United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2004

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

For the transition period from to

Commission File Number 000-28540

VERSANT CORPORATION
(Exact name of Registrant as specified in its charter)

California		94-3079392
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6539 Dumbarton Circle, Fremont, California 94555
(Address of principal executive offices) (Zip code)

(510) 789-1500
Registrant’s telephone number, including area code:

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 ý No o

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

As of February 27, 2004, there were outstanding 14,822,868 shares of the Registrant’s common stock, no par value.

VERSANT CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended January 31, 2004

Table of Contents

Part I. Financial Information

	Item 1. Financial Statements

	Condensed Consolidated Balance Sheets — January 31, 2004 and October 31, 2003

	Condensed Consolidated Statements of Operations — Three Months Ended January 31, 2004 and January 31, 2003

	Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2004 and January 31, 2003

	Notes to Condensed Consolidated Financial Statements

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3. Quantitative and Qualitative Disclosures About Market Risk

	Item 4. Evaluation of Disclosure Controls and Procedures

Part II. Other Information

	Item 5. Other Information

	Item 6. Exhibits and Reports on Form 8-K

Signature

Certifications

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 31, 2004			October 31, 2003
	(unaudited)

ASSETS

Current assets:
Cash and cash equivalents	$	3,978		$	3,311
Accounts receivable, net of allowance for doubtful accounts of $206 and $258, respectively	3,343			4,023
Other current assets	70			623
Total current assets	7,391			7,957

Property and equipment, net	1,085			1,232
Other assets	838			543
Intangibles, net of accumulated amortization	365			389
Goodwill	948			948
Total assets	$	10,627		$	11,069

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Line of credit	$	—		$	500
Accounts payable	422			739
Accrued liabilities	2,456			2,148
Current portion of deferred revenue	3,455			3,905
Current portion of deferred rent	71			63
Total current liabilities	6,404			7,355

Long-term liabilities, net of current portion:
Long-term portion of deferred revenue	28			83
Long-term portion of deferred rent	289			309
Total long-term liabilities	317			392

Total liabilities	6,721			7,747
Shareholders’ equity:
Convertible preferred stock, no par value	4,912			4,912
Common stock, no par value	55,212			55,096
Accumulated deficit	(56,103		)	(56,708		)
Accumulated other comprehensive income	(115		)	22
Total shareholders’ equity	3,906			3,322
	$	10,627		$	11,069

See accompanying notes to condensed consolidated financial statements.

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
(unaudited)

	Three Months Ended January 31,
	2004		2003

Revenue:
License	$	3,082	$	2,672
Maintenance	1,591		1,567
Professional services	1,693		1,610
Total revenue	6,366		5,849

Cost of revenue:
License	47		777
Maintenance	339		330
Professional services	1,476		1,440
Amortization of purchased intangibles	24		19
Total cost of revenue	1,886		2,566

Gross profit	4,480		3,283

Operating expenses:
Marketing and sales	2,164		2,126
Research and development	961		1,270
General and administrative	807		607
Total operating expenses	3,932		4,003

Income (loss) from operations	548		(720		)

Other income, net	97		80

Income (loss) before taxes	645		(640		)
Provision for income taxes	40		24
Net income (loss)	$	605	$	(664	)

Basic net income (loss) per share	$	.04	$	(.05	)

Diluted net income (loss) per share	$	.03	$	(.05	)

Basic weighted average common shares	14,743		13,374

Diluted weighted average common shares	17,967		13,374

See accompanying notes to condensed consolidated financial statements.

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended January 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss)	$	605		$	(664	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	193			288
Stock-based compensation	—			—
Write off of equipment	—			—
Reduction in Provision for doubtful accounts receivable	(23		)	(241		)
Changes in current assets and liabilities:
Accounts receivable	703			1,743
Other current assets and inventory	553			882
Other assets	55			(13		)
Accounts payable	(317		)	(755		)
Accrued liabilities	308			(1,080		)
Deferred revenue	(505		)	257
Deferred rent	(12		)	(5		)
Net cash provided by operating activities	1,560			412

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs	(350		)	(213		)
Purchases of property and equipment	(22		)	(36		)
Net cash used in investing activities	(372		)	(249		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net	116			43
Principal payments under capital lease obligations	—			(1		)
Net payments under short-term note and bank loan	(500		)	—
Net cash provided by (used in) financing activities	(384		)	42

Effect of foreign exchange rate changes	(137		)	67
Net increase in cash and cash equivalents	667			272
Cash and cash equivalents at beginning of period	3,311			4,427
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,978		$	4,699
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	1		$	—
Income taxes	$	40		$	21
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Mokume acquisition for stock	—			$	630

See accompanying notes to condensed consolidated financial statements.

VERSANT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1. Organization, Operations and Liquidity

References to the “Company” or “Versant” in these notes to condensed consolidated financial statements and in this report refer to Versant Corporation and its subsidiaries. The Company is subject to the risks associated with other companies in a comparable stage of development. These risks include, but are not limited to, fluctuations in operating results, product concentration, a limited customer base, seasonality, a lengthy sales cycle, dependence on the acceptance of object database technology, competition, dependence on key individuals, dependence on international operations, foreign currency fluctuations, and the ability to adequately finance its ongoing operations.

Although the Company had not achieved business volume sufficient to restore profitability and positive cash flow on a consistent basis, the Company’s operating activities provided cash of $1,210,000 and the Company reported a net income of $605,000, for the three months ended January 31, 2004 compared to operating cash outflows of $412,000 and a net loss of $664,000 in the three months ended January 31, 2003. Management anticipates funding future operations and repaying its debt obligations from current cash resources and future cash flows from operations, if any. If financial results fall short of projections, additional debt or equity may be required and the Company may need to implement further cost controls. No assurances can be given that these efforts, if required, will be successful.

On September 27, 2003, the Company entered into an Agreement and Plan of Merger or, “merger agreement”, with Poet Holdings, Inc., a publicly held developer of object database management and e-commerce software whose stock is traded on the Frankfurt Stock Exchange. The signing of the merger agreement was publicly announced in a report on Form 8-K that the Company filed with the Securities and Exchange Commission on September 29, 2003. The merger agreement provides that, subject to the satisfaction of certain conditions, a wholly owned subsidiary of Versant will merge with and into Poet in a statutory merger, which will result in Poet becoming a wholly-owned subsidiary of Versant and in Poet’s stockholders and stock option holders becoming stockholders and option holders of Versant, respectively.

Under the terms of the merger agreement, upon consummation of the merger, each outstanding share of Poet common stock will be converted into and exchanged for 1.4 shares of Versant common stock, and the outstanding options and warrants to purchase Poet common stock will be exchanged for options to purchase shares of Versant common stock at the same exchange ratio.

In order for Versant and Poet to complete the proposed merger, several conditions must first be met, including the condition that Versant’s and Poet’s stockholders each approve and adopt the merger agreement and the merger. In addition, as an integral part of the proposal to approve the merger, Versant’s stockholders must also approve the issuance of shares of Versant common stock and options to purchase Versant common stock in the merger and several proposed amendments of Versant’s articles of incorporation, which will take effect only if the merger is consummated. Versant and Poet currently anticipate that they will hold special meetings of their stockholders to consider and vote on proposals to approve the merger and related matters on March 17, 2004. If the merger agreement with Poet is terminated without consummation of the merger in certain circumstances, then Poet or Versant may become obligated to pay the other party certain termination fees, ranging from $500,000 to $1,000,000.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements included herein (other than the Company’s balance sheet at October 31, 2003) have been prepared by the Company, without audit, pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted United States accounting principles have been condensed or omitted pursuant to these rules and regulations. These condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2003. The unaudited information has been prepared on the same basis as the annual financial statements and, in the opinion of the Company’s management, reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented.

The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending October 31, 2004, or any other future period.

Revenue Recognition

We recognize revenue in accordance with the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” Revenue consists mainly of revenue earned under software license agreements, maintenance support agreements and agreements for consulting and training activities.

We use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date. If there is an undelivered element under the license arrangement, we defer revenue based on vendor-specific objective evidence, or VSOE, of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If VSOE of fair value does not exist for all undelivered elements, we defer all revenue until sufficient evidence exists or all elements have been delivered. We defer revenue from license arrangements that require significant modification of the software and/or non-recurring engineering agreements requiring future obligations not yet performed and record it as revenue using contract accounting.

Revenue from software license arrangements, including prepayment revenue, is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collection is probable. If an acceptance period or other contingency exists, revenue is not recognized until satisfaction of the contingency, customer acceptance or expiration of the acceptance period, as applicable.

We license our data management products to end-users, value-added resellers and distributors through two types of perpetual licenses—development licenses and deployment licenses. Development licenses are typically sold on a per seat basis and authorize a customer to develop an application program that uses Versant Developer Suite (VDS) or Versant enJin. Before that customer may deploy an application that it has developed under our development license, it must purchase deployment licenses based on the number of computers connected to the server that will run the application using our database management system. For certain applications, we offer deployment licenses priced on a per user basis. Pricing of VDS and Versant enJin varies according to several factors, including the number of computer servers on which the application will run and the number of users that will be able to access the server at any one time. Customers may elect to simultaneously purchase development and deployment licenses for an entire project. These development and deployment licenses may also provide for prepayment of a nonrefundable amount for future deployment.

Versant does not currently license our Versant Real-Time Framework (VRTF) product directly to end-users. To date, it has been marketed only as a private-labeled product sold through physical execution systems vendors to whom Versant will provide integration, training and other consulting services.

Resellers, including value-added resellers and distributors, purchase development licenses from us on a per seat basis, on terms similar to those of development licenses sold directly to end-users. Resellers are authorized to sublicense deployment copies of VDS, Versant enJin and VRTF that are either bundled or embedded in the resellers’ applications and sold directly to end-users. Resellers are required to report their distribution of our software and are charged a royalty that is based either on the number of copies of application software distributed or computed as a percentage of the selling price charged by the reseller to its end-user customers. Revenue from royalties is recognized when reported by the reseller, assuming collection is probable.

Revenue from our resale of third-party products is recorded at total contract value with the corresponding cost included in cost of sales when we act as a principal in these transactions and we assume the risks and rewards of ownership, including the risk of loss for collection, delivery or returns. When we do not assume the risks and rewards of ownership, revenue from our resale of third-party products or services is recorded at contract value net of the cost of sales.

simultaneously for an entire project and are attempting to align their payments with deployment schedules. Extended payment terms are generally granted only to customers with a proven ability to pay at the time the order is received, and with prior approval of our senior management.

We defer revenue from maintenance and support arrangements and recognize it ratably over the term of the arrangement, which is typically twelve months. Training and consulting revenue is recognized when a purchase order is received, the services have been performed and collection is deemed probable. Consulting services are billed on an hourly, daily or monthly rate. Training classes are billed based on group or individual attendance.

For the quarter ended January 31, 2004, there were two customers that accounted for 17%, and 16% of total quarterly revenues, respectively. For the quarter ended January 31, 2003, there were three customers that accounted for 18%, 16% and 13% of total quarterly revenues, respectively.

Goodwill and Acquired Intangible Assets

We account for purchases of acquired companies in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations (SFAS 141) and account for the related acquired intangible assets in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets, with the remaining amount being classified as goodwill. Certain intangible assets, such as “acquired technology,” are amortized to expense over time, while in-process research and development costs (“IPR&D”), if any, are charged to operations at the acquisition date.

We test goodwill for impairment in accordance with SFAS 142, which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently upon the occurrence of certain events, as provided in SFAS 142. The Company uses an estimate of undiscounted future cash flows to determine if impairment has occurred. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows to be derived from the asset are less than its carrying value. If the Company determines any of our assets are impaired, the amount of such impairment will be measured as the difference between the carrying value and the fair value of the impaired asset and recorded in earnings during the period of such impairment.

As required by SFAS 142, we ceased amortizing goodwill effective November 1, 2002. Prior to November 1, 2002, Versant amortized goodwill over five years using the straight-line method. Identifiable intangibles (acquired technology) are currently amortized over five years using the straight-line method.

Impairment of Long-Lived Assets

We evaluate long-lived assets, including intangible assets other than goodwill, for impairment in accordance with the provisions of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires that long-lived assets and intangible assets other than goodwill be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. Should events indicate that any of our assets are impaired, the amount of such impairment will be measured as the difference between the carrying value and the fair value of the impaired asset and recorded in earnings during the period of such impairment.

Reserve for Doubtful Accounts

We initially record our provision for doubtful accounts based on historical experience and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider, among other factors: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable (i.e. license, consulting, maintenance, etc.); (iv) our historical provision for doubtful accounts; (v) the credit-worthiness of each customer; (vi) the economic conditions of the customer’s industry; and (vii) general economic conditions.

Accrued Liabilities

Accrued liabilities consist of the following as of (in thousands):

	January 31, 2004		October 31, 2003
Payroll and related	$	1,290	$	934
Customer deposits	190		72
Taxes payable	274		637
Other	702		505
Total	$	2,456	$	2,148

Comprehensive Loss

Comprehensive loss includes unrealized gains and losses on foreign currency translation that have been excluded from net loss and reflected in shareholders’ equity. The tax effects of the components of the comprehensive loss were not significant. For the periods presented, comprehensive loss was as follows (in thousands):

	Three Months Ended January 31, 2004			Three Months Ended January 31, 2003
Net income/(loss)	$	605		$	(664	)
Foreign currency translation adjustment	(137		)	67
Comprehensive loss	$	468		$	(597	)

Stock-Based Compensation

We have elected to continue to account for employee stock-based compensation plans using the intrinsic value method, as prescribed by APB No. 25 Accounting for Stock Issued to Employees and interpretations thereof (collectively “APB 25”) rather than the fair value method prescribed by SFAS No. 123 Accounting for Stock-Based Compensation (SFAS 123) as amended by SFAS 148. Accordingly, deferred compensation is only recorded if the current price of the underlying stock exceeds the exercise price on the date of grant. We record and measure deferred compensation for stock options granted to non-employees at their fair value. Deferred compensation is expensed on an accelerated basis over the vesting period of the related stock option, which is generally up to four years. The Company did not grant any stock options at exercise prices below the fair market value of the Company’s common stock on the date of grant during the three months ended January 31, 2004 and 2003.

Had compensation cost for the Company’s stock plans and employee stock purchase plan been determined based on the fair value at the grant dates for the awards calculated in accordance with SFAS No.123, the Company’s net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands except for per share amounts):

		Three months ended January 31,
		2004			2003
Net income (loss)	As reported	$	605		$	(664	)
Compensation expense under SFAS 123 related to:
Stock option plans		(211		)	(400		)
Employee stock purchase plans		(34		)	(31		)
	Pro forma	$	360		$	(1,095	)
Basic net income (loss) per share	As reported	$	.04		$	(0.05	)
	Pro forma	$	.02		$	(0.08	)

Diluted net income (loss) per share	As reported	$	.03		$	(0.05	)
	Pro forma	$	.02		$	(0.08	)

The weighted average fair value of stock options granted was $1.22 and $0.56 during the three months ended January 31, 2004 and January 31, 2003, respectively.

Net Income(Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of shares outstanding plus the dilutive potential common shares. The dilutive effect of stock options is computed using the treasury stock method, and the dilutive effect of convertible preferred stock is computed using the if converted method. Potentially dilutive securities are excluded from the diluted net income (loss) per share computation if their effect is antidilutive.

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

	Income (Loss) (Numerator)			Shares (Denominator)	Per Share Amount

FOR THE THREE MONTHS ENDED JANUARY 31, 2003
Basic and diluted net (loss) per share	$	(664	)	13,374	$	(0.05	)

FOR THE THREE MONTHS ENDED JANUARY 31, 2004
Basic net income per share	$	605		14,743	$	.04
Add:
Dilutive effect of common share equivalents				592
Dilutive effect upon conversion of preferred shares				2,627
Dilutive effect of non-employee stock options				5
Diluted net income per share	$	605		17,967	$	.03

Potential shares of common stock have been excluded from the computation of diluted net income per share for the three months ended January 31, 2004 as the exercise price exceeded the fair market value for the warrants. The following potential shares of common stock have been excluded from the computation of diluted net (loss) per share for the three months ended January 31, 2003 because the effect would have been anti-dilutive (in thousands):

	Three Months Ended January 31, 2004	Three Months Ended January 31, 2003
Shares issuable under stock options	—	4,252
Shares issuable pursuant to warrants to purchase common stock	1,333	1,333
Shares issuable upon conversion of preferred stock	—	2,627
	1,333	8,212

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

4. Segment and Geographic Information

The Company is organized geographically and by line of business. The Company has three major lines of business reporting segments: license, maintenance and technical support and consulting/training which the chief operating decision-maker (the Company’s CEO) evaluates on a regular basis. However, the Company also evaluates certain lines of business segments by vertical industries as well as by product categories. While management evaluates results in a number of different ways, the line of business management structure is the primary basis upon which it assesses financial performance and allocates resources.

The license line of business includes the following product offerings: a sixth generation object database management system, Versant Developer Suite (VDS), a transaction accelerator for application servers, Versant enJin and VRTF, our data integration product for our real-time business offering. The support line of business provides customers with a wide range of technical support services that include telephone and internet access to support personnel, dedicated technical assistance, 24x7 support options, as well as software upgrades. The consulting and training line of business provides customers with a wide range of consulting and training services to assist them in

evaluating, installing and customizing our VDS, Versant enJin and VRTF products, as well as training classes on the use and operation of the Company’s products.

The accounting policies of the line of business reporting segments are the same as those described in the summary of significant accounting policies. The Company does not monitor assets or operating expenses by reporting segments. Consequently, it is not practicable to show assets or operating loss by reporting segment.

The table below presents a summary of reporting segments (in thousands):

	Three Months Ended January 31, 2004			Three Months Ended January 31, 2003
Revenues from unaffiliated customers:
License	$	3,082		$	2,672
Support	1,591			1,567
Consulting and training	1,693			1,610
Total revenue	6,366			5,849

Cost of revenue:
License	47			777
Support	339			330
Consulting and training	1,476			1,440
Amortization of purchased intangibles	24			19
Total cost of revenue	1,886			2,566

Gross profit:
License	3,035			1,895
Support	1,252			1,237
Consulting and training	217			170
Amortization of purchased intangibles	(24		)	(19		)
Total gross profit	4,480			3,283

Other operating expenses	3,932			4,003
Other income, net	97			80
Income(loss) before taxes	$	645		$	(640	)

The table below presents the Company’s revenue by geographic region (in thousands):

	Three Months Ended January 31, 2004		Three Months Ended January 31, 2003
Total revenue attributable to:
United States/Canada	$	4,318	$	4,565
Germany	1,003		417
France	105		30
United Kingdom	424		598
Australia	28		1
Japan	194		226
Other	294		12
Total	$	6,366	$	5,849

The Company’s long-lived assets residing in countries other than the United States are insignificant and thus, have not been disclosed.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of accounts receivable. At January 31, 2004, three customers had an outstanding balance that represented 27%, 26% and

11% of total accounts receivable. At January 31, 2003, one customer had an outstanding balance that represented 22% of total accounts receivable. The Company performs periodic credit evaluations of its customers’ financial condition. The Company generally does not require collateral security on its accounts receivable. The Company provides reserves for estimated credit losses in accordance with management’s ongoing evaluation.

