UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________

FORM 10-QSB

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2003


[ ]		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: 000-28017

POET HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


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

1065 E. Hillsdale Blvd., Suite 205
Foster City, CALIFORNIA 94404

(Address of principal executive offices)

(650) 212-3100

(Issuer’s telephone number)

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 [X] NO [ ]

The number of shares outstanding of the Registrant’s Common Stock on September 30, 2003 was 10,924,606 shares.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3 CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

POET HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-QSB

INDEX


		PAGE

PART I:	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements
	Unaudited Condensed Consolidated Balance Sheets – September 30, 2003 and December 31, 2002	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss - Three and Nine months ended September 30, 2003 and 2002	4
	Unaudited Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2003 and 2002	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3	Controls and Procedures	15
PART II:	OTHER INFORMATION	17
Item 1.	Legal Proceedings	17
Item 2.	Changes to Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURES		19
EXHIBIT INDEX		20

Note Regarding Forward Looking Statements

In addition to historical information, this Form 10-QSB contains forward-looking statements that relate to future events or future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” in Poet Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2002 as filed with the SEC. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

Assets


			September 30,			December 31,
			2003			2002

Current assets:
	Cash and equivalents		$	9,183		$	9,055
	Short term investments			—			2,981
	Accounts receivable (net of allowances of $167 and $227 in 2003 and 2002)			1,802			1,532
	Inventories and other current assets			209			269

		Total current assets		11,194			13,837
Property, furniture and equipment, net				401			541
Other assets				939			834

Total assets			$	12,534		$	15,212

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	603		$	513
	Accrued liabilities			1,064			1,154
	Restructuring accruals			—			725
	Deferred revenue			547			419

		Total current liabilities		2,214			2,811

Long Term Obligations				39			—
Stockholders’ equity:
	Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares outstanding			—			—
	Common stock, $0.001 par value; 100,000,000 shares authorized
	Shares outstanding: 2003 - 10,924,606 - 2002 - 10,893,646			11			11
	Additional paid in capital			66,306			66,291
	Deferred stock compensation			—			—
	Accumulated deficit			(56,859	)		(54,533	)
	Accumulated other comprehensive income			823			632

		Total stockholders’ equity		10,281			12,401

Total liabilities and stockholders’ equity			$	12,534		$	15,212

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenues:
	Product		$	1,127		$	830		$	3,224		$	3,459
	Consulting and training			386			392			1,201			985
	Support and maintenance			440			483			1,102			1,390

Total revenues				1,953			1,705			5,527			5,834

Costs and operating expenses:
	Cost of product			55			143			214			383
	Cost of consulting and training			279			288			879			967
	Cost of support and maintenance			205			343			613			1,093
	Selling and marketing			1,075			1,748			3,210			6,211
	Research and development			801			1,067			2,559			3,109
	General and administrative			695			586			1,400			1,964
	Restructuring costs			—			1,773			—			1,773
	Amortization of deferred stock compensation (*)			—			13			—			65

		Total costs and operating expenses		3,110			5,961			8,875			15,565

Operating loss				(1,157	)		(4,256	)		(3,348	)		(9,731	)

Other income (expense):
	Interest expense			(1	)		(1	)		(3	)		(2	)
	Interest income and other, net			111			31			1,035			332

	Total other income (expense), net			110			30			1,032			330

Loss before income taxes				(1,047	)		(4,226	)		(2,316	)		(9,401	)
Income tax expense				—			(13	)		(11	)		(58	)

Net loss			$	(1,047	)	$	(4,239	)	$	(2,327	)	$	(9,459	)

Other comprehensive income (loss)				54			(22	)		192			150

Comprehensive loss			$	(993	)	$	(4,261	)	$	(2,135	)	$	(9,309	)

Basic and diluted net loss per share			$	(0.10	)	$	(0.39	)	$	(0.21	)	$	(0.87	)

Shares used in computing basic and diluted net loss per share				10,925			10,893			10,921			10,884

(*) Amortization of deferred stock compensation
	Cost of consulting and training		$	—		$	2		$	—		$	8
	Cost of support and maintenance			—			—			—			2
	Selling and marketing			—			6			—			29
	Research and development			—			3			—			18
	General and administrative			—			2			—			8

			$	—		$	13		$	—		$	65

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)


				Nine Months Ended September 30,

				2003			2002

Cash flows from operating activities:
Net loss				$	(2,327	)	$	(9,459	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				350			535
	Amortization of deferred stock compensation				—			65
	Write-off of fixed assets				—			25
	Restructuring charges				—			141
	Amortization of investment discounts				—			(205	)
	Changes in operating assets and liabilities:
		Accounts receivable			(151	)		282
		Inventories and other current assets			(2	)		87
		Other assets			331			74
		Accounts payable and accrued liabilities			(856	)		409
		Deferred revenue			100			(179	)

			Net cash used in operating activities		(2,555	)		(8,225	)
Cash flows from investing activities:
	Purchases of property, furniture and equipment				(150	)		(202	)
	Proceeds from sales and maturities of investments				2,981			18,426
	Investment in unconsolidated company				—			(168	)
	Purchase promissory note				(300	)		—
	Purchases of investments				—			(13,610	)

			Net cash provided by investing activities		2,531			4,446
Cash flows from financing activities:
	Repayments of debt				(12	)		(63	)
	Borrowings				51			13
	Common stock issued, net of issuance costs				15			—

			Net cash provided by financing activities		54			(50	)
Effect of exchange rate changes on cash and equivalents					98			(17	)

Increase (decrease) in cash and equivalents					128			(3,846	)
Cash and equivalents — beginning of period					9,055			10,905

Cash and equivalents — end of period				$	9,183		$	7,059

Supplemental disclosure of cash flow information:
	Interest paid			$	3		$	—

	Taxes paid			$	11		$	37

See Notes to Unaudited Condensed Consolidated Financial Statements

POET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)

1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary (consisting of normal, recurring adjustments) for a fair presentation of Poet Holdings, Inc.’s (“Poet’s” or the “Company”) financial position as of September 30, 2003, the results of operations and comprehensive loss for the three and nine months periods ended September 30, 2003 and 2002 and cash flows for the nine months periods ended September 30, 2003 and 2002.

The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2003. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 as filed with the SEC.

2. BALANCE SHEET COMPONENTS

INVESTMENTS

Investments with original maturities greater than three months and with maturities less than one year from the balance sheet date are classified as short-term investments. Investments with maturities one year or greater from the balance sheet date are classified as long-term investments. The Company accounts for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” The Company’s policy is to protect the value of its investment portfolio and to minimize principal risk by earning returns based on current interest rates. The Company has classified all of its investments as available-for-sale securities. While the Company’s practice is to hold debt securities to maturity, the Company has classified all debt securities as available-for-sale securities, as the sale of such securities may be required prior to maturity to implement management strategies. The carrying value of all securities is adjusted to fair market value, with unrealized gains or losses being excluded from earnings and reported as a separate component of stockholder’s equity. Cost is based on the specific identification method for purposes of computing realized gains and losses.

As of September 30, 2003, the Company no longer holds short-term investments. The Company has transferred the majority of its funds into EURO. At September 30, 2003 the Cash and Equivalents included $816,000 and the equivalent of $8.4 million in EURO based on an exchange rate of EURO 0.8584 per US-$. On October 2, 2003 the Company has transferred the equivalent of $4.8 million based on an exchange rate of EURO 0.8584 per US-$ back from EURO into US-$.

On March 7, 2003 the Company purchased a promissory note from FastObjects, Inc., our exclusive reseller for the U.S. and Canada for our database product line, “FastObjects by Poet” for $300,000. The note bears interest of 5% per annum and is due and payable on the earlier of (i) March 6, 2007 (maturity date), (ii) the termination of the reseller agreement with FastObjects, Inc., or (iii) upon default. The promissory note is included in Other Assets.

3. NET LOSS PER SHARE

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):


	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,

	2003			2002			2003			2002

Net loss (numerator), basic and diluted	$	(1,047	)	$	(4,226	)	$	(2,316	)	$	(9,401	)
Shares (denominatior) used in computing basic and diluted net loss per share weighted average common shares outstanding		10,925			10,893			10,921			10,884

Net loss per share basic and diluted	$	(0.10	)	$	(0.39	)	$	(0.21	)	$	(0.86	)

For the three and nine months ended September 30, 2003 the Company had securities outstanding, which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:


	SEPTEMBER 30,

	2003		2002

Outstanding options		1,422,103		1,355,260
Warrants		—		55,739

Total		1,422,103		1,410,999

Weighted average exercise price of options	$	4.72	$	9.09

Weighted average exercise price of warrants	$	—	$	6.88

4. STOCK BASED COMPENSATION

Stock-Based Compensation — The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees.

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

Our calculations were made using the Black-Scholes Option Pricing Model with the following weighted average assumptions:


							Employee Stock												Employee Stock
	Stock Option Plans						Purchase Plan						Stock Option Plans						Purchase Plan
	Three Months Ended						Three Months Ended						Nine Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2003			2002			2003			2002			2003			2002			2003			2002
Risk-free interest rate		1.2			1.8			1.2			1.8			1.2			2.8			1.4			2.9
Volatility		101	%		92	%		101	%		92	%		95	%		91	%		95	%		91	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%

The expected life of options under the Company’s Stock Option Plans and the Company’s ESPP plan were estimated at 12 months following the vesting and at 6 months, respectively. The Company’s calculations are based on a single option valuation approach and forfeitures are recognized as they occur (in thousands, except per share data):


	THREE MONTHS ENDED SEPTEMBER 30,				NINE MONTHS ENDED SEPTEMBER 30,

	2003		2002		2003		2002

Net loss — as reported	$	1,047	$	4,239	$	2,327	$	9,459
Add: Stock-based compensation expense determined using fair value method, net of tax		352		745		1,059		2,320
Less : Stock-based compensation included in the net loss		0		-13		0		-65
Net loss — pro forma	$	1,399	$	4,971	$	3,386	$	11,714

Basic and diluted loss per common share— as reported	$	0.10	$	0.39	$	0.21	$	0.87
Basic and diluted loss per common share— pro forma	$	0.13	$	0.46	$	0.31	$	1.08

5. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

The Company operates in one reportable segment, the development and marketing of software products that allow businesses to share and manage complex information and facilitate effective business-to-business processes and information exchange over the Internet. The Company principally operates in the U.S. and Germany. The following is a summary of operations within geographic areas (in thousands):


	THREE MONTHS ENDED SEPT. 30,				NINE MONTHS ENDED SEPT. 30,

	2003		2002		2003		2002

Revenues (1):
United States	$	109	$	312	$	536	$	2,206
Europe		1,844		1,393		4,991		3,628

	$	1,953	$	1,705	$	5,527	$	5,834

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


	SEPTEMBER 30,		DECEMBER 31,
	2003		2002

Long Lived Assets
United States	$	10	$	6
Germany		391		535

	$	401	$	541

6. RESTRUCTURING COSTS

During the quarter ended September 30, 2002, the Company approved and implemented a plan to reduce its overall workforce, especially with its United States subsidiary, Poet Software Corporation. As part of the plan, the Company switched from selling directly in USA and Canada to indirect sales channels. The Company also decreased the size of its management team from eight executives on December 31, 2001 to three executives on December 31, 2002. These actions resulted in severance and related costs and facility and equipment costs that totaled $1.8 million for fiscal 2002. The downsizing process has been completed and all payments have been made as of June 30, 2003.

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

In connection with the downsizing of Poet Software Corporation and reduction in overall workforce, certain facilities leases were terminated and property and equipment sold. Charges relating to lease terminations and property and equipment amounted to $676,000 all recorded during the year ended December 31, 2002.

At September 30, 2003 the Company had no more accruals on its balance sheet for restructuring charges. The following table sets forth an analysis of the components of the first nine months of 2003 of restructuring charges and the payments made against the accrual through December 31, 2002 (in thousands). There were also no restructuring charges or payments made against the accrual as of December 31, 2002 in the quarter ended September 30, 2003.


	Accrual Balance		Non-cash		Cash			Accrual Balance at
	at December 31, 2002		Charges		Payments			September 30, 2003
Severance and related costs	$	278	$	—	$	(278	)	$	—
Facility and equipment costs		447		—		(447	)		—

	$	725	$	—	$	(725	)	$	—

7. PROPOSED MERGER WITH VERSANT

On September 27, 2003, the Company, Versant Corporation, a California corporation (“Versant”) and Puma Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Versant (“Merger Sub”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company surviving the merger and becoming a wholly owned subsidiary of Versant (the “Merger”). Upon consummation of the Merger, each outstanding share of the Company’s common stock will be exchanged for 1.4 shares of Versant common stock, and options and warrants to purchase the Company’s common stock will be exchanged for options to purchase shares of Versant common stock according to the same exchange ratio. The proposed Merger is intended to qualify as a tax-free reorganization for the Company and Versant. The Merger Agreement calls for Versant to reduce the size of its Board of Directors to five directors upon effectiveness of the Merger, with the board of directors immediately after consummation of the Merger to be composed of two directors from the Company and three directors (including Versant’s CEO, Nick Ordon) from Versant. The transaction is expected to be completed in the first calendar quarter of 2004. If the Merger Agreement is terminated without consummation of the Merger in certain circumstances, a party to the Merger would become obligated to pay the other party certain termination fees as described in the Merger Agreement ranging from $500,000 to $1,000,000.

8. PRODUCT WARRANTEES AND OTHER GUARANTEES

The Company provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products. The Company evaluates estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FIN 45. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the

Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications in our financial statements.

Further the Company generally warrants for a period of 12 months that its software products will perform substantially in accordance with its published specifications. In the event of any non-conformance, the Company agrees to repair, replace or in certain cases accept return of the non-conforming product and refund fees paid by the customer for said non-conforming product. The Company has never incurred significant expense under its product warranties. The Company believes the estimated fair value of these indemnification agreements is minimal.

9. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No.150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires an issuer to classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.

PART I: FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.

Note Regarding Forward-Looking Statements

This discussion contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans, ,“anticipates”, “believes”, “estimates”, “predicts”, “intends”, “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those listed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” in Poet Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2002 as filed with the SEC. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements.

OVERVIEW

We are a provider of innovative data management software and solutions that allow organizations to share, manage and manipulate complex information and to facilitate effective business-to-business processes and information exchange over the Internet. Our database management system utilizes and supports complex, multidimensional data models and standard Internet programming languages. Our Internet solutions provide our customers with the ability to author, manipulate and electronically distribute complex business documents based on advanced exchange protocols using the Internet as a new means to increase customer relationships, accelerate business processes and reduce costs, thereby facilitating effective B2B information exchange.

From commencement of our operations in June 1995 through September 2003, our operating activities related primarily to increasing our research and development capabilities, designing and developing the software products which we are currently selling and staffing our administrative, sales and marketing organizations. Since our inception, we have incurred significant losses, and as of September 30, 2003, we had an accumulated deficit of $57 million, and for the quarter ended September 30, 2003, our net loss was $1.0 million. We have not achieved profitability on a quarterly or annual basis. We expect to continue to incur significant selling and marketing, product development, professional services and administrative expenses, and as a result, we will need to generate significantly higher revenues to achieve and maintain profitability. The Company employed 80 employees as of September 30, 2003 as compared to 106 employees as of September 30, 2002. Of the 80 employees employed as of September 30, 2003, 75 were employed in Europe and 5 in the United States.

RESULTS OF OPERATIONS

COMPARISON OF RESULTS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 TO THE QUARTER ENDED SEPTEMBER 30, 2002

Total revenues increased 15% from $1.7 million for the quarter ended September 30, 2002 to $2.0 million for the quarter ended September 30, 2003. Product revenues increased 36% from $830,000 for the quarter ended September 30, 2002 to $1.1 million for the quarter ended September 30, 2003. The increase in product revenues was due primarily to low product revenues in the quarter ended September 30, 2002, in which most of our restructuring activities including the outsourcing of our database business to FastObjects, Inc. were implemented. Consulting and training revenues decreased 2% from $392,000 for the quarter ended September 30, 2002 to $386,000 for the quarter ended September 30, 2003. Support and maintenance revenues decreased 9% from $483,000 for the quarter ended September 30, 2002 to $440,000 for the quarter ended September 30, 2003. The decrease in support and maintenance revenues was primarily due to downsizing of our US operations and outsourcing of our FastObjects activities to FastObjects, Inc. as part of our restructuring efforts in the third quarter of 2002.

Cost of product revenues decreased 62% from $143,000 in the quarter ended September 30, 2002 to $55,000 in the quarter ended September 30, 2003. Cost of product revenues includes the cost of licensing third-party software incorporated into our products and the costs of packaging and distributing our products. The decrease was attributable primarily to a decrease in amortization expenses for software purchased and incorporated into our catalog solutions product line. As a result of the higher product revenues and the lower product expenses, the gross margin for product increased to 95% in the quarter ended September 30, 2003 as compared with 83% in the quarter ended September 30, 2002. Cost of consulting and training revenues decreased 3% from $288,000 in the quarter ended September 30, 2002 to $279,000 in the quarter ended September 30, 2003. This decrease was attributable primarily to the decrease in personnel and related expenses resulting from our restructuring activities in 2002. The gross margin for consulting and training increased to 28% in the quarter ended September 30, 2003 from 27% in the quarter ended September 30, 2002. Cost of support and maintenance revenues decreased 40% from $343,000 in the quarter ended September 30, 2002 to $205,000 in the quarter ended September 30, 2003. The decrease was attributable primarily to the outsourcing of our US support and maintenance of our FastObjects product line to FastObjects, Inc., our exclusive reseller for the USA and Canada, as part of our restructuring activities in 2002. The gross margin for support and maintenance increased to 53% in the quarter ended September 30, 2003 from 29% in the quarter ended September 30, 2002 primarily as a result of the decrease in expenses resulting from the outsourcing to FastObjects, Inc. and higher support and maintenance revenues from our catalog solutions product line.

Selling and marketing expenses decreased 39% from $1.7 million in the quarter ended September 30, 2002 to $1.1 million in the quarter ended September 30, 2002. Selling and marketing expenses decreased primarily due to a significant reduction in headcount of our sales and marketing team as part of our restructuring efforts in 2002.

Research and development expenses decreased 25% from $1.1million in the quarter ended September 30, 2002 to $801,000 in the quarter ended September 30, 2003. This decrease was attributable primarily to the reduction in headcount of our R&D team as part of our restructuring efforts in 2002.

General and administrative expenses increased 19% from $586,000 in the quarter ended September 30, 2002 to $695,000 in the quarter ended September 30, 2003. This increase was attributable primarily to the expenses related to the proposed merger with Versant Corporation totaling $317,000 in the quarter ended September 30, 2003.

Other income, net increased 275% from $30,000 in the quarter ended September 30, 2002 to $110,000 in the quarter ended September 30, 2003. The increase was attributable primarily to unrealized gains from investments denominated in EURO resulting from the increase in value of the EURO versus the US-$ partially offset by lower interest income earned on lower cash and equivalents and investment balances in the quarter ended September 30, 2003 as compared to the quarter ended September 30, 2002, as well as the overall decrease in interest rates on cash and equivalents.

COMPARISON OF RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002

Total revenues decreased 5% from $5.8 million for the nine months ended September 30, 2002 to $5.5 million for the nine months ended September 30, 2003. Product revenues decreased 7% from $3.5 million for the nine months ended September 30, 2002 to $3.2 million for the nine months ended September 30, 2003. The decrease in product revenues was due primarily to the outsourcing of our database business to FastObjects, Inc. as part of the restructuring activities implemented in the second half of 2002 and weak overall economic conditions in the United States and Europe. Consulting and training revenues increased 22% from $1.0 million for the nine months ended September 30, 2002 to $1.2 million for the nine months ended September 30, 2003. The increase in consulting and training revenues was due primarily to an increase in consulting services performed in relation to our catalog solutions product line in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Support and maintenance revenues decreased 21% from $1.4 million for the nine months ended September 30, 2002 to $1.1 million for the nine months ended September 30, 2003. The decrease in support and maintenance revenues was primarily due to the decrease in overall product revenues and to the restructuring activities implemented in the second half of 2002.

Cost of product revenues decreased 44% from $383,000 in the nine months ended September 30, 2002 to $214,000 in the nine months ended September 30, 2003. Cost of product revenues includes the cost of licensing third-party software incorporated into our products and the costs of packaging and distributing our products. The decrease was attributable primarily to a decrease in amortization expenses for software purchased and incorporated into our catalog solutions product line. The gross margin for product increased to 93% in the nine months ended September 30, 2003 compared with 89% in the nine months ended September 30, 2002 primarily due to the lower cost of product revenues. Cost of consulting and training revenues decreased 9% from $967,000 in the nine months ended September 30, 2002 to $879,000 in the nine months ended September 30, 2003. This decrease was attributable

primarily to the decrease in personnel and related expenses resulting from our restructuring activities in 2002. The gross margin for consulting and training increased to 27% in the nine months ended September 30, 2003 from 2% in the nine months ended September 30, 2002, primarily as a result of higher utilization of consulting and training personnel and the increase in consulting and training revenues. Cost of support and maintenance revenues decreased 44% from $1.1 million in the nine months ended September 30, 2002 to $613,000 in the nine months ended September 30, 2003. The decrease was attributable primarily to the outsourcing of our US support and maintenance of our FastObjects product line to FastObjects, Inc., our exclusive reseller for the USA and Canada, as part of our restructuring activities in 2002. The gross margin for support and maintenance increased to 44% in the nine months ended September 30, 2003 from 21% in the nine months ended September 30, 2002 primarily as a result of the decrease in expenses resulting from the outsourcing to FastObjects, Inc.

Selling and marketing expenses decreased 48% from $6.2 million in the nine months ended September 30, 2002 to $3.2 million in the nine months ended September 30, 2003. Selling and marketing expenses decreased primarily due to a significant reduction in headcount of our sales and marketing team as part of our restructuring efforts in 2002.

Research and development expenses decreased 18% from $3.1 million in the nine months ended September 30, 2002 to $2.6 million in the nine months ended September 30, 2003. This decrease was attributable primarily to the reduction in headcount of our R&D team as part of our restructuring efforts in 2002.

General and administrative expenses decreased 29% from $2.0 million in the nine months ended September 30, 2002 to $1.4 million in the nine months ended September 30, 2003. This decrease was attributable primarily to the reduction in headcount of our G&A team as part of our restructuring efforts in 2002.

Other income, net increased 213% from $330,000 in the nine months ended September 30, 2002 to $1.0 million in the nine months ended September 30, 2003. The increase was attributable primarily to the increase in value of the EURO versus the US-$ partially offset by lower interest income earned on lower cash and equivalents and investment balances in the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002, as well as the overall decrease in interest rates on cash and equivalents.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through private sales of redeemable convertible preferred stock and from our initial public offering, resulting in net proceeds of $16.4 million and $41.5 million, respectively. To a lesser extent, we have also financed our operations through a convertible note financing and lending arrangements in the aggregate amount of $6.3 million.

As of September 30, 2003, we had $9.2 million in cash and equivalents and $9.0 million in working capital. As of December 31, 2002, we had $9.1 million in cash and equivalents, $3 million in short term investments, and $11.0 million in working capital. The decrease in working capital was primarily due to operational expenditures and the purchase of a promissory note for $300,000 from FastObjects, Inc., our exclusive reseller for the USA and Canada.

Net cash used in operating activities was $2.6 million for the nine months ended September 30, 2003 and $8.2 million for the nine months ended September 30, 2002. Net cash used in operating activities for the nine months ended September 30, 2003 primarily reflects the net loss and the decrease in liabilities and the increase in accounts receivable, partially offset by a decrease in other assets and deferred revenues. Net cash used in operating activities for the nine months ended September 30, 2002 primarily reflects the net loss partially offset by depreciation and amortization and the increase in accounts payable and accrued liabilities.

Net cash provided from investing activities was $2.5 million for the nine months ended September 30, 2003 and $4.4 million for the nine months ended September 30, 2002. Cash from investing activities reflects proceeds from the sale and maturity of short-term and long-term investments, offset by purchases of short-term and long-term investments, purchases of property, furniture and equipment and purchases or the sale of notes receivables in each period. Since inception, we have generally funded capital expenditures either through the use of working capital or, to a lesser extent, through equipment leases. For the nine months ended September 30, 2003, net cash provided from investing includes a use of $300,000 in cash for the purchase of a promissory note receivable from FastObjects, Inc. The note bears interest of 5% per annum and is due and payable on the earlier of (i) on September 6, 2007 (maturity date), (ii) the termination of the reseller agreement with FastObjects, Inc., and (iii) upon default.

Net cash provided by financing activities was $54,000 for the nine months ended September 30, 2003 and net cash used by financing activities was $50,000 for the nine months ended September 30, 2002. Our financing activities for the nine months periods ended September 30, 2003 and 2002 provided cash primarily through the issuance of common stock and the financing of capitalized leases and, for the nine months ended September 30, 2002 only, used cash primarily to repay debt in the form of loans.

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

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

PROPOSED MERGER WITH VERSANT

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, sales warranties and allowance for doubtful accounts, long-lived assets, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, the actual results could differ from those estimates.

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

Revenue Recognition

Our revenue recognition policy is significant because our revenue is a key component of our results of operations. In addition, our revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue results are

difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. The Company’s revenue recognition policy is consistent with Statement of Position No. 97-2, as amended. License revenues are comprised of fees for the Company’s software products. Revenue from license fees is recognized when an agreement has been signed, delivery of the product has occurred, no significant Company obligations remain, the fee is fixed or determinable, collectibility is probable and vendor-specific objective evidence exists to allocate a portion of the total fee to any undelivered elements of the arrangement. For electronic delivery, the software is considered to have been delivered when the Company has provided the customer with the access codes that allow for immediate possession of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected.

Allowance for Doubtful Accounts

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

Restructuring Activities

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

Income Taxes

We have a history of operating losses. These losses generated a sizable net operating loss carry-forward in excess of $28.6 million as of December 31, 2002. Generally accepted accounting principles in the United States of America require that we record a valuation allowance against the deferred tax asset associated with this net operating loss carry-forward if it is “more likely than not” that we will not be able to utilize it to offset future taxes. Due to the size of the net operating loss carry-forward in relation to our history of unprofitable operations, we have a full valuation allowance against this net deferred tax asset. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily state taxes and minimum taxes). It is possible, however, that we could be profitable in the future at levels which cause management to conclude that it is more likely than not that we will utilize all or a portion of the net operating loss carry-forward. Upon reaching such a conclusion, we would immediately reduce our valuation allowance to reflect the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal the relevant current local tax rates rather than the 0% rate currently being used. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the net operating loss carry-forward is utilized.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto included elsewhere in our Form 10-K which contain accounting policies and other disclosures required by GAAP.

ITEM 3 CONTROLS AND PROCEDURES

(a) Within the 90-day period prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the

“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company (including its consolidated subsidiaries) required to be included in our Exchange Act filings.

(b) There were no significant changes in our Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

ADDITIONAL INFORMATION REQUIRED ACCORDING TO THE RULES AND REGULATIONS OF THE PRIME STANDARD OF THE FRANKFURT STOCK EXCHANGE

The following is a summary of changes in stockholders’ equity for the nine months ended September 30, 2003 (in thousands, except share amounts).


							Deferred					Accumulated
	Common Stock						Stock					Other			Total
					Paid in		Compen-		Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital		sation		Deficit			Income (Loss)			Equity

Balances at December 31, 2002		10,893,646	$	11	$	66,291	$	—	$	(54,533	)	$	632		$	12,401
Issuance of common stock		30,960		—		15				—			—			15
Amortization deferred Stock Comp		—		—		—		—		—			—
Net loss		—		—		—		—		(2,327	)		195			(2,132	)
Other comprehensive income		—		—		—		—		—			(3	)		(3	)

Balances at September 30, 2003		10,924,606	$	11	$	66,306	$	—	$	(56,860	)	$	824		$	10,281

The following is a summary of changes in stockholders’ equity for the nine months ended September 30, 2002 (in thousands, except share amounts).


								Deferred						Accumulated
	Common Stock							Stock						Other		Total
					Paid in			Compen-			Accumulated			Comprehensive		Stockholder's
	Shares		Amount		Capital			sation			Deficit			Income (Loss		Equity

Balances at December 31, 2001		10,876,912	$	11	$	66,331		$	(126	)	$	(43,954	)	$	283	$	22,545
Issuance of common stock		16,734		—		13			—			—			—		13
Amortization deferred Stock Comp						(33	)		97								64
Net loss		—		—		—						(9,459	)		—		(9,459	)
Other comprehensive income		—		—		—						—			150		150

Balances at September 30, 2002		10,893,646	$	11	$	66,311		$	(29	)	$	(53,413	)	$	433	$	13,313

Ownership of Common Stock and Options By Officers and Directors of Poet Holdings, Inc.

The following table sets forth information with respect to beneficial ownership of the Company’s common stock and options by each officer and director as of September 30, 2003.


	Shares of		Shares of Stock
	Common Stock		Options
	Owned at		Outstanding at
	September 30,		September 30,
Name and Address of Beneficial Owners	2003		2003

Dr. Herbert May (1)		0		80,000
Dr. Gert Koehler (1)		555,436		85,000
Jochen Witte (2)		405,717		203,500
Robert Helgerth		1,000		300,000
Ludwig Lutter		750		185,500

	(1)		Outside, non-executive directors

	(2)		Includes an option held by Mrs. Witte to purchase 3,500 shares

At September 30, 2003, shares of stock options outstanding to non-officer employees totaled 568,103 shares.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	b)		Reports on Form 8-K

	(1)		Current report on Form 8-K filed on September 30, 2003 with respect to the announcement of the merger with Versant.

	(2)		Current report on Form 8-K filed on August 25, 2003 with respect to the announcement of the receipt of an order from DaimlerChrysler.

	(3)		Current report on Form 8-K filed on July 22, 2003 with respect to the announcement of the financial results for the quarter ended June 30, 2003.

POET HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 11, 2003.


		Poet Holdings, Inc. (Registrant)

		By:		/s/ Jochen Witte

				Jochen Witte President, Chief Executive Officer and Director

		By:		/s/ Ludwig Lutter

				Ludwig Lutter Chief Financial Officer

EXHIBIT INDEX


Exhibit
No.		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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POET HOLDINGS INC 10-Q