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, 2002

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

The number of shares of common stock, no par value, outstanding
as of February 25, 2002: 12,256,846

VERSANT CORPORATION

FORM 10-Q

Quarterly Period Ended January 31, 2002

Table of Contents

Part I. Financial Information

	Item 1. Financial Statements

	Condensed Consolidated Balance Sheets — January 31, 2002 and October 31, 2001

	Condensed Consolidated Statements of Operations — Three Months Ended January 31, 2002 and March 31, 2001

	Condensed Consolidated Statements of Cash Flows —Three Months Ended January 31, 2002 and March 31, 2001

	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

Part II. Other Information

	Item 6. Exhibits and Reports on Form 8-K

Signature

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERSANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 31, 2002			October 31, 2001
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	5,817		$	4,101
Accounts receivable, net	3,479			6,478
Prepaid and other current assets	813			1,256
Total current assets	10,109			11,835

Property and equipment, net	2,774			3,093
Other assets	15			—
Goodwill, net	392			442
Total assets	$	13,290		$	15,370

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of capital lease obligations	$	41		$	57
Short-term debt	31			550
Accounts payable	871			1,239
Accrued liabilities	2,006			2,577
Deferred revenue	3,039			3,748
Total current liabilities	5,988			8,171

Long-term liabilities, net of current portion:
Capital lease obligations	2			3
Deferred revenue	678			234
Deferred rent	399			397
Total long term liabilities	1,079			634

Total liabilities	7,067			8,805

Shareholders’ equity:
Preferred stock, no par value	4,912			4,912
Common stock, no par value	52,709			52,465
Accumulated deficit	(51,507		)	(50,929		)
Cumulative other comprehensive income	109			117
Total shareholders’ equity	6,223			6,565
	$	13,290		$	15,370

The accompanying notes are an integral part of these consolidated balance sheets.

VERSANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended January 31, 2002			Three Months Ended March 31, 2001
Revenue:
License	$	3,528		$	1,606
Services	2,576			3,608
Total revenue	6,104			5,214

Cost of revenue:
License	741			361
Services	1,278			2,809
Total cost of revenue	2,019			3,170

Gross profit	4,085			2,044

Operating expenses:
Marketing and sales	2,346			2,777
Research and development	1,503			1,698
General and administrative	804			857
Amortization of goodwill	50			123
Total operating expenses	4,703			5,455

Loss from operations	(618		)	(3,411		)

Other income (expense), net	53			(127		)

Loss before provision for income taxes	(565		)	(3,538		)

Provision for income taxes	13			47

Net loss	$	(578	)	$	(3,585	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.30	)

Basic and diluted weighted average common shares	12,132			11,933

The accompanying notes are an integral part of these condensed consolidated statements

VERSANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended January 31, 2002			Three Months Ended March 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(578	)	$	(3,585	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Write off of fixed assets	50			—
Depreciation and amortization	311			491
Provision for doubtful accounts	(61		)	49
Changes in current assets and liabilities:
Accounts receivable	3,060			3,617
Prepaid and other current assets	443			68
Other assets	(15		)	40
Accounts payable	(368		)	218
Accrued liabilities	(571		)	(218		)
Deferred revenue and deferred rent	(263		)	(695		)
Net cash provided by (used in) operating activities	2,008			(15		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	8			(196		)
Net cash used in investing activities	8			(196		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock	244			221
Principal payments under capital lease obligations	(17		)	(19		)
Payments on short-term debt	(519		)	(1,236		)
Net cash used in financing activities	(292		)	(1,034		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	(8		)	(21		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,716			(1,266		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	4,101			4,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	5,817		$	3,014

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	5		$	19
Foreign withholding and state income taxes	13			137

The accompanying notes are an integral part of these condensed consolidated financials statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1. Organization, Operations and Liquidity

References to the "Company" in these Notes to condensed, consolidated financial statements 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, seasonality, a lengthy sales cycle, dependence on the acceptance of object database technology, competition, a limited customer base, dependence on key individuals, dependence on international operations, foreign currency fluctuations, product concentration, and the ability to adequately finance its ongoing operations.

As of January 31, 2002, the Company had not achieved business volume sufficient to restore profitability and consistent positive cash flow on an annual basis, although the Company’s operating activities provided net cash in the three months ended January 31, 2002 and the ten-month period ended October 31, 2001. The Company had a net loss of $578,000 in the three months ended January 31, 2002 and a net loss of $3.6 million in the three months ended March 31, 2001. Management anticipates funding future operations and repaying its debt obligations from current cash resources and future cash flows from operations. 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 10, 2001, the Company filed Form 8-K reporting a decision by the Board of Directors to change the Company’s fiscal year-end from December 31 to October 31. This change was made to better align the Company’s customers’ procurement and the Company’s financial reporting cycles. As a result of this change, the Company had a ten-month transition period from January 1, 2001 to October 31, 2001. The Company’s new fiscal year 2002 commenced on November 1, 2001.

2. Summary of Significant Accounting Policies

The condensed consolidated financial statements included herein 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 accounting principles in the United States have been condensed or omitted pursuant to these rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. 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 Form 10-K for the transition period from January 1, 2001 through October 31, 2001. 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, 2002, or any other future period.

Revenue Recognition

The Company adopted 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 agreements and for consulting and training activities.

The Company licenses its products to value added resellers, distributors and end users through two types of licenses—development licenses and deployment licenses. Development licenses are 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 it has developed under a development license, it must purchase deployment licenses based on the number of computers connected to the server that will run the application using the database management system. For certain applications, the Company offers 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 or 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 agreements may also include prepayment of a nonrefundable amount for future deployment. The Company recognizes prepayment revenue immediately if all the four revenue recognition criteria are

met. Revenue from perpetual software license agreements is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists (2) delivery has occurred or services have been rendered (3) the fee is fixed and determinable, and (4) collection is probable. If an acceptance period or other contingency exists, revenue is recognized upon the satisfaction of the contingency, customer acceptance, or the expiration of the acceptance period.

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

Revenue from the resale of third-party products is recorded at total contract value with the corresponding cost included in cost of sales, for the amount of revenue earned from the sale of the goods. The Company assumes risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and the Company acts as principal in the transaction.

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. Extended payment terms are granted on an exception basis, typically in situations where customers elect to simultaneously purchase development and deployment licenses for an entire project and are attempting to align their payments with customer deployment schedules. Extended payment terms are only granted to customers with a proven ability to pay at the time the order is received, and with prior approval of the Company’s senior management.

The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date. If an undelivered element of the arrangement exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the undelivered element. If vendor-specific objective evidence does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. License arrangements that require significant modification of the software, and/or nonrecurring engineering agreements requiring future obligations not yet performed, are deferred at the time of the transaction and recorded as revenue once the obligation has been fulfilled.

Revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance contract, which is typically twelve months. Training and consulting revenue is recognized when a purchase order is received, services have been performed and collection is deemed probable. Consulting services are billed on an hourly, daily or monthly rate. Training classes are billed as a group or individual attendee rate.

For the quarter ended January 31, 2002, there were two customers that accounted for 17% and 11% of quarterly revenues, respectively. For the quarter ended March 31, 2002, there was one customer that accounted for 11% of quarterly revenues, respectively.

