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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 333-87267

Poet Holdings, Inc.

1065 E. Hillsdale Blvd., Suite 205

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

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

     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.

Table of Contents

POET HOLDINGS, INC.

FORM 10-K

INDEX

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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.

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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      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

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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.

      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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      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 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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      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

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	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.

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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

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      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.

      We currently do not have any pending material legal proceedings.

      Not Applicable.

PART II

      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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      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

      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 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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      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.

      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.

      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

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      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 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.

      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

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      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.

      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).

(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.

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      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.”

      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”

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      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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      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.

      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 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.

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      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 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.

      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.

      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.

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      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 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 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.

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      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.

      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

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      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.

      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:

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

      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.

      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.

      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

      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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      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.

      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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      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.

      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.

      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.

      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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      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.

      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.

      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.

      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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      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 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.

      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.”

      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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      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.

      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.

      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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      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.

      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.

      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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      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.

      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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      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.

      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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      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 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.

      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.

      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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      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.

      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 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.

      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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      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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POET HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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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

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

See notes to consolidated financial statements.

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POET HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY