used in computing per share amounts: |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |       
|                                            | Basic and Diluted  |                                          |        | 10,877   |   |               |        | 10,881       |   |   |        | 10,893 |   |   |        | 10,893 |  

|                                            |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |        |  
|------------------------------------------- | ------------------ | ---------------------------------------- | ------ | -------- | - | ------------- | ------ | ------------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                            |                    |                                         
|                                            |                    | Three Months Ended                      
|                                            |                    |                                         
|                                            |                    | March 31,                                |        | June 30, |   | September 30, |        | December 31,
|                                            |                    | 2001                                     |        | 2001     |   | 2001          |        | 2001        
|                                            |                    |                                          |        |          |   |               |        |             
|                                            |                    |                                         
|                                            |                    | (In thousands, except per share amounts)
|Net revenues                                |                    | $                                        | 2,749  |          |   | $             | 2,805  |              |   | $ | 1,845  |        |   | $ | 2,412  |       
|Gross profit                                |                    | $                                        | 2,104  |          |   | $             | 2,126  |              |   | $ | 1,171  |        |   | $ | 1,655  |       
|Net loss*                                   |                    | $                                        | (3,616 | )        |   | $             | (2,854 | )            |   | $ | (3,281 | )      |   | $ | (2,310 | )     
|Net loss per share:                         |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |       
|                                            | Basic and Diluted* |                                          | $      | (0.34    | ) |               | $      | (0.26        | ) |   | $      | (0.30  | ) |   | $      | (0.21  | )
|Shares used in computing per share amounts: |                    |                                          |        |          |   |               |        |              |   |   |        |        |   |   |        |       
|                                            | Basic and Diluted  |                                          |        | 10,784   |   |               |        | 10,818       |   |   |        | 10,848 |   |   |        | 10,858 |  



---



|  |                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|* | The sum of the quarterly net loss and net loss
    per share will not necessarily equal the net loss and net loss
    per share for the total year.

57



---



##### Table of Contents








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

Not Applicable.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|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, 2003:

|                   |  |     |    |          |  |                                                             
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Jochen Witte       |  |     | 42 |          |  | President, Chief Executive Officer and Director             
|Herbert May(1)(2)  |  |     | 53 |          |  | Director                                                    
|Gert Koehler(1)(2) |  |     | 53 |          |  | Director                                                    
|Robert Helgerth    |  |     | 44 |          |  | Vice President of Field Operations 
    eSupplier Solutions
|Ludwig Lutter      |  |     | 36 |          |  | Chief Financial Officer                                     



---



|    |                                  
|--- | ---------------------------------
|(1) | Member of audit committee.       
|   
|(2) | Member of compensation committee.

There are no family relationships between any of
the executive officers and directors.

Jochen Witteis a
co-founder of Poet Holdings and has served as our Chief
Executive Officer and director since September 2002. Before that
he served as our Chief Financial Officer since commencement of
operations in 1995 and as our Executive Vice President of
European Operations since July 1999. From March 1995 to July
1999, Mr. Witte also served as one of our directors.
Mr. Witte holds a Master of Science in Business
Administration from the Technical University in Berlin, Germany.

Dr. Gert
Koehlerhas served as a director of
Poet Holdings 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. Koehler holds
Masters degrees in Solid State Physics and in Mathematics from
the University of Tuebingen, 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
the Institut dAdministration Enterprise in France. After
working as management consultant at McKinsey & Co,
Dr. Koehler assumed office as Managing Director of a
technology company within Herbert Quandt group. In 1987,
Dr. Koehler founded Technologieholding, which he built up
into one of the leading high-tech-venture capital companies in
Germany. When Technologieholding was bought by 3i in 2000,
Dr. Koehler served as its Managing Director and was
responsible for high-tech investments in Europe. Today,
Dr. Koehler acts as a member of the advisory bodies of
several venture capital companies, as investor in the high-tech
area and as Managing Director of a number of asset management
companies.

Dr. Herbert Mayjoined the Board of Directors in November 2000 and has served as
Chairman of the Board since September 2002. In addition, he
serves as a member of both the audit committee and the
compensation committee. He has held several leading positions at
Alcatel in both Stuttgart and Paris. His last position at
Alcatel was Head of the Office Communication Division. In 1994,
Dr. May, acting in the position of Spokesman for the
Management Board, 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 consulting and investment company
and is a member of the advisory boards of several IT and
Multimedia companies.

