Overview of the Company  

We are a leading provider of object-oriented data management software that forms a critical component of the infrastructure of enterprise computing.   Companies use Versant solutions to solve complex data management and data integration problems. We design, develop, market and support object-oriented database management system products to address such problems. We also provide related product support, training, and consulting services to assist users in developing and deploying software applications based on our products. We operate our business within a single operating segment referred to as Data Management. We were incorporated in California in August 1988 under the name Object Sciences Corporation and completed our initial public offering of our common stock under the name of Versant Object Technology Company in July 1996. The name of the company was changed to Versant Corporation on July 15, 1998. In November 2002, we acquired Mokume Software, Inc., a privately held company that developed technology for use in real-time applications. In March 2004, we acquired Poet Holdings, Inc. (Poet) through a merger. Prior to that merger, Poet was a European-based provider of object-oriented data management software whose stock was publicly traded in the U.S. In June 2004, we acquired the JDO Genie product line and its customers from JDO Genie (PTY) Ltd., a privately held South African company and in July, 2004, we acquired FastObjects, Inc., a private company that held North American distribution rights with respect to Poet’s FastObject database management product. Our principal executive offices are located at 6539 Dumbarton Circle, Fremont, California 94555 and our telephone number is 510.789.1500.  Our website URL is www.versant.com.

 
Industry Background

Data management has evolved significantly over the past few decades.  As business computing became more sophisticated, network and hierarchical databases emerged in the 1970’s to serve growing business

data requirements.  In the 1980s, these types of databases were largely superseded by relational database technology, which continues to be a widely prevalent database technology today.  The mid to late 1980s saw the emergence of object-oriented software programming, in which smaller software building blocks called objects, which can perform specific functions, are aggregated with other objects in order to create larger software systems. With the advent of object-oriented software programming, it became possible to incorporate the unique features and advantages of object-based software into database management solutions. Our principal products are object-based database management software solutions, which we believe have advantages over relational database technology. In particular, we believe that object-based database management solutions are especially well suited for successfully addressing the complex and challenging data management and analytical requirements of companies who need to rapidly source, update, analyze and use very large changing bodies of data for a wide variety of business applications.

 
Overview of the Products and Services  

We provide sophisticated data management solutions designed to address the complex data management needs of enterprises and providers of products requiring complex data management functions.  Our products are typically deployed to manage data for business systems and enable these systems to access and integrate data necessary for their sophisticated business applications. Our Versant Object Database product is used primarily by larger enterprises which have significant large-scale data management requirements, such as technology providers, telecommunications carriers, government defense agencies and defense contractors, healthcare companies and companies in the financial services and transportation industries. Since the incorporation of Poet’s FastObjects solution into our product line in March 2004, we have expanded the scope of our solutions to address the data management needs of smaller systems as well. The data management needs of our customers usually involve many business functions, ranging from usage and management of the customer’s internal data to the processing of externally originated information; such as customer enrollment, billing and payment transaction data.  Our solution has also been used to solve complex data management issues such as fraud detection, risk analysis, yield management, and a host of other problems that requires an application specific data management solution.

In addition to our product offerings, assisting users in development and deployment of applications based on the Versant Object Database and FastObjects, we offer a variety of services, including consulting, training, and technical support services.  We provide maintenance and support services with respect to our own products.  In addition, we also offers a dedicated consulting practice for IBM WebSphere customers, under which we provide a certain number of consultants to IBM and both IBM and Versant sales representatives market the services of these consultants to different WebSphere customers.

 
Benefits of Versant Solutions  

Our products provide customers the following benefits for specialized data management:

•                                           High Performance .  Our object-based architecture provides direct access or navigation to stored objects.  The balanced client-server architecture of Versant products enhances performance by efficiently distributing processing burdens between clients and servers to leverage the processing power of networked computers.

•                                           Highly Scalable Support for Distributed Computing .  Our products can work in various environments ranging from small workgroup operations to operations involving thousands of users over the wide area networks or the Internet. This scalability can be achieved through object-level operations and other design features.

•                                           Reliability, Availability and Serviceability .  Our Object Database product offers a number of features designed to permit continuous operation, including features providing online backup and recovery and online modification of the database system, as well as system utilities that can operate while the system is running.  These features, together with replication and disk mirroring provided by a Fault Tolerant Server, support continuous operation of our products.

•                                           Language-Independent Support for Object-Oriented Programming .  Our products provide native support for the leading object-oriented software development languages of C++ and Java.  This quality of our products facilitates rapid and flexible application development by the customers and the maintenance and evolution of complex and dynamic applications that closely model real-world systems and processes.

•                                           Support for Component Architectures .  The Versant Object Database client integrates with leading J2EE application servers, including the IBM WebSphere and BEA Weblogic application servers. These application servers enable users to build and deploy J2EE-based applications that will work compatibly and directly with the Versant Object Database in order to gain our inherent productivity and performance advantages.

•                                           Integration with Users’ Existing Information Systems .  Versant products operate on a wide range of server platforms, including UNIX platforms from Sun Microsystems, Hewlett-Packard, IBM, Linux platforms from Red Hat, and Microsoft Windows platforms. In addition, the interfaces for Versant products are based on industry standard APIs.  The support of these emerging standards for API’s allow our solutions to have interoperability with applications originally designed for relational databases that have taken this standards based approach during implementation.

 
Our Strategy  

We were involved in the following activities in fiscal 2005, which will impact our operation and business in fiscal 2006 and beyond:

We made substantial investments in research and development to align our products with industry trends.  We expect to receive benefits from such investments in the second half of fiscal 2006. We also released our Versant Object Database 7.0 with support for Java industry standards API’s, known as JSR243 (Java Data Objects) and JSR220 (The Java Persistence API).  These standards are expected to form the foundation for Java developers designing future database applications against both object and relational technologies.

We engaged in strategic marketing efforts to increase our visibility and credibility through participation in open source initiatives via the Eclipse Foundation, a nonprofit organization dedicated to advance open source computing that enjoys participation by a significant percentage of the Java developer community. We established an open source Java JSR220 tooling project within the Eclipse Foundation.  The tooling project provides useful capabilities for relational database developers and elevates our visibility and credibility within that community.

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

We also focused our sales and marketing efforts on our data management products, Versant Object Database, VDS and FastObjects, and related consulting and training services.  Versant Object Database and its predecessor VDS were the key focus of our marketing efforts and the major source of our license revenues in fiscal 2005.

The technology sector was the largest vertical market for our revenues in fiscal 2005. The incorporation of the Versant products into the offerings of independent software vendors (ISVs) has increased our share of license revenues in this sector. Examples of the technology applications in which our products are used are demand consensus forecasts, collaborative planning, and requirements management applications.

The telecommunications industry also continued to be a very significant vertical market for our revenues in fiscal 2005.  Customers in the telecommunications industry have used our products in such strategic distributed applications as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance, and customer billing.  Most notably, we were able to deploy our software in the next generation 3G UMTS applications built by several leading telecommunications equipment providers.

We have also been able to gain customer acceptance in other vertical markets, including defense, financial services, transportation, and health care.  We expect to maintain roughly the same mix of revenues between different vertical markets in fiscal 2006.

 
Products and Services

Versant Object Database

Versant Object Database, a seventh generation object database management system, is the successor to our VDS product. Based on the same technology, Versant Object Database provides the same capabilities as VDS while providing industry standard interfaces for the Java developer.  Additionally, Versant Object Database includes the following enhanced features over the VDS product:

•                   A new improved query engine, which has the ability to perform more appropriate report oriented queries and allows better support for the new standards based query APIs.  These queries include support for set based operations, server side sorting, and predicate evaluation.  The new query engine sets the stage for future integration with industry accepted reporting tools.

•                   Improved performance and scalability by opening the storage manager layer for higher concurrency, eliminating latency, which is found in read-mostly applications with large numbers of concurrent transactions.  This will have a significant impact on future competitive benchmarking situations for applications requiring large user bases.