Goodwill

The Company periodically evaluates whether events and circumstances have occurred which indicate that the remaining estimated useful life of goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company will use an estimate of undiscounted future net cash flows over the remaining life of the asset to determine if the impairment has occurred. If the Company determines an asset has been impaired, the impairment is recorded based on the fair value of the impaired asset.

Reserve for Doubtful Accounts

The Company’s bad debt allowance includes the specific identification of certain customers and a general reserve for accounts receivable. The general reserve is an estimate based on the Company’s collection experience, bad debt write off history, economic factors that may effect a customer’s ability to pay, and accounts receivable aging trends.

Accrued Liabilities

Current liabilities consisted of the following (in thousands):

	January 31, 2002		October 31, 2001
Payroll and related	$	1,018	$	1,090
Taxes payable	135		471
Restructuring	129		668
Other	724		348
Total	$	2,006	$	2,577

Comprehensive Loss

Comprehensive loss includes unrealized gains and losses on foreign currency translation that have been excluded from net loss and reflected instead in shareholders’ equity. For the periods presented, comprehensive loss is as follows (in thousands):

	Three Months Ended January 31, 2002			Three Months Ended March 31, 2001
Net loss	$	(578	)	$	(3,585	)
Foreign currency translation adjustment	(8		)	(21		)
Comprehensive loss	$	(586	)	$	(3,606	)

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares outstanding. Diluted net loss per share is computed by dividing net 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. Dilutive securities are excluded from the diluted net loss per share computation if their effect is antidilutive. Potential common shares of 3,218,738 stock options, 1,520,296 warrants and 2,627,4868 convertible preferred shares for the three months ended January 31, 2002 and potential common shares of 2,956,894 stock options, 1,520,296 warrants and 2,627,486 convertible preferred shares for the three months ended March 31, 2001 were not included in the computation of diluted net loss per share.

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):

	Loss (Numerator)			Shares (Denominator)	Per Share Amount
For the three months ended March 31, 2001:
Basic and diluted net loss per share:
Losses attributable to holders of common stock	$	(3,585	)	11,933	$	(0.30	)

For the three months ended January 31, 2002:
Basic and diluted net loss per share:
Losses attributable to holders of common stock	$	(578	)	12,132	$	(0.05	)

3. Segment Information

In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131 “Disclosures About Segments of an Enterprise and Related Information” which established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also established standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise

about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company is organized geographically and by line of business. The Company has three major line of business operating segments: license, support and consulting and training. However, the Company also evaluates certain line of business segments by vertical industries as well as by product categories. While the Executive Management Committee 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 two product offerings: a sixth generation object oriented database management system, VDS, and a transaction accelerator for application servers, Versant enJin. Versant enJin accelerates Internet transactions for the application server environment. The support line of business provides customers with a wide range of support services that include on-site, telephone or internet access to support personnel, 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 VDS or Versant enJin, as well as training classes on the use and operation of the Company’s products.

The accounting policies of the line of business operating segments are the same as those described in the summary of significant accounting policies.

The Company does not track assets by operating segments. Consequently, it is not practicable to show assets by operating segment.

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

	Three Months Ended January 31, 2002			Three Months Ended March 31, 2001
Revenue from unaffiliated customers
License	$	3,528		$	1,606
Support	1,379			1,215
Consulting and training	1,197			2,393
Total Revenue	6,104			5,214

Cost of revenue
License	741			361
Support	284			453
Consulting and training	994			2,356
Total cost of revenue	2,019			3,170

Gross Profit
License	2,787			1,245
Support	1,095			762
Consulting and training	203			37
Total gross profit	4,085			2,044

Other operating expenses	4,703			5,455
Other income (expense)	53			(127		)
Loss before provision for income taxes	$	(565	)	$	(3,538	)

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

	Three Months Ended January 31, 2002		Three Months Ended March 31, 2001
Total revenues attributable to:
United States	$	4,617	$	3,540
Germany	302		440
France	173		317
United Kingdom	652		611
Australia/Asia Pacific/Japan	360		306
Total	$	6,104	$	5,214

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. For the period ended January 31, 2002 there was one customer that had an outstanding balance that represented 12% of total accounts receivable. For the period ended October 31, 2001 there were two customers that had an outstanding balance that represented 32% and 15% of total accounts receivable. The Company performs periodic credit evaluation of its customers’ financial condition. The Company generally does not require collateral on accounts receivable. The Company provides reserves for estimated credit losses in accordance with management’s ongoing evaluation.

4. Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” which supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations.” SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 are effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The Company’s adoption of this Statement did not have a material impact on the financial position or results of operations of the Company

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets”. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually (unless indication of impairment becomes apparent sooner) using the fair value approach (except in certain circumstances), while other intangible assets will continue to be valued and amortized over their estimated lives and in-process research and development will continue to be written off immediately. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting and effective January 1, 2002 for fiscal years commencing after December 31, 2001, existing goodwill will no longer be subject to amortization. Goodwill arising between June 29, 2001 and December 31, 2001 is not subject to amortization. Due to the Company’s recent change in fiscal year-end from December 31 to October 31, the Company will adopt SFAS No. 142 on November 1, 2002 at which time the Company will no longer amortize goodwill.

Effective January 2002, the Company must adopt SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations - Transactions”. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121 and resolves implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 had no impact on the Company’s consolidated results of operations or financial position.

In July 2001, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products” (“EITF 00-25”). EITF 00-25 generally requires that consideration, including equity instruments, given to a customer be classified in a vendor’s financial statements not as an expense, but as an offset to revenue up to the amount of the cumulative revenue recognized or to be recognized. In November 2001, the EITF reached consensus on EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products” (“EITF 01-09”). EITF 01-09 clarifies and modifies certain items discussed in EITF 00-25. In accordance with the transition guidance in EITF 00-25,

adoption requires the reclassification of financial statements for prior periods presented for comparative purposes. Adoption of EITF 00-25 and 01-09 did not have a material effect on the Company’s consolidated results of operations.

In November 2001, the FASB issued an announcement on the topic of “Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred” (the Announcement). The Announcement requires companies to characterize reimbursements received for out of pocket expenses incurred as revenue in the income statement. The Company has netted reimbursements received for out of pocket expenses against the related expenses in the accompanying consolidated statements of operations. The Announcement is to be applied in the financial reporting periods beginning after December 15, 2001 and the comparative financial statements for prior periods are to be reclassified to comply with the Announcement. The Company will adopt the Announcement beginning in the second quarter of 2002. The Announcement is not expected to have a significant impact on operating results, but will increase services revenue and cost of services and decrease gross margin.

5. Restructuring Costs

On October 31, 2001 the Company implemented a restructuring plan aimed at optimizing performance in Europe. The primary goal was to reduce operating expenses, while maintaining current revenue streams in Europe. As a result, the Company changed its distribution model in France from a wholly owned subsidiary structure to an independent distributor. The Company incurred one-time costs related to employee severance payments, related benefit and outplacement expenses, the termination of the building lease and accounting and legal costs associated with the closure and the write-down of the carrying value of fixed assets. The total cost of the restructuring was estimated at $668,000 and was recorded as restructuring costs in operating expenses in the ten months ended October 31, 2001. All remaining obligations are expected to be paid by April 30, 2002.