Robert Helgerthhas
served as Vice President of Field Operations-eSupplier Solutions
worldwide since September 2002 and for 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

58



---



##### Table of Contents



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 of Nixdorf Computer.


Ludwig Lutterhas
served as Chief Financial officer since September 2002 and
General Manager of the German subsidiary Poet Software GmbH
since December 12, 1997. Prior to that Mr. Lutter
served in public accounting and tax consulting for KPMG and
other public accounting firms. Mr. Lutter holds a Bachelor
Degree of Science in Business Administration from the University
of Texas.

Additional Information According to Rules and
Regulations Neuer Markt



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Ownership of Common Stock and Options by
    Officers and Directors of Poet Holdings, Inc.

The following table sets forth information with
respect to beneficial ownership of the Companys common
stock and options by each officer and director as of
December 31, 2002:

|                |  |                  |         |                     |  |  |         |    
|--------------- |  | ---------------- | ------- | ------------------- |  |  | ------- | ---
|                |  | Shares of Common |         | Shares of Stock    
|                |  | Stock Owned at   |         | Options Outstanding
|                |  | December 31,     |         | at December 31,    
|Name            |  | 2002             |         | 2002               
|                |  |                  |         |                    
|Robert Helgerth |  |                  | 1,000   |                     |  |  | 200,000 |    
|Gert Koehler(1) |  |                  | 555,436 |                     |  |  | 85,000  |    
|Herbert May(1)  |  |                  |        |                     |  |  | 80,000  |    
|Jochen Witte    |  |                  | 405,717 |                     |  |  | 102,500 | (2)
|Ludwig Lutter   |  |                  | 750     |                     |  |  | 85,500  |    



---



|    |                                                            
|--- | -----------------------------------------------------------
|(1) | Outside, non-executive directors                           
|   
|(2) | Includes an option to purchase 2,500 held by
    Mrs. Witte

At December 31, 2002, shares of stock
options outstanding to non-officer employees totaled
611,731 shares.

During 2002, the following directors and
executive officers of the Company resigned from the Company:

Dirk Bartelswas a
co-founder of Poet Holdings, Inc. and served as President and
Chief Executive Officer and Director of the Company from
commencement of our operations in March 1995 to September 2002.

Mr. Gerhard
Schulmeyerserved as a director of
Poet Holdings, Inc. from May 2001 to July 2002.

David Guintherserved as Vice President of North American Field
Operations  FastObjects at our subsidiary Poet
Software Corporation from July 1999 to October 2002.

Michael Hoganserved
as Vice President of Field Operations  eSupplier
Solutions for North America and Asia-Pacific at our subsidiary
Poet Software Corporation from April 1997 to September 2002.

Joerg Tewesserved
as Vice President of Engineering at our subsidiary Poet Software
GmbH since January 1995 and as our Vice President of Development
and General Manager from September 1997 to March 2002.

Jerry Wongserved as
our Vice President of Finance from March 1997 to June 1999 and
served as our Executive Vice President of U.S. Operations
from July 1999 to September 2002.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures



| |                                                      
| | -----------------------------------------------------
| | Evaluation and disclosure controls and
    procedures

Within 90 days prior to the date of this
report (the Evaluation Date), the Companys Chief Executive
Officer and Chief Financial Officer, carried out an evaluation
of the effectiveness of the Companys disclosure
controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c)).
Based on that evaluation, these officers have concluded that as
of the Evaluation Date, the Companys disclosure controls
and procedures were adequate and designed to ensure that
material information

59



---



##### Table of Contents



relating to the Company and the Companys
consolidated subsidiaries would be made known to them by others
within those entities.




| |                             
| | ----------------------------
| | Changes in internal controls

There were no significant changes in the
Companys internal controls, or to the Companys
knowledge, in other factors that could significantly affect the
Companys disclosure controls and procedures subsequent to
the Evaluation Date.