6. Line of Credit

The Company has a revolving credit line with a wholly owned subsidiary of its existing bank that expires on July 18, 2004. The maximum amount that can be borrowed under this line is $5.0 million. As of January 31, 2004, there were no borrowings outstanding on this line. Borrowings are limited to the amount of eligible accounts receivable and are secured by a lien on substantially all of the Company’s assets. Any borrowings would bear interest at the bank’s prime rate plus 4.00% (8.00% at January 31, 2004). The loan agreement contains no financial covenants, but prohibits the payment of cash dividends and mergers and acquisitions without the bank’s prior approval.

7. Commitments and Contingencies

Indemnifications

The Company sells software licenses to its customers under contracts, which the Company refers to as Software License Agreements (each an “SLA”). Each SLA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The SLA generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time- and geography-based scope limitations and a right to replace an infringing product.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the SLA. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of January 31, 2004. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLA, the Company cannot determine the amount of potential future payments, if any, related to such indemnification provisions.

8. Business Combinations

Poet Holdings

On September 27, 2003, the Company signed an Agreement and Plan of Merger with Poet Holdings, Inc., a Delaware corporation (“Poet”), and Puma Acquisition, Inc., a wholly owned subsidiary of Versant (“Merger Sub”). Subject to the terms of this agreement and the satisfaction of several closing conditions, including approval of the merger by the stockholders of Poet and Versant, Poet will become a wholly-owned subsidiary of Versant in a statutory merger in which Merger Sub would be merged with and into Poet, with Poet surviving the merger. Poet is a publicly held developer of object database management and e-commerce software, whose stock is traded on the Frankfurt Stock Exchange. Upon consummation of the merger, each outstanding share of Poet common stock will be exchanged for 1.4 shares of Versant common stock, and options and warrants to purchase Poet common stock will be exchanged for options to purchase shares of Versant common stock at the same exchange ratio. The proposed merger is intended to qualify as a tax-free reorganization. If the Merger Agreement is terminated without consummation of the merger in certain circumstances, then a party to the Merger Agreement would become obligated to pay the other party certain termination fees as described in the Merger Agreement ranging from $500,000 to $1,000,000.

If the proposed merger with Poet had occurred on September 27, 2003 (the date the merger agreement was signed) then, based on the number of Versant and Poet shares that were outstanding on that date, and assuming each outstanding share of Versant’s Series A preferred stock is converted in connection with the merger into three shares of Versant common stock as contemplated by the merger agreement, in the merger Poet’s stockholders would be issued Versant common stock representing approximately 45% of the shares of Versant common stock that would be outstanding immediately after the merger, and the shares of Versant common stock issued to Poet stockholders and issuable under Versant stock options issued to Poet option holders in the merger would together represent approximately 42.7% of

Versant’s post-merger shares computed on a fully-diluted basis (taking into account Versant’s outstanding options and warrants, including the Versant options into which Poet’s options are converted in the merger).

The merger agreement calls for certain changes in Versant’s existing corporate structure. First, it calls for Versant to reduce the size of its Board of Directors from eight to five directors upon effectiveness of the merger with Poet, with Versant’s board of directors immediately after consummation of the merger to be composed of two directors from Poet, Jochen Witte and Herbert May, and three directors from Versant, who will be Nick Ordon, Versant’s Chief Executive Officer, and two other incumbent Versant directors, Uday Bellary and William Henry Delevati. In addition, it is currently a condition to consummation of the merger that Versant’s articles of incorporation be amended to: (i) increase the authorized number of Versant’s common shares from 45,000,000 to 75,000,000 shares; (ii) increase the number of shares of Versant common stock issuable upon the conversion of each share of Versant’s Series A preferred stock from two to three common shares; (iii) cause each outstanding share of Versant’s Series A preferred stock to be automatically converted into shares of Versant common stock immediately after effectiveness of the merger at the increased conversion rate described in (ii) above; (iv) provide that the merger will not trigger the liquidation preference rights of Versant’s Series A preferred stock; (v) require that at least 80% of Versant’s directors then in office approve certain corporate transactions or any change in the authorized number of Versant’s directors; and (vi) provide that the amendment described in clause (v) cannot be changed for 12 months after consummation of the merger without the approval of at least 80% of Versant’s directors then in office.

In connection with the execution of the Merger Agreement, Versant and Vertex Technology Fund, Ltd., Vertex Technology Fund (II), Ltd. and the Joseph M. Cohen Family Limited Partnership (collectively, the “Preferred Shareholders”) have entered into a Preferred Stock Conversion Agreement (the “Conversion Agreement”) pursuant to which the Preferred Shareholders have agreed to vote for certain actions that would cause their 1,313,743 outstanding shares of Versant Series A Preferred Stock to be converted into shares of Versant common stock effective upon consummation of the proposed merger with Poet. The conversion of the Preferred Shareholders’ shares of Series A Preferred Stock would occur at an increased conversion rate that would result in each such share of Series A Preferred Stock being converted into three shares of Versant common stock. Currently, each outstanding share of Versant’s Series A Preferred Stock is convertible into two shares of common stock. In addition, in exchange for this agreement to convert, effective upon such conversion, warrants to purchase a total of 1,331,349 shares of Versant common stock held by the Preferred Shareholders would be amended to reduce the exercise price of such warrants from $2.13 to $1.66 per share of common stock and to extend the term of such warrants by one year.

Mokume Software, Inc.

On November 19, 2002, the Company acquired 100% of the outstanding common stock of Mokume Software, Inc. (“Mokume”). Mokume developed real-time computing software solutions and related services for customers in the manufacturing industry to improve their business processes and logistics. Mokume became part of our Real-Time Solutions business unit, which is currently developing software products and technologies for building real-time computing software applications that link real-time data sources to an enterprise’s central software databases. Real-time computing solutions enable an enterprise to obtain information in real time from different parts of its operations in order to make better decisions based on up-to-the-minute information. To date, the Company has offered real-time consulting services and one real-time product, Versant Real-Time Framework (VRTF). The Company expects that its object database technology will be an integral part of the Company’s real-time solution offerings.

A total of 2.4 million shares of common stock were originally issued for our acquisition of Mokume in November 2002, 1.2 million shares of which (the “Contingent Shares”) were subject to repurchase by the Company unless certain operational targets relating to the acquired business were achieved (the “Earn-out Contingency”) or, in some cases, if certain vesting conditions were not satisfied. The initial aggregate purchase price for the acquisition of Mokume was $843,417, which included the issuance of 1.2 million shares of common stock of the Company, valued at $630,240, and $213,177 in acquisition related costs. In the three months ended July 31, 2003 we recorded $53,400 in additional acquisition related costs. The value of the common shares issued was determined based on the market price of the Company’s common shares of $0.52 on November 19, 2002, the acquisition date. On September 26, 2003, the Company entered into an Amendment Agreement, which amended the original merger agreement with Mokume of November 19, 2002 (“Mokume Merger Agreement”), as follows:

1. A total of 363,600 of the Contingent Shares or “forfeited shares”, were forfeited by the former Mokume stockholders and cancelled without consideration, and the remaining 848,400 Contingent Shares are no longer subject to forfeiture or repurchase by Versant and were released from the Earn-Out Contingency and any vesting restrictions that were applicable to them.

2. Subject to certain conditions, the 2,060,400 shares issued under the Mokume Merger Agreement that remained outstanding after forfeiture of the forfeited shares are to be released from the risk of forfeiture to satisfy claims for indemnification made by Versant under the Mokume Merger Agreement in installments over time as follows:

• 606,400 shares were released from potential forfeiture under indemnification claims on September 26, 2003.

• The balance of 1,454,000 shares are to be released in various increments at various times during the one-year period beginning on November 19, 2003 and ending November 19, 2004, when all shares not previously forfeited would be released from indemnification claims.

3. The Amendment Agreement also provides the former Mokume stockholders certain rights to satisfy Versant indemnification claims in cash in lieu of shares of the Company’s stock issued under the Mokume Merger Agreement.

The accelerated vesting of shares owned by non-employees resulting from the Amendment Agreement was recorded as additional goodwill in the amount of $290,000. As of October 31, 2003 the Mokume goodwill balance is $706,817. In accordance with SFAS 142, the goodwill will not be amortized but will be reviewed for impairment on an annual basis. The Company anticipates that any additional contingent consideration will be allocated to goodwill. The following table summarizes the purchase price allocation:

Purchased technology	$	480,000
Goodwill	706,817
Total assets acquired	$	1,186,817

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements within the meaning of the Securities Exchange Act of 1934 that reflect our current views with respect to future events and financial performance. Words such as “believe,” “anticipate,” “expect” and “intend” and similar expressions are also intended to identify forward-looking statements. However, these words are the exclusive means of identifying forward-looking statements. The forward-looking statements included in this Form 10-Q involve numerous risks and uncertainties that may cause actual results to differ materially from these forward-looking statements. These risks and uncertainties are described throughout this Form 10-Q, including under “Revenues” and “Risk Factors” within this Item 2, and in our October 31, 2003 report on Form 10-K on file with the Securities and Exchange Commission, especially the section labeled “Risk Factors.”