The following table summarizes the restructuring activity at January 31, 2002:

*Restructuring Costs*	Balance at Oct 31, 2001		Q1 2002 Usage			Balance at Jan 31,2002
Employee severance and related costs	$	290,000	$	(262,706	)	$	23,051
Lease termination and building costs	160,000		(123,281		)	42,534
Professional fees	110,000		(46,062		)	63,096
Write off of fixed assets	62,000		(62,000		)	—
Write off of other current assets and liabilities	46,000		(46,000		)	—
Total Restructuring	$	668,000	$	(540,049	)	$	128,681

6. Term Loan and Line of Credit

The Company maintains a revolving credit line with a bank that expires on May 15, 2002. The maximum amount that can be borrowed under the revolving credit line is $5.0 million. As of January 31, 2002 there were no borrowings under this line. Borrowings are limited to 80% of eligible accounts receivable and are secured by a lien on substantially all of the Company’s assets. As of January 31, 2002, the amount available under this line was approximately $2.0 million. This amount fluctuates monthly based on the eligibility of our receivables and is not indicative of future availability under this line. Any borrowings outstanding would bear interest at prime rate plus 2.00% (6.75% at January 31, 2002). The loan agreement contains certain financial covenants, and prohibits cash dividends and mergers and acquisitions without the bank’s prior approval. At January 31, 2002, the Company was not in compliance with certain of these covenants, and has received a waiver through that date. In addition, Versant Europe had short-term borrowings of $31,000 outstanding at January 31, 2002.

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. We have identified, with a preceding asterisk, various sentences within this Form 10-Q that contain these forward-looking statements and words such as “believe,” “anticipate,” “expect,” “intend” and similar expressions are also intended to identify forward-looking statements, but neither the asterisks nor these words are the exclusive means of identifying these 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, 2001 Form 10-K on file with the Securities and Exchange Commission, especially the section labeled “Risk Factors.”

Overview

We were incorporated in August 1988 and commenced commercial shipments of our principal products, the VDS, in 1991 and Versant enJin in 2000. Substantially all of our revenue has been derived from:

(1) sales of licenses for VDS and Versant enJin;

(2) related maintenance and support, training, consulting and nonrecurring engineering fees received in connection with providing services associated with VDS and Versant enJin;

(3) sales of peripheral products for VDS and Versant enJin; and

(4) the resale of licenses, maintenance, training and consulting for third-party products that complement VDS and Versant enJin.

In the first quarter of 2002, we continued to focus on three major sales and product development initiatives: enhancement of and revenue growth in our sixth generation object database management system, VDS; enhancement of, revenue growth in and marketing emphasis on our new e-business product suite, Versant enJin; and growth of our consulting programs.

*We expect that licenses of VDS, Versant enJin, related products, third party products and sales of associated services, will be our principal sources of revenue for the foreseeable future. *Our future performance will depend in significant part on the continued growth of the e-business market and its dependence on highly scalable, high performance and reliable object-based technologies such as ours. *The failure of our products to perform favorably in and become an accepted component of this market, or a slower than expected increase or a decrease in the volume of sales of our products and services to this same market, could have a material adverse effect on us.

We license our products directly to end-users, primarily through two types of licenses—development licenses and deployment licenses. Development licenses are sold on a per seat basis and authorize a customer to develop an application program that uses VDS or Versant enJin. Before that customer may deploy an application it has developed under a development license, it must purchase deployment licenses based on the number of computers connected to the server that will run the application using the database management system. If the customer wishes to install several copies of the application, separate deployment licenses are required for each server computer and each client that will run the particular application that is has developed under a development license. 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 or 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.

Value-added resellers purchase development licenses on a per seat basis, on terms similar to those of development licenses sold directly to end-users. Value-added resellers are authorized to sublicense deployment copies of VDS or Versant enJin, which are either bundled or embedded in the value-added resellers’ applications and sold directly to end-users. Resellers, which also include distributors, are required to report the distribution of Versant software and are charged a royalty that is based either on the number of copies of application software distributed or on a percentage of the selling price charged by the reseller to its end-user customers.

Our development and deployment agreements with value-added resellers typically require the payment of a nonrefundable, one-time license fee for a license of perpetual term and are limited to particular applications. Revenue from license agreements is recognized in accordance with generally accepted accounting principles and requires delivery of the software, execution of a license agreement, that the fee is fixed and determinable and that collection of the resulting receivable is deemed probable. If an acceptance period or other contingency exists, revenue is recognized upon the satisfaction of the contingency, customer acceptance, or the expiration of the acceptance period. Maintenance revenue is recognized ratably over the term of the maintenance contract, which is typically twelve months. Training and consulting revenue is recognized when a purchase order is received and services have been performed. License arrangements that require significant modification of the software, maintenance agreements, technical support and/or nonrecurring engineering agreements requiring future obligations to be performed by us are recorded on our balance sheet as deferred revenue, until the obligation has been fulfilled.

We license VDS, Versant enJin and peripheral products and sell associated maintenance support and services through our direct sales force to end-users, value-added resellers, distributors and system integrators.

Critical Accounting Policies

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. We base these estimates on historical experience and trends, projections of future results and industry, economic and seasonal fluctuations. Although we believe these estimates are reasonable under the circumstances, there can be no assurances as application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties. Please see Note 2 to our condensed consolidated financial statements for additional detail of significant accounting policies.

Revenue Recognition

The Company adopted 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 and maintenance support agreements and for consulting and training activities.

Revenue from perpetual software license agreements is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed and determinable, and (4) collection is probable. If an acceptance period or other contingency exists, revenue is recognized upon the satisfaction of the contingency, customer acceptance, or the expiration of the acceptance period.

Revenue from the resale of third-party products is recorded at total contract value with the corresponding cost included in cost of sales, for the amount of revenue earned from the sale of the goods. The Company assumes risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns and the Company acts as principal in the transaction.

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. Extended payment terms are granted on an exception basis, typically in situations where customers elect to simultaneously purchase development and deployment licenses for an entire project and are attempting to align their payments with their customer’s deployment schedules. Extended payment terms are only granted to customers with a proven ability to pay at the time the order is received, and with prior approval of the Company’s senior management.

The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date. If an undelivered element of the arrangement exists under the license arrangement, revenue is deferred based on vendor-specific objective evidence of the fair value of the undelivered element. If vendor-specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. License arrangements that require significant modification of the software and/or nonrecurring engineering agreements requiring future obligations not yet performed, are deferred at the time of the transaction and recorded as revenue once the obligation has been fulfilled.

Goodwill

the Company determines an asset has been impaired, the impairment is recorded based on the fair value of the impaired asset.

Reserve for Doubtful Accounts

The Company’s bad debt allowance includes the specific identification of certain customers and a general reserve for accounts receivable. The general reserve is an estimate based on the Company’s collection experience, bad debt write off history, economic factors that may effect a customers ability to pay, and accounts receivable aging trends.

Results of Operations

In 2001, we filed a Form 8-K reporting a decision by our Board of Directors to change our fiscal year-end from December 31 to October 31. This change was made to better align our customers’ procurement process and our financial reporting cycles. The condensed financial statements included in Item 1 include statements for the current quarter ended January 31, 2002 and for the quarter ended March 31, 2001 because it was impracticable and not cost justified to furnish complete statements for the quarter ended January 31, 2001. The Company does not believe that seasonal or other factors affect the comparability of information or trends in those financials. Nevertheless, because the Company was able, without undue cost, to provide dollar amounts for revenues and expenses for the directly comparable quarter ended January 31, 2001, it has presented these amounts in this “Management’s Discussion and Analysis” section and focused its discussion on this comparison. References to the "comparable quarter," or "comparable period" in the Managements Discussion and Analysis section refer to the quarter ended January 31, 2001.

	Three months ended
	January 31, 2002		January 31, 2001		March 31, 2001
Revenue:
License	58	%	56	%	31	%
Services	42	%	44	%	69	%
Total revenue	100	%	100	%	100	%
Cost of revenue:
License	12	%	8	%	7	%
Services	21	%	23	%	54	%
Total cost of revenue	33	%	31	%	61	%
Gross profit	67	%	69	%	39	%
Operating expenses:
Marketing and sales	38	%	39	%	53	%
Research and development	25	%	19	%	33	%
General and administrative	13	%	9	%	16	%
Amortization of goodwill	1	%	1	%	2	%
Total operating expenses	77	%	68	%	104	%
Loss from operations	(10	%)	(1	%)	(65	%)
Other expense	1	%	(0	%)	(3	%)
Loss before taxes	(9	%)	(0	%)	(68	%)
Provision for taxes	0	%	0	%	1	%
Net income (loss)	(9	%)	(0	%)	(69	%)

	Three months ended
	January 31, 2002		January 31, 2001			March 31, 2001			% of change from 1/31/01		% of change from 3/31/01
			(unaudited)
License revenue	$	3,528	$	3,932		$	1,606		(10	%)	120	%
Service revenue	2,576		3,103			3,606			(17	%)	(29	%)
Total revenue	6,104		7,035			5,214			(13	%)	17	%

Cost of license	741		546			361			36	%	105	%
Cost of service	1,278		1,638			2,809			(22	%)	(55	%)
Total cost of revenue	2,019		2,184			3,170			(8	%)	(36	%)

Marketing and sales expense	2,346		2,712			2,777			(13	%)	(16	%)
R&D expense	1,503		1,319			1,698			14	%)	(11	%
G&A expense	804		613			857			31	%	(6	%)
Goodwill amortization	50		124			123			(60	%)	(59	%)
Total operating expense	4,703		4,768			5,455			(2	%)	(14	%)

Other income (expense), net	53		(59		)	(127		)	—		—

Revenue

Total consolidated revenue decreased 13% from $7.0 million in the comparable period of 2001. This decrease was due to the restructuring of our European operations in addition to the continued effects of a weakened 2001 economy.

The Company experienced the onset of the current economic downturn, especially as it pertains to the telecommunications sector, in our March 2001 license sales that were dramatically impacted by customer cancellations and delays. This economic situation prevails today, but its impact on the Company was more marked in the three months ended March 31, 2001, which is the reason for the dramatic increase in license revenue in the three months ended January 31, 2002, when compared to the three months ended March 31, 2001.

License revenue

License revenue decreased 10% from $3.9 million in the comparable period of 2001. This decrease was due to the lingering effects of a weakened 2001 economy where VDS deployment license sales were adversely affected by customers’ decisions to delay or cancel IT capital spending. License revenue increased in the first quarter of 2002 to 58% of total revenue, from 56% of total revenue for the comparable period of 2001.

Services revenue

Services revenue consists of revenue from consulting, training and technical support provided. Services revenue decreased 17% from $3.1 million in the comparable period of 2001, which was the result of lower revenues from Europe and a decrease in sub-contracted service engagements. In particular, a U.S. engagement in the telecommunications space commenced in December of 2000 and concluded in November of 2001. Services revenue decreased to 42% of total revenue in the first quarter of 2002 compared to 44% on a comparable basis.

Cost of Revenue and Gross Profit

Total cost of revenue decreased to $2.0 million in the first quarter from $2.2 million in the comparable period of 2001. This decrease was the result of lower sub-contracted service revenues, partially offset by increased amortization of product royalty obligations. Total cost of revenue as a percentage of total revenue increased to 33% in the first quarter of 2002 from 31% in the comparable period of 2001.

Cost of license revenue consists primarily of product royalty obligations, bad debt reserves, user manuals, product media and packaging and to a lesser extent, production labor and freight costs. Cost of license revenue increased to $741,000 in the first quarter of 2002 from $546,000 during the comparable period of 2001. This increase was primarily the result of amortizing product royalty costs incurred with the release of Versant enJin. Cost of license revenue as a percentage of license revenue increased to 21% in the first quarter from 14% in the comparable period of 2001, as a result of increased costs together with a lower license revenue base.

Cost of services revenue consists principally of personnel costs (both employee and sub-contractors) associated with providing consulting, training and technical support work paid for by customers. Cost of services revenue decreased to $1.3 million in the first quarter of 2002 from $1.6 million in the comparable period of 2001, which was primarily attributable to lower sub-contracted service revenues. Cost of service revenue as a percentage of service revenue decreased to 50% in the first quarter of 2002 from 53% of service revenue for the comparable period of 2001 due to a higher concentration of maintenance revenues in the overall service revenue mix.

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, literature, product management, sales offices, facility and depreciation expense. Marketing and sales expense decreased in the first quarter of 2002 to $2.3 million from $2.7 million in the comparable period. This decrease was the result of lower commission expense due to lower license revenue and reduced marketing program costs in the first quarter of 2002. As a percentage of total revenue, marketing and sales expenses decreased slightly to 38% in the first quarter of 2002 from 39% in the comparable period of 2001, with the reduction in expenses being slightly more than the decline in revenues.

Research and Development Expenses

Research and development expenses consist primarily of salaries, recruiting and other personnel-related expenses, depreciation, the expensing of development equipment, occupancy expenses, travel expenses and supplies. Research and development expenses increased to $1.5 million in the first quarter of 2002 from $1.3 million for comparable period in 2001. The increase for the comparable period was due to the increased cost to support application server integration and synchronization efforts. To date, all research and development expenditures have been expensed as incurred. As a percent of total revenue, research and development expenses increased to 25% in the first quarter of 2002 from 19% for the comparable period in 2001, more a function of higher expense, than decreased revenue.

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 outside legal, public relations, audit and external reporting costs. General and administrative expenses increased to $804,000 in the first quarter of 2002 from $613,000 in the comparable period of 2001. The increase from the comparable period of 2001 was the result of cost reduction efforts in December of 2000, which included the elimination of employee bonuses for 2000. As a percentage of total revenue, general and administrative expenses increased in the first quarter of 2002 to 13% from 9% in the comparable period of 2001, more a function of increased expense, than decreased revenue.

Amortization of Goodwill

The 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 the Company changed this estimate to a five-year period in 1998. We amortized approximately $50,000 in the three months ended January 31, 2002 and $156,000 in the ten months ended October 31, 2001. *We will amortize $139,950 of this remaining goodwill amount in fiscal 2002.

The acquisition of Soft Mountain in September 1998 resulted in our recording goodwill of $1.2 million, which was being amortized over a five-year period. In October 31, 2001, the Company wrote off the remaining $555,000 net book value of the goodwill related to Soft Mountain due to an impairment of the carrying value of the asset due to the abandonment of the product and the closure of an office in France.

Other Income (Expense), Net

Other expense, net represents the interest expense associated with our financing activities offset by income earned on our cash and cash equivalents and the foreign currency gain (loss) as a result of entering into transactions denominated in currency other than local currency. The Company reported net other expense of $59,000 in the comparable period of 2001 and net other income of $53,000 in the first quarter of 2002. The change was the result of lower currency exchange costs on the repayment of loans denominated in U.S. dollars by foreign subsidiaries that occurred in the first quarter of 2001.

Liquidity and Capital Resources

Cash and cash equivalents increased to $5.8 million at January 31, 2002 from $4.1 million at October 31, 2001. For the first quarter of 2002, the Company generated $2.0 million from operations with the net loss being more than offset by a reduction in accounts receivable due to collections. Financing activities used cash of $536,000 to the pay down of short-term debt and capital leases, which was offset in part from sales of the Company’s common stock totaling $244,000.

At January 31, 2002 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 2002. The Company has implemented several cash conservation measures to help improve its overall cash position. Specifically, the company has cut expenses through the closure of its France office, reduced cash bonus and cash incentive programs, reduced employee fringe benefit programs and delayed or eliminated capital expenditure plans. We will continue to evaluate and implement additional cash conservation measures as circumstances dictate. However, there can be no assurance of this, 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, if financial results fall short of our goals. *Additional debt or equity financing may be required or desirable and may not be available to us on commercially reasonable terms, or at all. The sale of additional equity or convertible debt securities could result in dilution to our shareholders, which could be substantial. Even if we were able to obtain additional debt or equity financing, the terms of this financing might significantly restrict our business activities. *Cash may also be used 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.

Recent Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” which supersedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations.” SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The adoption of this Statement did not have a material impact on our financial position or results of operations of the Company.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” Under this SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually (unless indication of impairment becomes apparent sooner) using the

fair value approach (except in certain circumstances), while other intangible assets will continue to be valued and amortized over their estimated lives and in-process research and development will continue to be written off immediately. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting and, effective January 1, 2002 for fiscal years commencing after December 31, 2001, existing goodwill will no longer be subject to amortization. Goodwill arising between June 29, 2001 and December 31, 2001 is not subject to amortization. Due to the Company’s recent change in fiscal year-end from December 31 to October 31, the Company will adopt SFAS No. 142 on November 1, 2002 at which time the Company will no longer amortize goodwill.

Effective January 2002, the Company must adopt SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations - Transactions”. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121 and resolves implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 will not have a material effect on our consolidated results of operations or financial position.

Risk Factors

This Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those set forth below, and those set forth in our Form 10-K for the period from January 1, 2001 through October 31, 2001 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. At January 31, 2002, we had $5.8 million in cash and cash equivalents and working capital of approximately $4.1 million. To date, we have not achieved profitability or positive cash flow on a sustained basis. *While 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 2002, as our revenue is unpredictable and a significant portion of our expenses are fixed, a revenue shortfall could deplete our limited financial resources and require us to reduce operations substantially or to raise additional funds through debt or equity financings. Additionally, we may choose to raise additional funds if such are available to us on terms we believe reasonable to strengthen our financial position or to make acquisitions. From time to time, we have been in violation of covenants of our bank debt, and there can be no assurance that our bank line of credit will be available if needed. Additionally, when our line expires in May 2002, there can be no assurance it will be renewed. There can be no assurance any necessary or desirable equity or debt funding would be available to us on favorable terms, if at all. Any sales of additional equity or convertible debt securities would result in dilution, which could be substantial, to our shareholders. Additionally, if we issue shares of preferred stock or convertible debt to raise funds, the holders of those securities may be entitled to various preferential rights over common stock, including repayment of their investment,

and possibly additional amounts, prior to any payments to holders of common stock, in the event of an acquisition of the company.

Our revenue levels are unpredictable. Our revenue has fluctuated dramatically on a quarterly basis, and we expect this trend to continue. These fluctuations result from a number of factors, including:

• the lengthy and highly consultative sales cycle associated with our products;

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

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

• the impact of new product introductions by us and 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.

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 the services we offer. The general economic slowdown in the world economy may have caused our customers to defer purchases of our products and services and otherwise altered their purchasing patterns. Capital spending in the information technology sector generally has decreased over the past 12 to 18 months, 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 events or similar events in the future, or of any related or unrelated military action, on our customer or our business. We believe that, in light of these events, some businesses may 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.

Stock ownership has become more concentrated and is subject to dilution; our holders of preferred stock have substantial liquidation preference. 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 indicates that Vertex holds 4,009,428 shares (which amount includes conversion of all preferred shares and exercise of warrants held by Vertex) and assuming that the Company has 15,669,907 shares outstanding (which amount consists of all outstanding shares of common stock of the Company plus conversion of preferred shares and exercise of warrants held by Vertex), Vertex and its affiliates would beneficially own approximately 26% of our common stock. Additionally, the preferred stock held by Vertex and others currently has a liquidation preference of $14 million, meaning that, in the event of an acquisition of the company, they would be entitled to the first $14 million of proceeds before holders of common stock would be entitled to any amount.

We rely on the telecommunications and financial services markets, which are characterized by complexity and intense competition. Historically, we have been highly dependent upon the telecommunications industry, and we are becoming increasingly dependent upon the financial services market 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. 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. The types of applications and commercial products for the telecommunications and financial services markets are continuing to develop and are rapidly changing, and the market is characterized by an increasing number of new entrants whose products may compete with those of ours. As a result, we cannot predict the future growth of these markets, and demand for object-oriented databases and 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. In addition, organizations 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 adequately hire and retain personnel for this practice.

We are repositioning our company for the e-business marketplace. Up to now the majority of our revenue has been generated by VDS. *However, we expect that future revenue growth will be generated mainly by our Versant enJin product, which has been developed to improve the performance of application servers in e-business applications for both large-scale enterprises and for Internet infrastructure companies. Our success in this marketplace depends on the continued growth of the application server market, this market’s acceptance of Versant enJin and our ability to deliver a reliable, competitively priced product, none of which is assured.

We may not be able to manage costs given the unpredictability of our revenue. We expended significant resources in 1999, 2000 and 2001 to build our infrastructure and hire personnel, particularly in our services and sales and marketing groups. We expect to continue to incur a relatively high level of fixed expenses. If planned revenue growth does not materialize, our business, financial condition and results of operations will be materially harmed.

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, although sales to our e-business customers are often concluded in shorter time intervals. Due in part to the strategic nature of our products and associated expenditures, potential customers are typically cautious in making product acquisition decisions. 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 no-fee pre-sales support resources, such as assistance in performing benchmarking and application prototype development. Because of the lengthy sales cycle 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 period.

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, in the three months ended January 31, 2002, two customers represented 17% and 11% of our total revenue, respectively. The timing of these orders and 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 that has become less significant in a given year with a different major customer could have a material adverse effect on our business.

We depend on our international operations. A significant portion of our revenue is derived from customers located outside the United States. This requires that we operate internationally and maintain a significant presence in international markets. However, our international operations are subject to a number of risks. These risks include:

• 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;

• difficulties and costs of staffing and managing foreign operations;

• potentially adverse tax consequences;

• foreign exchange fluctuations;

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

• the impact of business cycles and economic instability outside the United States; and

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

We must defend against 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 on January 26, 1998, February 5, 1998, March 11, 1998 and March 18, 1998. On June 19, 1998, a Consolidated Amended Complaint was filed by the court-appointed lead Plaintiff. On May 22, 2000, the court granted the defendants’ motion to dismiss the Consolidated Amended Complaint, permitting plaintiffs leave to amend. Plaintiffs filed a Second Amended Complaint on July 7, 2000. The court granted the defendant’s motion to dismiss the Second Amended Complaint on April 2, 2001, permitting plaintiffs leave to amend. Plaintiffs filed a First Amended Complaint on May 10, 2001. Like its predecessors, the First Amended Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Securities and Exchange Commission Rule 10b-5 promulgated under the Securities Exchange Act, in connection with public statements about Versant and our financial performance. The First Amended Complaint seeks an unspecified amount of damages. We vigorously deny the plaintiffs’ claims and have filed a motion

to dismiss the First Amended Complaint. On December 4, 2001, the court dismissed, with prejudice, the complaint against us in the securities class action suit, In re Versant Object Technology Securities Litigation. It is possible, however, that the plaintiffs in this action may appeal the court’s decision. Therefore, although we has been successful in defending against this litigation thus far, this litigation may continue. Securities litigation can be expensive to defend, consume significant amounts of management time and result in adverse judgments or settlements that could have a material adverse effect on our results of operations and financial condition.

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 significant shortfalls in revenue and earnings from levels expected by securities analysts and investors, which has had an immediate and significant adverse effect on the trading price of our common stock and resulted in litigation. 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 could result in an even more immediate and adverse effect on the trading price of our common stock.

Risks Related To Our Industry

We face competition for both our VDS and Versant enJin products. For our VDS products, we compete with companies offering object and relational database management systems. Object-oriented competitors include eXcelon (formerly Object Design, Inc.), Objectivity, Inc. and Poet Software Corporation. In addition, our products compete with traditional relational database management systems such as those from Oracle, Computer Associates, Sybase, IBM and Microsoft.

In the e-business market our competitors can be classified into two groups. First, we compete with relational database companies, many of which have modified or are expected to modify their Relational Database Management Systems (RDBMs) to incorporate object-oriented interfaces and other functionality and which 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 this marketplace, 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 current and potential customers of ours. Our competitors may be able to devote greater resources to the development, promotion and sale of their products, 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. 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 to remain competitive. While we believe our research and development expenditures will improve our product lines, due to 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.

We also face certain challenges in integrating first-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 first-party technology provider, 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 such 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 first-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. 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.

To date, we have not been notified that our products infringe the proprietary rights of first parties, but first parties could claim that our current or future products infringe such rights. 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. Any claim of this type, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays or 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. Competition for such personnel is intense, especially in Silicon Valley where our headquarters are located, and we may not be able to attract, train and motivate such personnel.

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 revenues 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

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibit No.		Exhibit Title
10.52		Business Loan Agreement (Asset based) dated December 14, 2001 by and between the registrant and Greater Bay Bank

(b) Reports on Form 8-K

No Reports on Form 8-K were filed in the quarter ended January 31, 2002.

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

Date: March 15, 2002		/s/ Lee McGrath
		Lee McGrath
		Vice President Finance and Administration. Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Principal Financial Officer)

EXHIBIT INDEX

EXHIBIT TITLE

NUMBER

3.03 — Registrant’s Amended and Restated Articles of Incorporation filed following the closing of registrant’s initial public offering(1)

3.05 — Registrant’s Amended and Restated Bylaws adopted prior to the closing of registrant’s initial public offering(1)

3.06 — Certificate of Amendment of Amended and Restated Articles of Versant Object Technology Corporation(2)

3.07 — Registrant’s Certificate of Determination dated July 12, 1999, incorporated by reference to the Company’s current report on Form 8-K (Exhibit 3.01) filed July 12, 1999.

10.03 — Registrant’s 1996 Directors Stock Option Plan, as amended, and related documents(3)**

10.04 — Registrant’s 1996 Employee Stock Purchase Plan, as amended, and related documents(4)**

10.05 — Registrant’s 401(k) Plan and addendum thereto(1)

10.09 — Joint Venture Agreement dated as of July 26, 1995 between Registrant and ISAR-Vermogensverwaltung Gbr mbH(1)*

10.10 — Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers(1)

10.14 — Form of Amendment to Versant Corporation Stock Option Agreement(1)**

10.15 — Lease Agreement dated November 25, 1996 between John Arrillaga, Trustee et al. and Registrant(5)

10.16 — Form of Letter Agreement dated October 22, 1997 between registrant and its executive officers(6)**

10.18 — Letter Agreement dated November 26, 1997 between registrant and Nick Ordon(6)**

10.23 — Corporate Resolution and Incumbency Certification dated March 30, 1998(2)

10.28 — Vertex Note Purchase Agreement Dated October 16, 1998(10)

10.29 — Vertex Convertible Secured Subordinated Promissory Note Dated October 16, 1998(8)

10.30 — Vertex Security Agreement Dated October 16, 1998(8)

10.31 — Vertex Registration Rights Agreement Dated October 16, 1998(6)

10.32 — Vertex Subordination Agreement Dated October 16, 1998(8)

10.33 — Special Situations Fund Common Stock and Warrant Purchase Agreement Dated December 28, 1998(8)

10.34 — Special Situations Fund Stock Warrant Dated December 28, 1998(8)

10.35 — Special Situations Fund Registration Rights Agreement Dated December 28, 1998(8)

10.37 — Preferred Stock and Warrant Purchase Agreement entered into as of June 28, 1999 incorporated by reference to the Registrant’s current report on Form 8-K (Exhibit 10.01) filed July 12, 1999.

10.38 — Form of Common Stock Purchase Warrant 1999 incorporated by reference to the Registrant’s current report on Form 8-K (Exhibit 10.02) filed July 12, 1999.

10.39 — Debt Cancellation Agreement between the Company and Vertex Technology Fund, Inc incorporated by reference to the Company’s current report on Form 8-K (Exhibit 10.03) filed July 12, 1999.

10.40 — Supplement to Registration Rights Agreement among the Company and the parties listed on the Schedule of Investors attached thereto incorporated by reference to the Company’s current report on Form 8-K (Exhibit 10.04) filed July 12, 1999.

10.41 — 1996 Equity Incentive Plan, amended as of January 19, 2000(9)

10.42 — Public Relations Firm Agreement Dated November 1, 1999(10)

10.50 — Business Loan Agreement (Asset Based) dated June 28, 2001 by and between the registrant and Greater Bay Bank.

10.51 — Commercial Security Agreement dated June 28, 2001 by and between the registrant and Greater Bay Bank.

10.52 — Business Loan Agreement (Asset Based) dated December 14, 2001 by and between the registrant and Greater Bay Bank.

23.01 — Consent of Arthur Andersen LLP, Independent Public Accountants(10)

1) Incorporated by reference to the Registrant’s Registration Statement on Form SB-2 (file number 333-4910-LA) filed with and declared effective by the Securities and Exchange Commission on July 17, 1996.

2) Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended September 30, 1998, filed with the Securities and Exchange Commission on November 13, 1998.

3) Incorporated by reference to Exhibit 4.07 to the Registrant’s Registration Statement on Form S-8 (file number (333-67776) filed with the Securities and Exchange Commission on August 17, 2001.

4) Incorporated by reference to Exhibit 4.06 to the Registrant’s Registration Statement on Form S-8 (file number (333-67776) filed with the Securities and Exchange Commission on August 17, 2001.

5) Incorporated by reference to the Registrant’s Form 10-KSB for the quarter ended December 31, 1997, filed with the Securities and Exchange Commission on April 3, 1998.

6) Incorporated by reference to the Registrant’s Form 10-KSB for the year ended December 31, 1996, filed with the Securities and Exchange Commission on March 31, 1997.

7) Incorporated by reference to the Registrant’s Form 10-KSB for the quarter ended December 31, 1998, filed with the Securities and Exchange Commission on April 3, 1999.

8) Incorporated by reference to the Registrant’s Form 10-KSB for the quarter ended December 31, 1999 filed with the Securities and Exchange Commission on April 3, 1999.

9) Incorporated by reference to Exhibit 4.05 to the Registrant’s Registration Statement on Form S-8 (file number (333-67776) filed with the Securities and Exchange Commission on August 17, 2001.

10) Incorporated by reference to the Registrant’s Form 10-KSB for the period from January 1, 2001 through October 31, 2001, filed with the Securities and Exchange Commission on January 31, 2002.

* Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been omitted from the filing and have been filed separately with the Securities and Exchange Commission.

** Management contract or compensatory plan.

BUSINESS LOAN AGREEMENT (ASSET BASED)

Principal
$5,000,000.00

Loan Date
12-14-2001

Maturity
05-15-2002

Loan No.
530037155

Call/Coll
2000

Account

Officer
802

Initials

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower:	Versant Corporation	Lender:	Greater Bay Bank. a division of Mid-Peninsula Bank
	6539 Dumbarton Circle		Fremont Region
	Fremont. CA 94555		39470 Paseo Padre Parkway
			Fremont, CA 94538

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated December 14, 2001, is made and executed between Versant Corporation (“Borrower”) and Greater Bay Bank, a division of Mid-Peninsula Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of December 14, 2001, and shall continue in full force and effect amid such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges or until such time as the parties may agree in writing to terminate this Agreement.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:

Conditions Precedent to Each Advance. Lender’s obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender:

(1) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender.

(2) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request.

(3) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect.

(4) All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect.

(5) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower’s Accounts, banks, records, and operations, and Lender shall be satisfied as to their condition.

(6) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and Related Documents as are then due and payable.

(7) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled “Compliance Certificate.”

Making Loan Advances. Advances under this credit facility, as well as directions for payment form Borrower’s accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the Instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.

Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.

Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loan obligations and duties owed by Borrower to Lender. Borrower (and others, if required) shall grant to Lender Security interests in such property and assets as Lender may require. Lender’s Security interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender.

Perfection of Security Interests. Borrower agrees to execute financing statements and all documents perfecting Lender’s Security Interest and to take whatever other actions are requested by Lender to perfect and continue Lender’s Security interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney in fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender’s security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender before any change in Borrower's Social Security Number of Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address of location of Borrower’s principal governance office or should Borrower merge or consolidate with any other entity.

Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender’s representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at 6539 Dunbarion Circle, Fremont, Ca 94555. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower’s collateral.

Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and schedules of Eligible Accounts in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: With respect to Eligible Accounts, schedules shall be delivered as follows: Monthly accounts receivable and accounts payable agings within fifteen (15) days of month and with Borrowing Base Certificate.

Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time and at Borrower’s expense to inspect, examine, and audit Borrower’s records and to confirm with Account Debtors the accuracy of such Accounts.

Remittance Account. Borrower agrees that Lender may at any time require Borrower to institute procedures whereby the payments and other proceeds of the Accounts shall be paid by the Account Debtors under a remittance account or lock box arrangement with Lender, or Lender’s agent, or with one or more financial institutions designated by Lender. Borrower further agrees that, if no Event of Default exists under this Agreement, any and all of such funds received under such a remittance account or lock box arrangement shall, at Lender’s sole election and discretion, either be (1) paid or turned over to Borrower; (2) deposited into one or more accounts for the benefit of Borrower (which deposit accounts shall be subject to a security assignment in favor of Lender); (3) deposited into one or more accounts for the joint benefit of Borrower and Lender (which deposit accounts shall likewise be subject to a security assignment in favor of Lender); (4) paid or turned over to Lender to be applied to the indebtedness in such order and priority as Lender may determine within its sole discretion; or (5) any combination of the foregoing as Lender shall determine from time to time. Borrower further agrees that should one or more Events of Default exist, any and all funds received under such a remittance account or lock box arrangement shall be paid or turned over to Lender to be applied to the Indebtedness, again in such order and priority as Lender may determine within its sole discretion.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Fees and Expenses Under This Agreement. Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

Representations and Warranties. The representations and warranties set forth in this agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of California. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 6539 Dumbarton Circle, Fremont, CA 94555. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities.

Assumed Business Names. Borrower has filed or recorded all documents of filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business ; None.

Authorization. Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower’s articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower to Borrower’s properties.

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of Borrower’s Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treet, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release of threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement including the obligation to indemnify, shall survive the payment of the indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, to other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing. Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly occurring repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than ninety (90) days after the end of each fiscal year Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than 15 days after the end of each month, Borrower’s balance sheet and profit and loss statement for the period ended, prepared by Borrower.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended. Federal and other governmental tax returns, prepared by Borrower.

Additional Requirements. Borrower agrees to provide Lender with 10K report annually within ninety (90) days and 100 report within forty-five (45) days of quarter end.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Financial Covenants and Ratios. Comply with the following covenants and ratios:

Working Capital Requirements. Borrower shall comply with the following working capital ratio requirements:

Quick Ratio. Maintain a Quick Ratio in excess of 1,300 to 1,000. The term “Quick Ratio” means Borrower’s Cash & Equivalent plus Borrower’s net Trade Receivables divided by Borrower’s total Current Liabilities. This liquidity ratio will be evaluated as of month-end.

Minimum Income and Cash flow Requirements. Maintain not less than the following Minimum Net Income level: Maintain a minimum quarterly Net Profit Before Interest, Income and Franchise Taxes, Depreciation, Amortization and Depletion Expenses plus Other Noncash Charges - Extraordinary Income [Gains/Losses] beginning January 31, 2002 and quarterly thereafter.

Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of not less than: $6,500,000.00. Other Net Worth Requirements are as follows: Minimum Net Worth Requirement shall be Evaluated on a quarterly basis, beginning October 31, 2001.

Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower upon request at Lender will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender [however not more often then annually], Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, condition, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to use or occupancy of the Collateral, including without limitation, the Americans with Disabilities Act. Borrower may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security of a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memorande of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Compliance Certificates. Unless waived in writing by Lender, provide Lender within fifteen (15) days after the end of each month, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event with thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority {including any request or policy not having the force of law} shall impose, modify or make applicable any taxes {except federal, state or local income or franchise taxes imposed on Lender}, reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates. (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (C) reduce the rate of return on Lender’s capital as a consequence of Lender’s obligations with respect to the credit facilities to which the Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender’s written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharging or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharge or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect. Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases. (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cause operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” {as defined in the Internal Revenue Code of 1985, as amended}, Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets. (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if; (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or become insolvent files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims, or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or an Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender (?) or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender and in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender behaves the prospect of payment of performance of the Loan is impaired.

Right to Cure. If any default, other than a default on indebtedness, is curable and if Borrower or Grantor, as the case may be has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's safe discretion to be sufficient to cure the default and thereafter (?) produce compliance as soon as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further loan Advances or disbursements), and, at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit or any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

EXHIBIT A. Exhibit A is attached to this Agreement, and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement.

DEPOSIT RELATIONSHIP. Borrower agrees that until such time as Borrower is no longer subject to the terms of any credit agreement(s) with Lender, the primary deposit account(s) maintained by Borrower will be placed with Lender, or a bank affiliated with Lender.

ACCOUNTS RECEIVABLE AUDITS. Audits of accounts receivable may be conducted annually and within forty-five (45) days of documentation or prior to initial line advance, of at such frequency as Lender shall require. It is agreed that Lender will be reimbursed for the costs of any such audits.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees: Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings {including efforts to modify or vacate any automatic stay or injunction}, appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, or one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Agreement has been accepted by Lender in the State of California.

Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of Alameda County, State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a wavier of any of Lender’s rights of any or Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, or first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted form this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements contained by or an behalf of Borrower shall bind Borrower’s successors and

assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time of Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Account. The word “Account” means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender).

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Assets Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time.

Borrower. The word “Borrower” means Versant Corporation, and all other persons and entities signing the Note in whatever capacity.

Borrowing Base. The words “Borrowing Base” mean, as determined by Lender from time to time, the lesser of [1] $5,000,000.00 or (2) 80.000% of the aggregate amount of Eligible Accounts.

Business Day. The words “Business Day” mean a day on which commercial banks are open in the State of California.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factors’ lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device or any other security or lien interest whatsoever, whether created by law, contract or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.

Eligible Accounts. The words “Eligible Accounts” mean at any time, all of Borrower’s Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agree to by Lender in writing. Eligible accounts do not include:

(1) Accounts with respect to which the Account Debtor is employee or agent to Borrower.

(2) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors.

(3) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional.

(4) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender.

(5) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower.

(6) Accounts which are subject to dispute, counterclaim, or setoff.

(7) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor.

(8) Accounts with respect to which lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory.

(9) Accounts of any Account Debtor who has filed or has had filed against it a position in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, of debtor in relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due.

(10) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States.

(11) Accounts which have not been paid in full within 90 days from the invoice date. The entire balance of any Account of any single Account Debtor will be ineligible whenever the portion of the Account which has not been paid within 90 days from the invoice date is in excess of 20.000% of the total amount outstanding on the Account.

(12) That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all the Borrower’s Accounts.

(13) C.O.D. accounts, cash accounts, non customer miscellaneous accounts and finance charges incurred on past due account balances.

(14) Accounts in which the Borrower fails to provide Lender with requested financial information concerning the subject accounts (Although certain concentrations are examined on a case-by-case basis, Lender’s standard procedure is to request D & B reports of financial statements on all potential concentrations greater than 25%.)

(15) Unbilled accounts receivable.

(16) Dated and/or extended-term accounts receivable.

(17) Refundable maintenance contract accounts receivable.

(18) Bonded accounts receivable.

(19) Retarnages (amounts withheld from billing and which may not be due depending on acceptable performance or completion of a contract.)

(20) Any accounts that in the solo discretion of the Lender are considered to be ineligible for the purposes of the transaction(s) contemplated.

(21) Credit Balances aged past 90 days from invoice date or 60 days past due.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1990, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act. 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code. Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Expiration Date. The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadcast sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means Greater Bay Bank, a division of Mid Peninsula Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Promissory Note executed by Versant Corporation dated June 28, 2001 in the original principal amount of $5,000,000.00, (the “Note”), together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Primary Credit Facility. The words “Primary Credit Facility” mean the credit facility described in the Line of Credit section of this Agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

Tangible Net Worth. The words “Tangible Net Worth” mean Borrower’s total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total debt.

Trade Receivables. The words “Trade Receivables” mean all of Borrower’s accounts from trade, net of allowance for doubtful accounts.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED DECEMBER 14, 2001.

BORROWER:

VERSANT CORPORATION

By:	/s/ Lee McGrath,
Lee McGrath, Chief Financial Officer of Versant
Corporation

LENDER:

GREATER BAY BANK, A DIVISION OF MID-PENINSULA BANK

By:
Authorized Signer

EXHIBIT “A” TO BUSINESS LOAN AGREEMENT

Principal
$5,000,000.00

Loan Date
12-14-2001

Maturity
05-15-2001

Loan No
530037155

Call/Coll
2000

Account

Officer
602

Initials

Borrower:	Versant Corporation	Lender :	Greater Bay Bank, a division of Mid-Peninsula Bank
	6539 Dumbarton Circle		Fremont Region
	Fremont, CA 94555		39470 Passo Padra Parkway
			Fremont, CA 94538

This EXHIBIT “A” TO BUSINESS LOAN AGREEMENT is attached to any by this reference is made a part of the Business Loan Agreement (Asset Based), dated December14, 2001, and executed in connection with a loan or other financial accommodations between GREATER BAY BANK, A DIVISION OF MID-PENINSULA BANK and Versant Corporation.

ADDITIONAL PROVISION

As applicable, the definition(s) of the following financial covenants and/or defined terms contained in this Business Loan Agreement are amended to read as follows:

Working Capital. The Words “Working Capital” mean Borrower’s current assets less current liabilities.

Tangible Net Worth. The words “Tangible Net Worth” mean Borrower’s total assets excluding all Intangible assets (i.e., goodwill, trademarks, patents, copyrights, franchises, capitalized software, covenants not to compete, organizational costs, Investments, employee/owner and intercompany accounts receivable and similar intangible items) less total debt, excluding subordinated debt.

Cash Flow. The words “Cash Flow” mean Borrower’s net income after taxes, exclusive of extraordinary gains and income, plus depreciation and amortization less cash dividends, distributions and withdrawals, and repurchase of treasury stock.

Debt/Worth Ratio. The ratio “Debt/Worth” means Borrower’s Total Liabilities, excluding subordinated debt, divided by Borrower’s Tangible Net Worth.

Initials : ___________________.

THIS EXHIBIT “A” TO BUSINESS LOAN AGREEMENT IS EXECUTED ON DECEMBER 14, 2001.

BORROWER:

VERSANT CORPORATION

By:	/s/ Lee McGrath
Lee McGrath, Chief Financial Officer of Versant
Corporation

LENDER:

GREATER BAY BANK, A DIVISION OF MID-PENINSULA BANK

By:
Authorized Signer