60



---



##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | 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, 2000,
    2001, 2002 is filed as part of this Annual Report and should be
    read in conjunction with the Financial Statements of Poet
    Holdings, Inc.

|                                                    |  |        
|--------------------------------------------------- |  | -------
|Schedule II  Valuation and
    Qualifying Accounts |  | Page 63



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedules not listed above have been omitted
    because the information required to be set forth therein is not
    applicable or is shown in the consolidated financial statements
    or notes herein.               
|
| | 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.

a) Exhibits

|        |           |                         |  |                                                                                                                                                            
|------- | --------- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                        
|Number  |           | Description of Document
|        |           |                        
|        | 3.1(1)    |                         |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                   
|        | 3.2(2)    |                         |  | Certificate of Amendment to Amended and Restated
    Certificate of Incorporation of the Registrant                                                        
|        | 3.3(2)    |                         |  | Amended and Restated Bylaws of the Registrant.                                                                                                             
|        | 4.1(1)    |                         |  | Form of Registrants common stock
    certificate.                                                                                                         
|        | 10.1(1)   |                         |  | Change of Control Severance Agreement by and
    between the Registrant and Jerry Wong, dated November 14,
    1995.                                       
|        | 10.2(1)   |                         |  | Change of Control Severance Agreement by and
    between the Registrant and Michael Hogan, dated April 2,
    1997.                                        
|        | 10.4.1(1) |                         |  | Employment Contract between POET Software GmbH
    and Jorg Tewes, dated September 29, 1997.                                                               
|        | 10.4.2(1) |                         |  | English Summary of Exhibit 10.4.1.                                                                                                                         
|        | 10.5.1(1) |                         |  | Employment Contract between POET Software GmbH
    and Jochen Witte, dated May 19, 1993.                                                                   
|        | 10.5.2(1) |                         |  | English Summary of Exhibit 10.5.1.                                                                                                                         
|        | 10.6(2)   |                         |  | 1995 Stock Option Plan.                                                                                                                                    
|        | 10.7(3)   |                         |  | 1999 Director Stock Option Plan.                                                                                                                           
|        | 10.8(2)   |                         |  | 1999 Employee Stock Purchase Plan.                                                                                                                         
|        | 10.9(3)   |                         |  | 2001 Nonstatutory Stock Option Plan                                                                                                                        
|        | 10.10(1)  |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and executive officers.                                             
|        | 10.11(1)  |                         |  | Second Amended and Restated Stockholder Rights
    Agreement, dated December 23, 1998.                                                                     
|        | 10.12(1)  |                         |  | Warrant to purchase shares of Series A
    common stock of the Registrant issued to Ariba, Inc., dated
    April 30, 1999.                                 
|        | 10.13(1)  |                         |  | Form of warrant to purchase shares of
    Series D preferred stock of the Registrant.                                                                      
|        | 10.14(1)  |                         |  | Lease Agreement, dated November 23, 1998,
    between Spieker Properties, L.P., and the Registrants
    wholly owned subsidiary POET Software Corporation.

61



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##### Table of Contents



|        |            |                         |  |                                                                                                                                                                                                               
|------- | ---------- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |                        
|Number  |            | Description of Document
|        |            |                        
|        | 10.15.1(1) |                         |  | Office Lease Agreement between the
    Registrants wholly owned subsidiary POET Software GmbH and
    GBR Petersen/ Schroeder/ Schmiel-Vemieter for office space in
    Hamburg, Germany, dated May 29, 1997.
|        | 10.15.2(1) |                         |  | English Summary of Exhibit 10.15.1.                                                                                                                                                                           
|        | 10.16(1)   |                         |  | Agreement between POET Software Corporation and
    Ariba, Inc., dated April 30, 1999.                                                                                                                        
|        | 10.17.1    |                         |  | Employment Contract between POET Software GmbH
    and Ludwig Lutter, dated May 22, 2002.                                                                                                                     
|        | 10.17.2    |                         |  | English Summary of Exhibit 10.17.1.                                                                                                                                                                           
|        | 22.1(1)    |                         |  | Subsidiaries of Registrant.                                                                                                                                                                                   
|        | 23.1       |                         |  | Independent Auditors Consent.                                                                                                                                                                                
|        | 24.1       |                         |  | Power of Attorney (see page 64).                                                                                                                                                                              
|        | 99.1       |                         |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                    



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from Registrants
    Registration Statement on Form S-1 (Reg. No. 333-87267)                                         
|   
|(2) | Incorporated by reference from Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 2001 (Reg. No. 000-28017).
|   
|(3) | Incorporated by reference from Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001 (Reg. No. 000-28017) 

(b) Reports on Form 8-K



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed a report on Form 8-K on
    October 23, 2002, which contained an ad hoc notice
    announcing the restructuring of our United States sales
    operations and a press release as well as an ad hoc notice
    announcing our third quarter results of fiscal 2002.