Overview

We are a California corporation and were incorporated in August 1988. Our principal product is the Versant Developer Suite, or VDS, a sixth generation object database management system. Our other products include Versant enJin, a database management product suite that accelerates transactions for application servers, Versant Real-time Framework, or VRTF, a comprehensive framework for delivering real-time solutions and Versant JDO, a data access tool that enables enterprise applications to efficiently access data from a versant object database. We commenced commercial shipment of VDS in 1991 and commercially released Versant enJin in 2000. We license VDS, Versant enJin and peripheral products, and sell associated maintenance, training and consulting services to end-users through our direct sales force and through value-added resellers, systems integrators and distributors. Following our acquisition of Mokume Software in November of 2002, we commenced our real-time solutions business and in January 2003 announced our VRTF real-time solutions product. We introduced Versant JDO in the fourth quarter of 2003. In addition to these products, we also offer other internally developed peripheral software products and resell related software developed by third parties. We also provide maintenance and support services related to our products as well as consulting and training services. These services are an important aspect of our business, and in the fiscal year ended October 31, 2003, a majority of our revenues were derived from these services. To date, substantially all of our revenue has been derived from the following data management products and services:

• sales of licenses for VDS and, to a lesser extent, Versant enJin, VRTF and Versant JDO;

• maintenance and support services related to VDS, Versant enJin, and VRTF;

• consulting services (Versant consulting practice and dedicated IBM WebSphere consulting practice) and training services;

• nonrecurring engineering fees received in connection with providing services associated with VDS and Versant enJin;

• sales of peripheral products for VDS and Versant enJin;

• the resale of licenses, maintenance, training and consulting for third-party products that complement VDS and Versant enJin; and

• reimbursements received for out-of-pocket expenses incurred for revenue in the income statement.

In fiscal 2003 and the first quarter of 2004, we continued to focus our efforts on: (i) sales and product development activities designed to obtain revenue growth from, and enhance VDS and to a lesser extent, Versant enJin, our data management products; (ii) further work to pursue and develop our real-time solutions business initiative and related products, such as VRTF; and (iii) obtaining growth in our consulting service programs.

We expect that our principal sources of revenue for the foreseeable future will be licenses of VDS, as well as maintenance, support, training and consulting services and to a lesser extent license and service revenues from Versant enJin and VRTF. To a significantly lesser degree we also anticipate deriving revenue from new products we may develop in our real-time business and the resale of third-party products. While it will continue to be important for Versant to derive revenue from customers it has historically served in the telecommunications, financial services, technology and defense industries, we believe that our efforts in the real-time market and, to a lesser degree, in the e-business market, will be important elements of our future performance. Success in the market for real-time products will depend on both the successful growth and emergence of this market and its continued need for highly scalable, high performance and reliable object-based technologies such as ours.

If our proposed merger with Poet Holdings is approved by our shareholders and Poet’s stockholders and is consummated, we currently expect that our data management software business will market products to new and additional market segments now addressed by Poet that we do not currently pursue and that our business would focus even more so on international sales, primarily in Europe.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amount of our assets and liabilities at the date of the financial statements and of our revenues and expenses during the reporting period. We base these estimates and judgments on information reasonably available to us, such as our historical experience and trends and industry, economic and seasonal fluctuations, and on our own internal projections that we derive from that information. Although we believe our estimates are reasonable under the circumstances, there can be no assurances that our estimates will be accurate given that the application of these accounting policies necessarily involves the exercise of subjective judgment and the making of assumptions regarding future uncertainties. We consider “critical” those accounting policies that require our most difficult, subjective, or complex judgments, and that are the most important to the portrayal of our financial condition and results of operations. These critical accounting policies relate to revenue recognition, goodwill and acquired intangible assets, impairment of long-lived assets, the determination of our reserve for doubtful accounts and stock-based compensation.

Revenue Recognition

We license our data management products to end-users, value-added resellers and distributors through two types of perpetual licenses—development licenses and deployment licenses. Development licenses are typically sold on a per seat basis and authorize a customer to develop an application program that uses our software product. Before that customer may deploy an application that it has developed under our development license, it must purchase deployment licenses based on the number of computers connected to the server that will run the application using our database management system. For certain applications, we offer deployment licenses priced on a per user basis. Pricing of VDS and Versant enJin varies according to several factors, including the number of computer servers on which the application will run and the number of users that will be able to access the server at any one time. Customers may elect to simultaneously purchase development and deployment licenses for an entire project. These development and deployment licenses may also provide for prepayment of a nonrefundable amount for future deployment.

Versant does not currently license our VRTF product directly to end-users. To date, it has been marketed only as a private-labeled product sold through physical execution systems vendors to whom Versant will provide integration, training and other consulting services.

Probability of collection is assessed using the following customer information: credit service reports, bank and trade references, public filings, and/or current financial statements. Prior payment experience is reviewed on all existing customers. Payment terms in excess of our standard payment terms of 30-90 days net, are granted on an exception basis, typically in situations where customers elect to purchase development and deployment licenses simultaneously for an entire project and are attempting to align their payments with deployment schedules. Extended payment terms are generally granted only to customers with a proven ability to pay at the time the order is received, and with prior approval of our senior management.

Goodwill and Acquired Intangible Assets

We account for purchases of acquired companies in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations (SFAS 141) and account for the related acquired intangible assets in accordance with SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as “acquired technology,” are amortized to expense over time, while in-process research and development costs (“IPR&D”), if any, are charged to operations at the acquisition date.

We test goodwill for impairment in accordance with SFAS 142, which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently upon the occurrence of certain events, as provided in SFAS 142. The Company uses an estimate of undiscounted future cash flows to determine if impairment has occurred. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows to be derived from the asset are less than its carrying value. If the Company determines that any of our assets are impaired, the amount of such impairment will be measured as the difference between the carrying value and the fair value of the impaired asset and recorded in earnings during the period of such impairment.

Impairment of Long-Lived Assets

Reserve for Doubtful Accounts

Should any of these factors change, the estimates made by management will also change, which could impact the level of our future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts may be required. A number of our customers are in the telecommunications industry and as part of our evaluation of the provision for doubtful accounts, we have considered not only the economic conditions in that industry but also the financial condition of our customers in that industry in determining the provision for doubtful accounts. If conditions continue to deteriorate in that industry, or any other industry, then an additional provision for doubtful accounts may be required.

Stock-Based Compensation

current price of the underlying stock exceeds the exercise price on the date of grant. We record and measure deferred compensation for stock options granted to non-employees at their fair value. Deferred compensation is expensed on an accelerated basis over the vesting period of the related stock option, which is generally up to four years.

Results of Operations

The following table summarizes the results of our operations as a percentage of total revenue for the periods presented:

	Three Months Ended
	January 31, 2004		January 31, 2003

Revenue:
License	48	%	46	%
Maintenance	25	%	27	%
Professional Services	27	%	27	%
Total revenue	100	%	100	%
Cost of revenue:
License	1	%	13	%
Maintenance	5	%	6	%
Professional Services	24	%	25	%
Amortization of purchased intangibles	—		—
Total cost of revenue	30	%	44	%

Gross profit margin	70	%	56	%

Operating expenses:
Marketing and sales	34	%	36	%
Research and development	15	%	22	%
General and administrative	13	%	10	%
Amortization of goodwill			—
Total operating expenses	62	%	68	%
Loss from operations	8	%	(12	)%
Other income, net	2	%	1	%
Loss before income taxes	10	%	(11	)%
Provision for income taxes	—		—
Net loss	10	%	(11	)%

The following table summarizes the results of our operations for the periods presented:

	Three Months Ended January 31,					% change from
	2004		2003			2003

License revenue	$	3,082	$	2,672		15	%
Maintenance revenue	1,591		1,567			2	%
Professional Services revenue	1,693		1,610			5	%
Total revenue	6,366		5,849			9	%

Cost of license revenue	47		777			(94	)%
Cost of maintenance revenue	339		330			3	%
Cost of professional services revenue	1,476		1,440			3	%
Amortization of purchased intangibles	24		19			26	%
Total cost of revenue	1,886		2,566			(27	)%

Operating expenses:
Marketing and sales	2,164		2,126			2	%
Research and development	961		1,270			(24	)%
General and administrative	807		607			33	%
Amortization of goodwill	—		—			—
Total operating expense	3,932		4,003			(2	)%
Income (loss) from operations	548		(720		)	(176	)%
Other income, net	97		80			21	%
Income (loss) before income taxes	645		(640		)	(201	)%
Provision for income taxes	40		24			67	%
Net Income (loss)	$	605	$	(664	)	(191	)%

Revenue

Revenue consists of license fees and fees for services, which includes technical support, consulting and training services. Total revenue for the first quarter of 2004 increased 9% to $6.4 million from $5.8 million in the first quarter of 2003 with increases across both license and service revenue categories. Telecommunication customers accounted for approximately 22% of our first quarter 2004 revenues compared with approximately 17% for the same period last year; technology customers represented 28% of our first quarter 2004 revenues compared with 24% in the same period last year; and medical customers represented 19% of our first quarter 2004 revenues compared with 2% in the same period last year. Our deal volume and average transaction size remained consistent in both the first quarter of 2004 and 2003.

International revenue as a percentage of our total revenue increased to 25% in the first quarter of 2004, from 22% in the first quarter of 2003, with the above-mentioned increase in the telecommunications sector benefiting both European and Asian sales.

License revenue

License revenue increased 15% to $3.1 million in the first quarter of 2004 from $2.7 million in the first quarter of 2003, primarily the result of increased VDS revenues. Total license revenue from the sale of our proprietary products (VDS and to a much lesser extent, enJin and VRTF) were 99% of total license revenues for the first quarter of 2004, compared to 72% from the first quarter of 2003. As a percentage of total quarterly revenue, license revenue increased in the first quarter of 2004 to 48% from 46% for the first quarter of 2003.

Maintenance revenue

Maintenance revenue increased slightly in the first quarter of 2004 and was approximately $1.6 million in the both the first quarter of 2004 and 2003. As a percentage of total sales, maintenance revenue decreased to 25% of total revenue in the three months ended January 31, 2004 from 27% in the first quarter of 2003, as a result of higher license content in our overall revenue mix in the quarter ended January 31, 2004.

Professional services revenue

Professional services revenue increased 5% to $1.7 million in the first quarter of 2004 from $1.6 million in the first quarter of 2003, primarily due to higher Versant consulting revenues. Of total professional services for the first quarter of 2004, WebSphere consulting represented 61%, Versant consulting was 28% and training accounted for 11%. Of total professional services for the first quarter of 2003, WebSphere consulting was 64%, Versant consulting represented 27% and training and related travel accounted for 9%. As a percentage of total sales, services revenue remained constant at 27% in both the three months ended January 31, 2004 and 2003.

Cost of Revenue and Gross Profit Margins

Total cost of revenue decreased 27% to $1.9 million in the first quarter of 2004 from $2.6 million in the first quarter of 2004. This decrease was primarily due to a decrease in cost of license revenue that was partially offset by an increase in the amortization of intangibles and slightly higher cost of services. Total cost of revenue as a percentage of total revenue decreased to 30% in the three months ended January 31, 2004 from 44% in the first quarter of 2003, as a result of predominantly higher margin license revenue in the overall mix.

Cost of license revenue

Cost of license revenue consists primarily of third-party product and royalty obligations. It also includes costs of user manuals, product media and packaging and, to a lesser extent, production labor and freight costs. Cost of license revenue decreased 94% to $47,000 in the first quarter of 2004 from $777,000 during the first quarter of 2003. This significant decrease in cost of license revenue resulted primarily from the fact that, in the first quarter of 2003, a large portion of our revenues were associated with the resale of third party products in a single transaction. The decrease was to a lesser extent, also due to lower product royalty costs.

Cost of license revenue as a percentage of total revenue decreased to 1% in the first quarter of 2004 from 13% in the same period of 2003 and decreased to 2% of total license revenues in the first quarter of 2004 from 29% in the same period of 2003 as a result of lower resale and royalty costs.

Cost of maintenance revenue

Cost of maintenance revenue includes revenue derived from maintenance agreements that provide customers internet and telephone access to support personnel and software upgrades, dedicated technical assistance and emergency response support options. It also includes cost of maintenance revenue on the resale of third party products. Cost of maintenance revenue increased 3% to $339,000 in the first quarter of 2004 from $330,000 in the first quarter of 2003 as a result of the slight increase in maintenance revenues. Cost of maintenance revenue as a percentage of total revenue decreased to 5% in the first quarter of 2004 from 6% of total revenue for the first quarter of 2003, as a result of higher revenues in the first quarter 2004. Cost of maintenance revenue as a percentage of maintenance revenue remained constant at 21% in both the first quarters of 2004 and 2003.

Cost of professional services revenue

Cost of professional services revenue consists principally of personnel costs (both employee and sub-contractor) associated with providing consulting and training services. Cost of revenues from professional services may vary depending on whether such services are provided by Versant personnel or by sub-contracted third party consultants. Cost of professional services revenue increased 3% to $1.5 million in the first quarter of 2004 from $1.4 million in the first quarter of 2003 due to slightly higher professional services revenue. Of the total professional services costs for the first quarter of 2004, WebSphere consulting costs were 66%, Versant consulting costs were 26% and training and related travel accounted for 8%. Of total cost of professional services for the first quarter of 2003, WebSphere consulting costs represented 50%, Versant consulting costs were 37% and training and related travel accounted for 13%.

Cost of professional services revenue as a percentage of total revenue decreased to 24% in the first quarter of 2004 from 25% of total revenue for the first quarter of 2003, primarily due to higher revenues.

Amortization of purchased intangibles

Amortization of $24,000 and $19,200 was recorded in the first quarter of fiscal 2004 and 2003, respectively, in connection with the acquisition of Mokume Software. The purchased intangibles were originally recorded at $480,000 and are being amortized over 5 years.

Marketing and Sales Expenses

Marketing and sales expenses consist primarily of marketing and sales labor costs, sales commissions, recruiting, business development, travel, advertising, public relations, seminars, trade shows, lead generation, marketing and sales literature, product management, sales offices, occupancy and depreciation expense. Marketing and sales expense increased slightly to $2.2 million in the first quarter of 2004 from $2.1 million in the first quarter of 2003 primarily as a result of higher commission costs associated with higher license revenues. As a percentage of total revenue, marketing and sales expenses decreased to 34% for the first quarter of 2004 from 36% in the first quarter of 2003 primarily due to increased revenues.

Research and Development Expenses

Research and development expenses consist primarily of salaries, recruiting and other employee-related expenses, depreciation, and expenses associated with development tools, small equipment, supplies and travel. Research and development expenses decreased 24% to $961,000 in the first quarter of 2004 from $1.3 million for the first quarter of 2003. These decreases were primarily due to lower employee related expenses. As a percentage of total revenue, research and development expenses decreased to 15% in the first quarter of 2004 from 22% for the first quarter of 2003 as a result of lower expenses in the first quarter of 2004.

We believe that a significant level of research and development expenditures is required to remain competitive and complete products under development. Accordingly, we anticipate that we will continue to devote substantial resources to research and development to design, produce and increase the quality, competitiveness and acceptance of our products. However, if we continue our research and development efforts without corresponding increases in revenue, our results of operations would be adversely affected. To date, all research and development expenditures have been expensed as incurred.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, recruiting and other personnel-related expenses for our accounting, human resources and general management functions. In addition, general and administrative expenses include changes to the reserve for doubtful accounts, outside legal, public relations, audit and external reporting costs. General and administrative expenses increased 33% to $807,000 in the first quarter of 2004 from $607,000 in the first quarter of 2003, primarily due to the collection of a previously reserved bad debt reversed in the first quarter of last year. As a percentage of total revenue, general and administrative expenses increased to 13% in the first quarter of 2004 from 9% in the first quarter of 2003, as a result of higher costs in the first quarter of 2004.

Other Income, Net

Other income (expense), net primarily represents the foreign currency gain or loss as a result of settling transactions denominated in currencies other than our functional currency and the re-measurement of non-functional currency monetary assets and liabilities. Secondarily, it represents the interest expense associated with our financing activities offset by income earned on our cash and cash equivalents. We reported net other income of $97,000 in the first quarter of 2004, which included a $90,000 gain on foreign exchange rates and $7,000 in interest income. We reported net other income of $80,000 in the first quarter of 2003, which included $13,000 of interest and other income and a $67,000 gain on foreign exchange.

Provision for Income Taxes

We account for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” We incurred net operating losses for 2003 for both federal and state tax purposes. We also incurred foreign withholding tax and state tax of approximately $40,000 and $24,000 in the first quarters of 2004 and 2003, respectively, which are included within the income tax provision.

Due to our history of operating losses and other factors, we believe that there is uncertainty regarding the realizability of the Company’s net operating loss carryforwards, and therefore a valuation allowance of approximately $19.7 million has been recorded against our net deferred tax assets.

Due to the “change in ownership” provisions of the Internal Revenue Code of 1986, the availability of net operating loss and tax credit carryforwards to offset federal taxable income in future periods is subject to an annual limitation due to changes in ownership for income tax purposes.

Amortization and Write-down of Goodwill

Our acquisition of Mokume Software in November of 2002 resulted in our recording goodwill of $363,417. Subsequent to the purchase, we reclassified additional goodwill in the amount of $53,400 and in conjunction with a September of 2003 amendment to the purchase agreement, we recorded additional goodwill of $290,000. In accordance with SFAS No. 142 goodwill is no longer subject to amortization. As of January 31, 2004, we had goodwill for Mokume of approximately $707,000, which will not be amortized. Instead this goodwill amount will be subject to periodic evaluation for impairment and will be reduced to the extent of any such impairment. See note 9 to our consolidated financial statements included in Item 8 of this report.

Our acquisition of Versant Europe in March 1997 resulted in our recording goodwill of $3.3 million. This goodwill was being amortized on a straight-line basis over seven years, but we changed this estimate to a five-year period in 1998. As of January 31, 2004, we had goodwill for Versant Europe of approximately $219,000, no longer subject to amortization but instead subject to periodic evaluation for impairment.

As of January 31, 2004, we had additional goodwill related to our Versant India acquisition of $21,000, which is no longer being amortized.

Liquidity and Capital Resources

On September 29, 2003, we issued a press release and filed a report on Form 8-K reporting our signing of a merger agreement with Poet Holdings, Inc. and our proposed merger with Poet. Through January 31, 2004, we have incurred approximately $800,000, and expect to incur up to an additional $700,000, in merger related costs, consisting primarily of legal, accounting and investment banking fees. If the merger agreement with Poet is terminated without consummation of the proposed merger in certain circumstances, which could include the failure of our shareholders to approve the merger, we could become liable to pay Poet certain termination fees, ranging in amount from $500,000 to $1,000,000.

We maintain a revolving credit line with a bank that expires in July 2004. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. The amount available under this line fluctuates monthly based on the eligibility of our receivables and is not indicative of future availability under this line. The loan agreement contains no financial covenants regarding our monthly or quarterly profitability or net asset position, and prohibits cash dividends and mergers and acquisitions without the bank’s prior approval. The bank has consented to our proposed merger with Poet Holdings.

In the three months ended January 31, 2004, net cash of $1.6 million was provided by operating activities and was generated primarily by net income of $605,000, a decrease in accounts receivable of $703,000 as well as a reduction in other current assets and inventory of $553,000. In the three months ended January 31, 2003, net cash of $412,000 was provided by operating activities and was generated by decreases in accounts receivable and inventory, partially offset by the first quarter net loss and decreases in accounts payable and accrued liabilities.