•                   Improved fault tolerant server operation and support of XA connectivity which has significant impact to 24x7 applications and applications operating in a heterogeneous environment.

In addition to the new features described, the Versant Object Database also includes the features of Versant Developer Suite.

Versant Developer Suite (VDS)

VDS, a sixth generation object database management system, is designed to support multi-user, commercial applications in distributed environments.  VDS enables users to store, manage, and distribute information that they believe often cannot be administered effectively through traditional database technologies, including the following types of information:

•                        real-time data, such as graphics, images, video, audio and unstructured text;

•                        dynamic, graph-oriented data, such as network management data and advanced financial instruments; and

•                        meta-data, data aiding integration of diverse systems, and workflow information, which together enable the construction of systems that integrate diverse systems and add new functionality, often making this functionality available over the Internet.

The object-oriented, balanced client-server architecture of VDS provides the basis for high-performance, scalable distributed applications.  We believe that VDS’ performance is superior compared to relational database management systems, particularly for complex data applications, for which VDS has the capability of processing a wide variety of abstract data types in a highly concurrent, high performance manner.

VDS is designed to integrate up to 65,000 databases connected over a like number of locations on a variety of hardware and software platforms.  Each database has a theoretical storage capacity of 4.6 million terabytes, an amount far beyond the actual capacity of the most existing operating systems. VDS implements a variety of database features, including a two-phase commitment for distributed transaction integrity and “database triggers” to monitor changing events and data and to notify users and applications when specified events occur.  In addition, on-line management utilities enable routine maintenance to be performed while the database is running.  These include utilities to perform backup operations, manage log

files, dynamically evolve database schema, add, delete and compress volumes on disk storage and related functions.  These utilities provide multiple levels of administrative access and application security.  We believe that use of VDS allows our customers to reduce the time they need to develop applications for their data management systems by improving their system performance.

Version 6.0 of VDS includes the core object database management system, C++ and Java language interfaces, XML for import and export of data into the database and asynchronous replication services to provide updates among distributed Versant databases. We believe that by bundling these components with VDS, it enhances the solution that we are offering and makes it easier for the customers to deploy such components.

As part of the VDS family, we also offer Fault Tolerant Server and High Availability Backup Solution, options that customer can use in situations that require advanced capabilities.

Versant Fault Tolerant Server provides for highly reliable operations in mission-critical environments. This product provides transparent failure recovery by connecting database clients to synchronized copies of the database stored on physically separate computers.  If one of the databases fails, due to operating system failure and hardware breakdown or any other form of interruption, the other database continues operation without application interruption.  When the failed database is restored, the two databases automatically resynchronize and resume operations without any interruption in application processing.

Our High Availability Backup Solution enables VDS to use the mirroring and backup features of other enterprise storage systems to take an online backup of very large data volumes within seconds, without impacting transaction response times.

FastObjects

FastObjects is an object database management system designed to provide minimal administration and work natively with the customer’s product. The primary target for FastObjects product line is for use as an embedded data management system to be integrated in a customer’s products. FastObjects is used in a vast range of applications, including medical devices, vending machines, telecom equipment, and defense systems. The majority of FastObjects installations are now running under the Microsoft Windows Operating System. However, during fiscal 2006 we plan to focus most of our development resources on our flagship product line, Versant Object Database, and plan to migrate to the Microsoft .NET environment in order to give our customers the opportunity to have a migration path from FastObjects products to Versant Object Database.

 
Services  

We derived a majority of our revenues from services in fiscal 2005. Our services include maintenance and support programs for our data management products and the WebSphere consulting services practice.

In addition to our product offerings, we offer our customers training, consulting and maintenance and technical support services.

We provide maintenance and technical support services for our products that are generally available at an annual fee that varies depending on the type and level of support the customer requires.  Maintenance and support contracts, which typically have twelve-month terms, are offered concurrently with the initial license of our product and entitle the customers to telephone support, product upgrades, and documentation updates.  For additional fees, customers may purchase a special support package that provides dedicated support engineers and telephone support available for 24 hours per day seven days a week.  Maintenance contracts are typically renewable annually and typically are paid for in advance for all products, but in some instances maintenance and support fees are paid in arrears.

We also provide a variety of training and consulting services to assist customers in design, development, training and management of applications they build based on our core products as well as IBM’s

WebSphere application server.  Training services are offered for a variety of Versant-specific and object-related technologies and range from beginning to advanced levels.  Consulting services are available for analysis and design assistance, mentoring and technical transfer, application coding, design reviews and performance analysis.  In addition, we provide custom development services to customers that request unique or proprietary product extensions.  Our IBM WebSphere consulting practice provides IBM with the manpower to support the WebSphere business, and IBM’s and our sales representatives market these consulting services.

  Sales Channels

We market and sell our products principally through our direct sales force and through value-added resellers, systems integrators, and distributors.

Direct Sales. Our direct sales organization is based in corporate offices in Fremont, California and Hamburg, Germany, and at our other regional offices in the U.S. and elsewhere around the world. The direct sales organization includes the field sales personnel, who are responsible for account management, and systems engineers, who answer technical questions and assist customers in running benchmarks against competitive products and in developing prototype applications.

Indirect Sales.   Our sales strategy is to develop indirect distribution channels, such as value-added resellers and systems integrators.  Systems integrators may include our products with our own or those of other vendors, in order to provide a complete solution to our customers. Under their agreements with Versant, value-added resellers and systems integrators are typically not subject to any minimum purchase or resale requirements and can cease marketing our products at any time. Certain value-added resellers and systems integrators offer products they produce or that are produced by third parties, which in some cases compete with our products.

Marketing.  Our marketing programs are aimed at audiences with the goal of building visibility and generating leads for our business. Our marketing programs include our efforts at cultivating media and analysts relations, fostering valuable investor communications, speakers’ programs, online marketing, partner-marketing programs and participation in conferences and tradeshows. Our products are typically marketed through (i) development licenses, which entitle the customer to develop applications that use a Versant software product, and (ii) deployment licenses, which entitle the customer to sell and market.

Sales Process .  The cycle for a complete sale of our products to new and large enterprise customers can often exceed six months and may extend to a year or beyond.  For existing customers with successfully deployed applications, sales cycles for new applications of our core products are generally shorter.  During the sales cycle, meetings involving both technical and management staff are conducted frequently at the prospective customer’s site and at our headquarters.  As part of their product selection process, our prospective customers typically perform a detailed technical evaluation or benchmark of our object-based technologies, often directly comparing them to competitive products.  Upon completion of the evaluation, a customer that chooses our solution may purchase one or more development licenses depending upon the number of their programmers that will develop and build their customers’ application.  Additionally, a customer may purchase technical support, training courses and consulting services.  Our customers may also purchase deployment licenses at the same time as they purchase development licenses, or may defer their purchase of deployment licenses and related maintenance until they complete the application development (a process that typically takes at least six months and can exceed one year). Once an application is ready for deployment, a customer may elect to purchase deployment licenses from us.

Shipping and Backlog . Our software may be either physically or electronically delivered to the customer. If physically delivered, our software product is shipped from either Fremont or Hamburg facilities and is delivered to the customer upon receipt of an approved order and a signed license agreement. We typically do not have a material backlog of unfilled license orders at any given time, and it does not consider backlog to be a meaningful indicator of our future performance.

International Sales and Marketing .  Our international sales are recorded by subsidiaries located in Germany and United Kingdom, which sell our products through distributors and value-added resellers, as well as directly to end-users.

 
Our Customers  

We categorize our customers into two broad groups, End-Users and Value Added Resellers (“VARs”). End Users are companies who use our products internally and do not redistribute our products outside of their corporate organizations. VAR customers, on the other hand, include traditional Value Added Resellers, Systems Integrators, OEMs and other vendors who redistribute Versant products to external third party customers, either individually or as part of an integrated product. We license our data management products through two types of perpetual licenses—development licenses and deployment licenses. Development licenses, typically sold on a per seat basis, authorize a customer to develop an application program that uses our software product.

Under a deployment license, a customer is permitted to deploy an application that it has developed under a development license from us. End-Users generally purchase deployment licenses based on the number of central processing units (CPU’s) supporting the server that will run the application using our database management system. We offer deployment licenses, for certain applications, priced on a per user basis.  Pricing of the Versant Object Database, VDS and FastObjects varies according to several factors, including the number of CPU servers on which the application run and the number of users that are able to access the server at any particular time. Customers may elect to simultaneously purchase development and deployment licenses for their projects.

VARs and distributors purchase development licenses from us on a per seat basis and on terms similar to those of development licenses sold directly to End-Users.  VARs are authorized to sublicense deployment copies of our data management products, which are either bundled or embedded in the VARs’ applications, directly to end-users.  VARs are required to report the distribution of our software to us 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 VAR to its end-user customers. These royalties may be prepaid in full or paid upon deployment.

 
Our Vertical Markets  

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

Our future performance will depend in significant part on the increase in the use and sales of the Versant Object Database and FastObjects in technology, telecommunications, defense, healthcare and financial market applications and the continued acceptance of our products within these industries.

 
Competition  

Our software products compete with companies offering object and relational database management systems. Our competitors, especially Oracle and Progress Software, have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings, larger and more established distribution channels and a larger installed base of customers. In addition, many of our competitors have well-established relationships with our current and potential customers. We may not be able to compete successfully against current or future competitors, and competitive pressures could have a material adverse effect on the business, pricing, operating results and financial condition of the company.

 
Research and Development  

Our research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits, expenses for facilities and payments made to outside software development contractors. In fiscal 2005 and fiscal 2004, our research and development expenses were $4.0 million and $5.1 million respectively. We anticipate that we will continue to invest significant resources in research and development activities in the future to develop new products, advance the technology of our existing products and develop new business opportunities.

 
Intellectual Property and Other Proprietary Rights  

We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to signed license agreements and, to a lesser extent, “shrink-wrap” licenses displayed in evaluation downloads and in software installation screens, which impose certain restrictions on the licensee’s ability to utilize our software. In addition, we take steps to avoid disclosure of our trade secrets, such as requiring persons with access to our proprietary information to execute non-disclosure agreements, and we restrict access to our software source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We were also awarded a United States patent (No. 5,822,759) for our proprietary cache system used within our product suites, which expires in 2015.

 
Employees  

As of October 31, 2005, we and our subsidiaries had a total of 100 full time employees, of whom 36 were based in the United States, 29 in Europe, and 35 in India. Of the total, 46 employees were engaged in engineering and technical services, 10 were engaged in sales and marketing, 30 were engaged in the services organization, and the remaining 14 were engaged in general administration and finance. To the best of our knowledge, none of our employees is represented by a labor union with respect to employment with Versant.  We have not experienced any organized work stoppage to date and believe that our relationship with our employees is generally good.

Our future performance depends mostly 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, operating results and financial condition.

Restructuring

In 2005 we announced that we were undertaking efforts to restructure our business to refocus our operations on our core database management products and to appropriately reduce our expenses.  In furtherance of this restructuring, in August 2005 we spun off our former Versant Open Access.NET (or VOA.Net) assets to Vanatec GmbH, a privately held German company.  As we continue to execute on our restructuring plans, it is possible that we may undertake similar actions with respect to portions of our business that are not strategic, or closely related, to our core database management business.

 
Investor Information  

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). Therefore, we file our periodic reports on Forms 10-Q, 10-QSB, 10-K, 10-KSB, 8-K, proxy statements and other information with the Securities and Exchange Commission (the SEC). These reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at the 450 Fifth Street, NW, Washington, DC 20549.  Information on operation of the SEC’s Public Reference Room may be obtained by calling SEC at 1.800.SEC.0330. In addition, the SEC maintains an Internet site (at http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

The financial and other information can also be accessed at our Investor Relations website. The address of Versant’s website is as follows: (http://www.versant.com). We make available, free of charge, copies of our annual reports, annual reports on Forms 10-K or 10-KSB, quarterly reports on Forms 10-Q or 10-KSB, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after filing such materials with the SEC.