62



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##### Table of Contents






SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS


|                                 |      |                                              |   |                  |  |              |   |                |  |  |   |      |   |  |   |     | 
|-------------------------------- | ---- | -------------------------------------------- | - | ---------------- |  | ------------ | - | -------------- |  |  | - | ---- | - |  | - | --- | 
|                                 |      |                                             
|                                 |      | Years Ended December 31, 2002, 2001 and 2000
|                                 |      |                                             
|                                 |      | Balance at                                   |   |                 
|                                 |      | Beginning of                                 |   | Charged to Costs |  |              |   | Balance at End
|                                 |      | Period                                       |   | and Expenses     |  | (Deductions) |   | of Period     
|                                 |      |                                              |   |                  |  |              |   |               
|                                 |      |                                             
|                                 |      | (In thousands)                              
|Description                      |      |                                              |   |                  |  |              |   |                |  |  |   |      |   |  |   |    
|Allowance for doubtful accounts: |      |                                              |   |                  |  |              |   |                |  |  |   |      |   |  |   |    
|                                 | 2002 |                                              | $ | 508              |  |              | $ | 284            |  |  | $ | (565 | ) |  | $ | 227 | 
|                                 | 2001 |                                              |   | 478              |  |              |   | 193            |  |  |   | (163 | ) |  |   | 508 | 
|                                 | 2000 |                                              |   | 134              |  |              |   | 391            |  |  |   | (47  | ) |  |   | 478 | 

63



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##### Table of Contents






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
March 31, 2003.



| |                    
| | -------------------
| | POET HOLDINGS, INC.
| | (Registrant)       



| |     |                 
| | --- | ----------------
| | By: | /s/ JOCHEN WITTE

| |                                          
| | -----------------------------------------
| |                                          
| | Jochen Witte                             
| | President and Chief Executive
    Officer




POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Jochen Witte and Ludwig Lutter, 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:

|                               |  |                                       |  |                |  | 
|------------------------------ |  | ------------------------------------- |  | -------------- |  | 
|                               |  |                                       |  |               
|Signature                      |  | Title                                 |  | Date          
|                               |  |                                       |  |               
|                              
|/s/ JOCHEN WITTEJochen Witte   |  | President and Chief Executive Officer |  | March 31, 2003
|                              
|/s/ LUDWIG LUTTERLudwig Lutter |  | Chief Financial Officer               |  | March 31, 2003
|                              
|/s/ GERT KOEHLERGert Koehler   |  | Director                              |  | March 31, 2003
|                              
|/s/ HERBERT MAYHerbert May     |  | Director                              |  | March 31, 2003

64



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##### Table of Contents



Certification Pursuant To 18 U.S.C.
Section 1350,

As Adopted Pursuant To


Section 302 of The Sarbanes-Oxley Act of
2002


I, Jochen Witte, certify that:



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this report 10-K of Poet Holdings, Inc.;                                                                                                                                                                                                                                                                  
|
| | 2.     Based on my
    knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this report, fairly present in all
    material respects the financial condition, results of operations
    and cash flows of the registrant as of, and for, the periods
    presented in this report;                   
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-15 and
    15d-15) for the registrant and have:                                                                                        



| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this report is being prepared;
|
| | (b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this report
    (the Evaluation Date); and                                                                                                      
|
| | (c) Presented in this report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                                     
| | ------------------------------------
| | /s/ JOCHEN WITTE                    
| |                                     
| | President,                          
| | Chief Executive Officer and Director

March 31, 2003

65



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##### Table of Contents



Certification Pursuant To 18 U.S.C.
Section 1350,

As Adopted Pursuant To


Section 302 of The Sarbanes-Oxley Act of
2002


I, Ludwig Lutter, certify that:



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this report 10-K of Poet Holdings, Inc.;                                                                                                                                                                                                                                                                  
|
| | 2.     Based on my
    knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this report, fairly present in all
    material respects the financial condition, results of operations
    and cash flows of the registrant as of, and for, the periods
    presented in this report;                   
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-15 and
    15d-15) for the registrant and have:                                                                                        



| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this report is being prepared;
|
| | (e) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this report
    (the Evaluation Date); and                                                                                                      
|
| | (f) Presented in this report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (d) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ LUDWIG LUTTER      
| |                        
| | Chief Financial Officer