In the three months ended January 31, 2004, net cash used in investing activities of $372,000, which includes $350,000 in costs associated with our pending merger with Poet and $22,000 for the purchase of property and equipment. In the three months ended January 31, 2003, net cash used in investing activities of $249,000 was the result of the acquisition costs of $213,000 for Mokume Software and the purchase of property and equipment of approximately $36,000.

In the first quarter of 2004, net cash used in financing activities was $384,000, which was the result of our repayment of short term borrowings against our line of credit of $500,000, which was partially offset by proceeds of $116,000 from the sale of common stock through our employee stock purchase plan. In the first quarter of 2003, net

cash provided by financing activities was $42,000, which resulted primarily from the sale of common stock through our employee stock purchase plan.

At January 31, 2004, we had $4.0 million in cash and cash equivalents, a decrease from $4.7 million in cash and cash equivalents as of January 31, 2003. At January 31, 2004, our commitments for capital expenditures were not material.

We believe that our current cash, cash equivalents and line of credit, and any net cash provided by operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for fiscal 2004, irrespective of whether or not the proposed merger with Poet Holdings, Inc. is consummated. We base this assertion on the following factors:

• Our net days sales outstanding (DSO) at January 31, 2004 was 46 days and was second only to the first quarter of 2003 in representing our best collections performance. This, combined with excellent operational results in Q1, translated into our being cash flow positive from operations for the third consecutive quarter.

• Assuming the merger with Poet does not consummate by the end of our second quarter, we would project our cash balance would be approximately $3 million. We believe this is adequate to sustain operations for the foreseeable future.

• We have a line of credit available through July 2004 to address short-term liquidity fluctuations and we have no reason to believe this line will not be renewed through 2005. To date this credit line has remained largely unutilized. The minimum amount that has been consistently available to us under this credit line, given its eligibility requirements, has been $1.5 million, while the maximum we have ever drawn down has been $1.0 million, and this for a period of less than one month.

• We believe that, based on current market conditions, we might be able to raise private financing if necessary, though such financing might require sales of our stock at prices below prevailing market prices, which could dilute the interests of existing shareholders. While we currently do not intend pursuing this option in the immediate future, this may become a more necessary focus should the proposed merger with Poet Holdings, Inc. not be consummated, particularly if we then became obligated to pay Poet any termination fees pursuant to the terms of our merger agreement with Poet.

If the proposed merger with Poet Holdings, Inc does indeed become effective in the March 2004 timeframe, then we expect the cash balance of the merged company will be in the range of approximately $6 million to $8 million, upon the effective date of the merger. It is possible that, if the merger with Poet is approved and consummated, shareholders of Poet and Versant who did not vote in favor of the merger may be able to exercise statutory dissenters’ appraisal rights in connection with the merger, which would potentially enable such shareholders to receive cash payments from Versant equal to the fair market value of their shares. The amounts that might have to be paid to satisfy such appraisal rights are unknown, but would reduce the combined company’s cash reserves to the extent exercised.

Although we expect to effectively manage our cash resources, there can be no assurance that our cash resources will be adequate, if our financial results fall short of our goals, as our operating results are very difficult to predict and we are dependent upon future events, including our ability to successfully renew our current revolving credit line or obtain additional debt or equity financing. The incremental cost requirements surrounding the proposed merger with Poet Holdings, Inc. has placed a significant further burden on the company’s cash resources. Additional debt or equity financing may be required or desirable, although it is not currently anticipated, and may not be available to us on commercially reasonable terms, or at all. In addition, debt or equity financing if available, would require Poet’s pre-approval of such financing transaction, under the terms of our merger agreement with Poet and there is no assurance that this approval would be forthcoming. The prices at which new investors would be willing to purchase our securities may be lower than the market value or trading price of our common stock. The sale of additional equity or convertible debt securities could result in dilution to our shareholders, which could be substantial and may involve the issuance of preferred securities that would have liquidation preferences that entitle holders of the preferred securities to receive certain amounts before holders of common stock in connection with an acquisition or business combination involving Versant or a liquidation of Versant. New investors may also seek agreements giving them additional voting control or seats on our board of directors. Even if we were able to obtain additional debt or equity financing, the terms of this financing might significantly restrict our business activities and in some circumstances, might require us to obtain the approval of our shareholders, which could delay or prevent consummation of the financing transaction. Cash may also

be needed to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies and we expect that, in the event of such an acquisition or investment, we will need to seek additional debt or equity financing.

Risk Factors

This Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth below, that could cause actual results to differ materially from those in the forward-looking statements. The matters set forth below should be carefully considered when evaluating our business and prospects.

Risks Related to Our Business

We have limited working capital and may experience difficulty in obtaining needed funding, which may limit our ability to effectively pursue our business strategies. At January 31, 2004, we had $4.0 million in cash and cash equivalents and working capital of approximately $987,000 and we experienced declines in our cash and working capital in fiscal 2003. To date, we have not achieved profitability or positive cash flow on a sustained basis. Although we believe that our current cash, cash equivalents, line of credit, and any net cash provided by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months, it is possible that events may occur that could render our current working capital reserves insufficient. Because our revenue is unpredictable and a significant portion of our expenses are fixed, a reduction in projected revenue or unanticipated requirements for cash outlays could deplete our limited financial resources. For example, our new real-time business initiative may increase our operating expenses, and if revenues from the real-time business don’t materialize when anticipated our working capital could be adversely impacted. If the merger with Poet is consummated we could also be called upon to pay cash amounts to certain dissenting shareholders. Impairment of our working capital would require us to make expense reductions and/or to raise funds through borrowing or debt or equity financing. If we require additional external funding, there can be no assurance that we will be able to obtain it under our bank line of credit because borrowings under our credit line are limited to eligible accounts receivable. In addition, when our bank line expires in July 2004, there can be no assurance that it will be renewed. Likewise, there can be no assurance that any equity or debt funding will be available to us on favorable terms, if at all. If we cannot secure adequate financing sources, then we would be required to reduce our operating expenses, which would restrict our ability to pursue our business objectives.

We are dependent on a limited number of products. Nearly all of our license revenue to date has been derived from two products, VDS and to a lesser extent, Versant enJin. Consequently, if our ability to generate revenue from either of these products, particularly VDS, were negatively impacted, our business, cash flows and results of operations would be materially adversely affected. Many factors could negatively impact our ability to generate revenue from VDS and enJin, including without limitation slowness in the general economy or in key industries we serve, such as the telecommunications and financial services industries, the success of competitive products of other vendors, reduction in the prices we can obtain for our products due to competitive factors, the adoption of new technologies or standards that make either product technologically obsolete or customer reluctance to invest in object-oriented technologies. Although we plan to eventually diversify our product line through our real-time business initiative, there can be no assurance that currently released or future developed real-time products will facilitate this objective, nor that such products will be well received by the market. Accordingly, any significant reduction in revenue levels from VDS or Versant enJin can be expected to have a strong negative impact on our business and results of operation.

Our revenue levels are not predictable. Our revenue has fluctuated dramatically on a quarterly basis, and we expect this trend to continue. These quarterly fluctuations result from a number of factors, including:

• delays by our customers in signing revenue-bearing contracts that were expected to be entered into in a particular fiscal quarter;

• general macroeconomic factors as they impact IT capital purchasing decisions;

• the lengthy sales cycle associated with our products;

• customer and market perceptions of the value and currency of object-oriented software technology;

• uncertainty regarding the timing and scope of customer deployment schedules of applications based on VDS and
Versant enJin;

• uncertainty regarding customer acceptance of our first real-time product, VRTF;

• failure to timely develop and launch successful new products;

• fluctuations in domestic and foreign demand for our products and services, particularly in the telecommunications, financial services, and defense markets;

• the impact of new product introductions, both by us and by our competitors;

• our unwillingness to lower prices significantly to meet prices set by our competitors;

• the effect of publications of opinions about us and our competitors and their products;

• customer order deferrals in anticipation of product enhancements or new product offerings by us or our competitors; and

• potential customers’ unwillingness to invest in our products given our perceived financial instability.

We may not be able to manage costs effectively given the unpredictability of our revenue. We expect to continue to maintain a relatively high level of fixed expenses, including expenses related to our new real-time business. If planned revenue growth, including revenue from real-time products, does not materialize, our business, financial condition and results of operations will be materially harmed.

Our customer concentration increases the potential volatility of our operating results. A significant portion of our total revenue has been, and we believe will continue to be, derived from a limited number of orders placed by large organizations. For example, one customer, IBM (who subcontracts for us on WebSphere consulting engagements), represented 16% of total revenue in the first quarter of fiscal 2004 and 18% of total revenue in fiscal 2003. The timing of large orders and of their fulfillment has caused, and in the future is likely to cause, material fluctuations in our operating results, particularly on a quarterly basis. In addition, our major customers tend to change from year to year. The loss of any one or more of our major customers or our inability to replace a customer making declining purchases with a different major customer could have a material adverse effect on our business.

Reduced demand for our products and services may prevent us from achieving targeted revenue and profitability. Our revenue and our ability to achieve and sustain profitability depend on the overall demand for the software products and services thatwe offer. The general economic slowdown in the world economy may have caused potential or existing customers to defer purchases of our products and services and otherwise alter their purchasing patterns, particularly for critical IT infrastructure spending. Capital spending in the information technology sector generally has decreased over the past two years and many of our customers and potential customers have experienced declines in their revenues and operations. The terrorist acts of September 11, 2001 also have increased the current uncertainty in the economic environment, and we cannot predict the impact of these or similar events in the future, or of any related or unrelated military action, on our customers or our business. We believe that, in light of these concerns, some businesses may continue to curtail or eliminate capital spending on information technology. In addition, we have experienced continued hesitancy on the part of our existing and potential customers to commit to new products or services from us. If U.S. or global economic conditions worsen, this revenue impact may worsen as well and have a material adverse impact on our business, operating results and financial condition.

We rely for revenue on the telecommunications and financial services industries, which are characterized by complexity and intense competition. Historically, we have been highly dependent upon the telecommunications industry and, more recently, on the financial services market and we are becoming increasingly dependent upon the defense industry for sales of VDS and Versant enJin. Our success in these areas is dependent, to a large extent, on general economic conditions, our ability to compete with alternative technology providers and whether our customers and potential customers believe we have the expertise and financial stability necessary to provide effective solutions in these markets on an ongoing basis. If these conditions, among others, are not satisfied, we may not be successful in generating additional opportunities in these markets. Currently, companies in these markets are scaling back their technology expenditures and the telecommunications industry has in particular experienced significant economic difficulties and consolidation trends which could jeopardize our ability to continue to derive revenue from customers in that industry. In addition, the types of applications and commercial products for the telecommunications, financial services and defense markets are continuing to develop and are rapidly changing, and these markets are characterized by an increasing number of new entrants whose products may compete with ours. As a result, we cannot predict the future growth of (or whether there will be future growth in) these markets, and demand for object-oriented databases and real-time e-business applications in these markets may not develop or be sustainable. We also may not be successful in attaining a significant share of these markets due to competition and other factors, such as our limited working capital. Moreover, potential customers in these markets generally develop sophisticated and complex applications that require substantial consulting expertise to implement and optimize. This requires that we maintain a highly skilled consulting practice with specific expertise in these markets. There can be no assurance that we can hire and retain adequate personnel for this practice.

We depend on our international operations. A large portion of our revenue is derived from customers located outside the United States. For the year ended October 31, 2003, approximately 25% of our total revenue was derived from customers outside the United States and Canada. This requires that we operate internationally and maintain a significant presence in international markets. In addition, we also perform a significant amount of engineering work in India through our wholly owned subsidiary located in Pune, India. Within our last fiscal year we have transitioned some of our international sales efforts to a business model that employs local distributors. While use of local distributors reduces certain sales and operating expenses, it also makes our business more dependent on the skills and efforts of third parties and can decrease our profit margins.

Our international operations are subject to a number of other risks. These risks include, but are not limited to:

• longer receivable collection periods;

• changes in regulatory requirements;

• dependence on independent resellers;

• multiple and conflicting regulations and technology standards;

• import and export restrictions and tariffs and other regulatory restrictions;

• difficulties and costs of staffing and managing foreign operations;

• potentially adverse tax consequences;

• foreign exchange rate fluctuations;

• the burdens of complying with a variety of foreign laws;

• the impact of business cycles, economic and political instability and potential hostilities outside the United States; and

• limited ability to enforce agreements, intellectual property rights and other rights in some foreign countries.

In addition, in light of increasing global security concerns in the wake of the events of September 11, 2001, there may be additional risks of disruption to our international sales activities. Any prolonged disruption in markets in which we derive significant revenue may potentially have an adverse impact on our revenues and results of operations.

Our products have a lengthy sales cycle. Our sales cycle, which varies substantially from customer to customer, often exceeds nine months and can sometimes extend to a year or more. Sales to our e-business customers are often concluded in shorter time intervals but sales to the defense industry can take considerably longer. Due in part to the strategic nature of our products and associated expenditures, potential customers are typically cautious in making product acquisition decisions. While we believe that the sales cycle for real-time products is shorter than for VDS, it may be that our initial sales of real-time products may have even longer sales cycles as we strive to build credibility with new customers in different industries. The decision to license our products generally requires us to provide a significant level of education to prospective customers regarding the uses and benefits of our products, and we must frequently commit, without any charge or reimbursement, pre-sales support resources, such as assistance in performing benchmarking and application prototype development. Because of the lengthy sales cycle for our products and the relatively large average dollar size of individual licenses, a lost or delayed sale could have a significant impact on our operating results for a particular fiscal period.

We are focusing our growth efforts on our new real-time computing business, which presents certain new risks. Our acquisition of Mokume Software in November 2002 initiated implementation of our strategy to develop a “real-time” business. Our strategic objective for this business is to expand our business base by using real-time technology, leveraged with our existing data management technology, to develop new solutions designed to enable us to address new customers in different industries. To date we have developed one real-time product, VRTF, and hope to ultimately develop additional real-time applications for the VRTF technology as part of this business initiative. However the real-time

market is relatively new and our efforts to develop a real-time business will require us to sell and market our products to manufacturing companies and companies in other new industries with which we have not had prior sales or marketing experience. We believe that success in developing and selling real-time business products will require us to devote appropriate efforts to developing strong sales, marketing and development skills required to address new target markets. These efforts may increase our operating costs, and if we fail to timely generate revenue from our real-time business, our working capital and operating results could be adversely affected. There can be no assurance that our efforts to pursue the real-time computing business will be successful or will not adversely affect our financial condition or results of operations, particularly in the near term.

We are subject to litigation and the risk of future litigation. We and certain of our present and former officers and directors were named as defendants in four class action lawsuits filed in the United States District Court for the Northern District of California in 1998. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or Exchange Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the Exchange Act, in connection with public statements about Versant and its financial performance. Although this case has been dismissed as of this date, there can be no assurance that we will not be subject to similar litigation in the future.

Risks Related to Our Industry

We face competition for our products. For our VDS product, we compete with companies offering object and relational database management systems. Object-oriented competitors include eXcelon (which was acquired by Progress Software Corporation in 2002) Objectivity, Inc. and Poet Holdings, Inc. Traditional relational database management competitors include Oracle, Computer Associates, Sybase, IBM and Microsoft.

In the e-business market our competitors can be divided into two groups. First, we compete with relational database management companies, many of which have modified or are expected to modify their relational database management systems to incorporate object-oriented interfaces and other functionality and claim that this object-relational functionality is an adequate solution for integration with application servers. Second, we face competition from object-oriented companies such as eXcelon, Persistence Software and TopLink that provide components similar to those included in our Versant enJin product offering. In order for our products to be well accepted in the e-business market, it is important for one or more of our technical partnerships with application server vendors such as IBM and BEA to become deeper and more extensive.

Many of our competitors, and especially Oracle and Computer Associates, have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings and a larger installed base of customers than ours. In addition, many of our competitors have well-established relationships with our current and potential customers. Our competitors may be able to devote greater resources to the development, promotion and sale of their products. They also may have more direct access to corporate decision-makers based on previous relationships and may be able to respond more quickly to new or emerging technologies and changes in customer requirements and may be able to obtain sales of products competitive to ours through package sales of a suite of products we do not offer or compete with. We may not be able to compete successfully against current or future competitors, and competitive pressures could have a material adverse effect on our business, operating results and financial condition.

We depend on successful technology development. We believe that significant research and development expenditures will be necessary for us to remain competitive. While we believe our research and development expenditures will improve our product lines, because of the uncertainty of software development projects, these expenditures will not necessarily result in successful product introductions. Uncertainties affecting the success of software development project introductions include technical difficulties, market conditions, competitive products and consumer acceptance of new products and operating systems. In particular we expect that we will need to devote substantial effort to the development of new products in our real-time solutions division.

We also face certain challenges in integrating third-party technology with our products. These challenges include the technological challenges of integration, which may result in development delays, and uncertainty regarding the economic terms of our relationship with the third-party technology providers, which may result in delays of the commercial release of new products.

We have developed technology that will allow Versant enJin to support BEA WebLogic, IBM WebSphere and other J2EE-based application servers; however, undiscovered bugs or errors may exist that prevent us from achieving

the functionality we seek with these integrations. In addition, because Java Bean containers are specific to each application server vendor and no standards have been adopted for these containers, we may not be able to take advantage of our existing development work when propagating our solution for other application server vendors.

Our future success will depend in part on our ability to integrate our products with those of vendors providing complementary products. Versant enJin and VDS must be integrated with compilers, development tools, operating systems, and other software and hardware components to produce a complete end user solution. We may not receive the support of these third-party vendors, some of which may compete with us, in integrating our products with their products.

We must protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, obtain or use information that we regard as proprietary or use or make copies of our products in violation of license agreements. Policing unauthorized use of our products is difficult and potentially expensive. In addition, the laws of many jurisdictions do not protect our proprietary rights to as great an extent as do the laws of the United States. Shrink-wrap licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and copyright and trade secret protection for software may be unavailable in certain foreign countries. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology.

We may be subject to claims of intellectual property infringement. We expect that developers of object-oriented technology will increasingly be subject to infringement claims as the number of products, competitors and patents in our industry segment grows. For example, we have received correspondence from a third party alleging that we received misappropriated intellectual property from Mokume Software when we acquired Mokume and that Mokume had interfered with certain business relationship of that third party. We believe these claims lack merit and we intend to defend them vigorously if they are pursued. Any claim of this type, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays and require us to enter into royalty or licensing agreements. Royalty or licensing agreements might not be available on terms acceptable to us, or at all, which could have a material adverse effect upon our business, operating results and financial condition.

We depend on our personnel, for whom competition is intense. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business. Our future success also depends on our continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Our current financial position may make it more difficult to attract and retain highly talented individuals due to constraints on our ability to offer compensation at levels that may be offered by larger competitors.