March 31, 2003

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##### Table of Contents



EXHIBIT INDEX

|        |            |                         |  |                                                                                                                                                                                                               
|------- | ---------- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |                        
|Number  |            | Description of Document
|        |            |                        
|        | 3.1(1)     |                         |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                                                                      
|        | 3.2(2)     |                         |  | Certificate of Amendment to Amended and Restated
    Certificate of Incorporation of the Registrant                                                                                                           
|        | 3.3(2)     |                         |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                
|        | 4.1(1)     |                         |  | Form of Registrants common stock
    certificate.                                                                                                                                                            
|        | 10.1(1)    |                         |  | Change of Control Severance Agreement by and
    between the Registrant and Jerry Wong, dated November 14,
    1995.                                                                                          
|        | 10.2(1)    |                         |  | Change of Control Severance Agreement by and
    between the Registrant and Michael Hogan, dated April 2,
    1997.                                                                                           
|        | 10.4.1(1)  |                         |  | Employment Contract between POET Software GmbH
    and Jorg Tewes, dated September 29, 1997.                                                                                                                  
|        | 10.4.2(1)  |                         |  | English Summary of Exhibit 10.4.1.                                                                                                                                                                            
|        | 10.5.1(1)  |                         |  | Employment Contract between POET Software GmbH
    and Jochen Witte, dated May 19, 1993.                                                                                                                      
|        | 10.5.2(1)  |                         |  | English Summary of Exhibit 10.5.1.                                                                                                                                                                            
|        | 10.6(2)    |                         |  | 1995 Stock Option Plan.                                                                                                                                                                                       
|        | 10.7(3)    |                         |  | 1999 Director Stock Option Plan.                                                                                                                                                                              
|        | 10.8(2)    |                         |  | 1999 Employee Stock Purchase Plan.                                                                                                                                                                            
|        | 10.9(3)    |                         |  | 2001 Nonstatutory Stock Option Plan                                                                                                                                                                           
|        | 10.10(1)   |                         |  | Form of Indemnification Agreement between the
    Registrant and each of its directors and executive officers.                                                                                                
|        | 10.11(1)   |                         |  | Second Amended and Restated Stockholder Rights
    Agreement, dated December 23, 1998.                                                                                                                        
|        | 10.12(1)   |                         |  | Warrant to purchase shares of Series A
    common stock of the Registrant issued to Ariba, Inc., dated
    April 30, 1999.                                                                                    
|        | 10.13(1)   |                         |  | Form of warrant to purchase shares of
    Series D preferred stock of the Registrant.                                                                                                                         
|        | 10.14(1)   |                         |  | Lease Agreement, dated November 23,
    1998,between Spieker Properties, L.P., and the Registrants
    wholly owned subsidiary POET Software Corporation.                                                    
|        | 10.15.1(1) |                         |  | Office Lease Agreement between the
    Registrants wholly owned subsidiary POET Software GmbH and
    GBR Petersen/ Schroeder/ Schmiel-Vemieter for office space in
    Hamburg, Germany, dated May 29, 1997.
|        | 10.15.2(1) |                         |  | English Summary of Exhibit 10.15.1.                                                                                                                                                                           
|        | 10.16(1)   |                         |  | Agreement between POET Software Corporation and
    Ariba, Inc., dated April 30, 1999.                                                                                                                        
|        | 10.17.1    |                         |  | Employment Contract between POET Software GmbH
    and Ludwig Lutter, dated May 22, 2002.                                                                                                                     
|        | 10.17.2    |                         |  | English Summary of Exhibit 10.17.1.                                                                                                                                                                           
|        | 22.1(1)    |                         |  | Subsidiaries of Registrant.                                                                                                                                                                                   
|        | 23.1       |                         |  | Independent Auditors Consent.                                                                                                                                                                                
|        | 24.1       |                         |  | Power of Attorney (see page 64).                                                                                                                                                                              
|        | 99.1       |                         |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                    



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|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from Registrants
    Registration Statement on Form S-1 (Reg. No. 333-87267)                                         
|   
|(2) | Incorporated by reference from Registrants
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 2001 (Reg. No. 000-28017).
|   
|(3) | Incorporated by reference from Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001 (Reg. No. 000-28017)