Risks Related to our Stock

Our common stock is listed on the Nasdaq SmallCap Market. We do not currently meet the listing requirements necessary for our common stock to be listed on the Nasdaq National Market System, or NMS. Effective on October 1, 2002, we transferred the listing of our common stock from the NMS to the Nasdaq SmallCap Market. The listing of our common stock on The Nasdaq SmallCap Market may be perceived as a negative by investors and may adversely affect the liquidity and trading price of our common stock. We may be unable to re-list our common stock on the NMS.

In order for our common stock to continue to be listed on The Nasdaq SmallCap Market, we must satisfy the Nasdaq SmallCap listing requirements, and there can be no assurance that we will be able to do so. In order for our common stock to continue to be listed for trading on The Nasdaq SmallCap Market, we must continue to satisfy the listing requirements of the Nasdaq SmallCap Market. Although the continued listing requirements of the Nasdaq SmallCap Market are not as demanding as those of the NMS, they do, among other things, require that our stock have a minimum bid price of $1.00 per share and that we either (i) have stockholders’ equity of $2,500,000, or (ii) have $500,000 in net income or (iii) that the market value of our publicly held shares be $35 million or more. For several reasons, including the fact that the bid price of our common stock has in the past been below $1.00 per share for a significant time period, there remains a significant risk that our common stock will cease to qualify for listing on the Nasdaq SmallCap Market. If our common stock is delisted from trading on the Nasdaq SmallCap Market, then the trading market for our common stock, and the ability of our stockholders to trade our shares and obtain liquidity and fair market prices for their Versant shares may be significantly impaired and the market price of Versant’s common stock may decline significantly.

We may engage in future acquisitions that dilute our stockholders and cause us to incur debt or assume contingent liabilities. As part of our strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance technical capabilities, or that may otherwise offer growth opportunities. In the event of any future acquisitions, we could:

• issue stock that would dilute current stockholders’ percentage ownership;

• incur debt; or

• assume liabilities.

These purchases also involve numerous risks, including:

• problems combining the purchased operations, technologies or products or integration of new personnel;

• 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 Poet’s business or any businesses, products, technologies or personnel that we might purchase in the future.

Our stock price is volatile. Our revenue, operating results and stock price have been and may continue to be subject to significant volatility, particularly on a quarterly basis. We have previously experienced revenue and earnings results that were significantly below levels expected by securities analysts and investors, which have had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Additionally, as a significant portion of our revenue often occurs late in the quarter, we may not learn of revenue shortfalls until late in the quarter, which, when announced, could result in an even more immediate and adverse effect on the trading price of our common stock.

Ownership of our stock is concentrated. As a result of the Vertex note conversion and equity financing in July 1999, ownership of our equity has become more concentrated. Based on Vertex’s filings with the SEC, which indicate that Vertex holds the equivalent of 4,027,034 shares (assuming conversion of all their preferred shares at the current conversion rate of two common shares for each preferred share and exercise of all their warrants), and assuming that Versant has 18,253,535 shares outstanding (which amount consists of 14,822,868 outstanding shares of our common stock as of February 27, 2004, plus shares resulting from the conversion of all preferred shares at their current conversion rate of two shares of common stock for each share of Series A preferred stock and the exercise of all warrants held by Vertex), Vertex and its affiliates would beneficially own approximately 22% of our common stock.

The holders of our preferred stock have a substantial liquidation preference over the holders of our common stock. The outstanding shares of our preferred stock held by Vertex and other preferred stockholders currently are entitled to a liquidation preference of approximately $14 million. This means that, in the event of an acquisition of Versant, our preferred shareholders would be entitled to receive approximately the first $14 million of acquisition proceeds before holders of common stock would be entitled to receive any proceeds of the acquisition transaction. It is a condition of our proposed merger with Poet Holdings that all our outstanding shares of Series A preferred stock be converted into common stock at an increased conversion rate of not more than three common shares for each share of Series A preferred stock, as opposed to the original conversion rate of two common shares for each share of Series A preferred stock. However, the proposed merger is subject to several conditions, including the approval of both Versant’s and Poet’s shareholders, and there can be no assurance that the merger will in fact be consummated or that our preferred stock will be converted. There are no plans to convert Versant’s preferred stock into common stock if the merger with Poet is not consummated.

We may desire to raise additional funds through debt or equity financings, which would dilute the ownership of our existing stockholders and possibly subordinate certain of their rights to rights of new investors. We may choose to raise additional funds in debt or equity financings if they are available to us on terms we believe reasonable to increase our working capital, strengthen our financial position or to make acquisitions. Any sales of additional equity or convertible debt securities would result in dilution of the equity interests of our existing shareholders, which could be substantial. Additionally, if we issue shares of preferred stock or convertible debt to raise funds, the holders of those securities might be entitled to various preferential rights over the holders of our common stock, including repayment of their investment, and possibly additional amounts, before any payments could be made to holders of our common stock in connection with an acquisition of the company. Such preferred shares, if authorized, might be granted rights and preferences that would be senior to, or otherwise adversely affect, the rights and the value of Versant’s common stock. Also, new investors may require that we enter into voting arrangements that give them additional voting control or representation on our board of directors. The terms of our merger agreement with Poet restrict us from raising funds in certain equity or debt financings without Poet’s consent.

Certain Risks Related to our Proposed Merger with Poet Holdings, Inc.

As previously noted in this report, we have entered into a merger agreement with Poet Holdings, Inc. which provides that, subject to certain terms and conditions, Poet would be merged into our wholly owned subsidiary Puma Acquisition, Inc. and become a wholly owned subsidiary of Versant. The proposed merger with Poet offers certain opportunities but also certain risks, including but not limited to the following:

Our stock price, business and working capital may be adversely affected if the merger is not completed. Completion of the merger is subject to the satisfaction of several closing conditions, including obtaining required approvals of the merger and related matters from Versant’s and Poet’s shareholders. Versant and Poet may be unable to obtain such approvals on a timely basis or at all and may be unable to satisfy other closing conditions. If the proposed merger with Poet is not completed, the market price of our common stock may decline. In addition, our business and operations may be harmed to the extent that customers, suppliers and others believe that we cannot effectively compete in the marketplace without the merger, or if there is customer, investor or employee uncertainty regarding our future business direction and strategy on a standalone basis. We also have, and expect to continue, to incur significant transaction costs in connection with the merger. These costs are primarily associated with combining the businesses of the two companies and the fees of financial advisors, attorneys, consultants and accountants, and will have a negative impact on our cash balances and working capital.

If the merger agreement is terminated under certain circumstances we may become obligated to pay a substantial termination fee. If the merger agreement with Poet is terminated under specified circumstances described in the merger agreement, Versant may become obligated to pay Poet a termination fee of between $500,000 to $1.0 million in connection with the termination of the merger agreement. One of the circumstances in which we could become responsible to pay a termination fee to Poet would be if Poet’s stockholders approved the merger and our shareholders failed to approve the merger or certain related transactions. The merger agreement also provides for other circumstances in which we might become obligated to pay a termination fee. Any payment of any such termination fee would materially reduce our cash and working capital.

Failure to complete the merger could negatively affect Versant’s and Poet’s ability to enter into alternative transactions and the merger agreement restricts our ability to enter into other transactions. If the merger is terminated and we determine to seek another merger or business combination, there can be no assurance that we will be able to find a partner at an attractive price. In addition, while the merger agreement is in effect, we are prohibited from directly or indirectly soliciting, initiating or encouraging or entering into a merger, consolidation, purchase of assets, tender offer or other business combination with any party except where our board of directors determines in good faith and after consultation with outside legal counsel and its financial advisor, that the alternative proposal is superior to the merger and that it must engage in discussions or negotiations regarding the transaction to comply with its fiduciary duties to its shareholders under applicable law. As a result of this prohibition, Poet and Versant are precluded from discussing alternative takeover proposals during the term of the merger agreement, and may lose an opportunity for a transaction with another potential partner at a favorable price if the merger is not completed. In certain circumstances Poet or Versant may also be obligated to pay a termination fee if they enter into such an alternative transaction within certain time periods, even after a termination of their merger agreement.

Our ability to enter into financing transactions is restricted by the merger agreement. Under the terms of the merger agreement, Poet has the right, exercisable at its option, to terminate the merger agreement if we enter into

financing transactions to raise or obtain funds through the issuance and sale of shares of our capital stock and/or other equity or debt securities, and if the proceeds from any such financing exceed $2,000,000 and Poet elects to terminate the merger agreement, we would be obligated to reimburse Poet for its merger expenses, which could be substantial.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Foreign currency hedging instruments. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the effect of changes in foreign currency exchange rates on revenue and operating expenses has not been material. Operating expenses incurred by our foreign subsidiaries are denominated primarily in local currencies. We currently do not use financial instruments to hedge these operating expenses. We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

We do not use derivative financial instruments for speculative trading purposes.

Interest rate risk. Our cash equivalents primarily consist of money market accounts, accordingly, we do not believe that our interest rate risk is significant.

Item 4: Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and regulations. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our chief executive officer and our chief financial officer, as of the end of the period covered by this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

Part II. OTHER INFORMATION

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibits are filed herewith:

Number		Title

31.01		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On November 24, 2003 we filed a report on Form 8-K which furnished a press release regarding our financial results for our fourth fiscal quarter and fiscal year ended October 31,2003. ended January 31, 2004.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		VERSANT CORPORATION

Dated: March 14, 2004		/s/ Lee McGrath
		Lee McGrath
		Vice President Finance and Administration.
		Chief Financial Officer, Treasurer and Secretary
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Filed Herewith
31.01	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	ý

31.02	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	ý

32.01	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	ý

32.02	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	ý

VERSANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Revenue

VERSANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS