<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

               [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended July 31, 1997
                                      or
             [ ] 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: 0-27772

                                METROWERKS INC.
            (exact name of registrant as specified in its charter)



       Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, No par value
                               (Title of Class)

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

The aggregate market value of the voting stock by non-affiliates of
the registrant as of September 15, 1997 was $54,679,485.

Number of shares of common stock outstanding as of September 15, 1997:
                                  11,555,366

                                                                               1
<PAGE>
 
        TABLE OF 
             CONTENTS
<TABLE> 
<CAPTION> 


   Part I
<S>                     <C>                                                                     <C>  
        Item 1.         Business                                                                3
 
        Item 2.         Properties                                                             17
 
        Item 3.         Legal Proceedings                                                      17
 
        Item 4.         Submission of Matters to a Vote of Security Holders                    17
 
   Part II

        Item 5.         Market for Registrant's Common Equity and
                        Related Stockholder Matters                                            18

        Item 6.         Selected Consolidated Financial Data                                   19

        Item 7.         Management's Discussion and Analysis of
                        Financial Condition and Results of Operations                          20

        Item 7a.        Quantitative and Qualitative Disclosures About Market Risk             24

        Item 8.         Financial Statements and Supplementary Data                            24

        Item 9.         Changes in and Disagreements with Accountants
                        on Accounting and Financial Disclosure                                 24


   Part III

        Item 10.        Directors and Executive Officers of the Registrant                     25

        Item 11.        Executive Compensation                                                 27

        Item 12.        Security Ownership of Certain Beneficial Owners
                        and Management                                                         30

        Item 13.        Certain Relationships and Related Transactions                         30

   Part IV

        Item 14.        Exhibits, Financial Statement Schedules, and
                        Reports on Form 8-K                                                    31

                        Signatures                                                             33

</TABLE> 

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<PAGE>
 
PART I.

Except for the historical information contained herein, the discussion in this
Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, as well as under the
captions "Additional Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

ITEM 1.   Business

Metrowerks Inc. ("Metrowerks" or "the Company") was amalgamated on January 1,
1990 under the Canada Business Corporations Act and the information contained
herein includes that of the Company and its two wholly-owned subsidiaries,
Metrowerks Corporation, a Texas corporation, which was formed in June 1994, and
Metrowerks Co. Ltd., a Japanese corporation, which was formed in October 1996.
Metrowerks is a computer software development company that designs, develops,
markets and supports software programming tools. The Company's products are used
primarily by professional software programmers and by programmers in the
academic community to create software applications. The Company's principal
product line, Metrowerks(R) CodeWarrior(R), consists of a suite of programming
tools used to develop software in the C, C++, Pascal, Java(TM) and Assembly
programming languages.

CodeWarrior is hosted on the Windows(R) 95 and Windows NT(R)-based and
Macintosh(R) computers and is used to develop software for platforms using a
variety of operating systems ("OS") including desktop operating systems Windows
95 and Windows NT and Mac(R) OS, Real-Time embedded Operating Systems ("RTOS")
such as Nucleus OS(TM), OS-9(TM), Precise/MQX OS(TM) and Tacit OS(TM) and
proprietary embedded operating systems such as PlayStation(TM) OS and Palm
OS(TM).

The Company's principal line of products, known as CodeWarrior, includes an
Integrated Development Environment ("IDE") which includes: native and two-
machine debuggers, which use a common user interface and which provide source-
level debugging capabilities for a variety of operating systems, including those
listed above; a text editor for editing source code; class browsers used for
developing and editing programs in object-oriented languages such as C++ and
Java; a state-of-the-art project manager which obsoletes "make"files; computer
language compilers for compiling source code written in C, C++, Pascal, Java,
and assembly programming languages into machine code for a variety of
microprocessors, including the 68K, PowerPC(R), x86, and MIPS(R) families of
microprocessors; and linkers, which permit compiled object code to be linked to
create "executable object code," or what is known as software programs.

The Company believes that CodeWarrior has become the industry standard for
developing Macintosh programs, and that its CodeWarrior products have been used
to program over 75% of all software applications that run native on the Power
Macintosh(TM) computer. Since the introduction of the CodeWarrior in
January 1994, the number of registered users of CodeWarrior has grown to over
100,000 users in 75 countries.

                                                                      BACKGROUND

                                             PROGRAMMING LANGUAGES AND COMPILERS

Microprocessors operate based on electrical impulses, with each character or
"bit" consisting of "on" (current or "1") and "off" (no current or "0"). Each
keystroke on the computer keyboard is represented by one "byte," which is
composed of a unique sequence of eight bits. This programming language is known
as machine language or object code. Because it is difficult and cumbersome to
program in object code, programming languages that use the standard 26-letter
alphabet have been devised. Programming languages are divided into two basic
types: low-level and high-level. Low-level languages, known as assembly
languages, map the logic of the instructions that a microprocessor processes on
a one-for-one basis. Programs written in assembly language are very efficient in
their use of microprocessor memory. However, because of this one-to-one mapping
to a particular microprocessor's instruction set, there is not "one" assembly
language but rather one for every kind of microprocessor. In order for a program
written in assembly language for a particular kind of microprocessor to

                                                                               3
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operate on a different kind of microprocessor, the program must be rewritten for
the other platform. Therefore, programming in assembly languages takes longer,
is expensive and requires a great deal of technical training and skill.

The problems inherent in low-level languages led to the development of high-
level languages. From the perspective of the programmer, these high-level
languages are easier to use and understand. Currently, the dominant high-level
programming languages are:

COBOL - used for programming mainframe-based applications;

BASIC - used for database application front-end development and in education;

Pascal - used for education purposes;

C and C++ - the dominant programming languages used for developing "shrink-
wrapped" Windows and Macintosh applications software, and used increasingly to
develop software for 32-bit embedded systems; and

Java - used for networking-based applications where Java-optimized bytecodes can
run on a variety of hardware, and do not need to be rewritten in native mode to
run on each specified platform.

Because high-level languages use their own logic to solve problems and do not
match the microprocessor's instruction set on a one-for-one basis, their "source
code" must be translated, or compiled, into object code. This task is performed
by software programs, known as compilers, which convert a software application
written in source code into object code that a particular microprocessor can
understand. Development of all software applications requires that source code
be compiled into object code, and thus one of the most important tools a
programmer uses is a compiler.

                                                            TECHNOLOGICAL TRENDS

The continuing evolution of computer technology has dramatically impacted the
environment in which computer programmers must operate. The development of
new programming languages and new operating systems, as well as the emergence
of new types of microprocessors, have all created new demands on programmers.

One of the most significant changes has been the increased number of 32-bit
microprocessors used in desktop and embedded systems. This shift resulted in
the development of new operating systems for the desktop and embedded systems
markets, the creation of major new microprocessors, such as Intel's Pentium(R)
family of processors, the increased use of object-oriented programming
languages, most notably C++ and Java, and the importance of networking and
communications technology. Prior to the invention in the 1980's of relatively
low-cost Dynamic Random Access Memory ("DRAM"), programmers went to great
lengths to "optimize" their software to use as little memory as possible,
resulting in relatively longer product development times. Today's competitive
environment for desktop and embedded applications software requires that
reliable software applications be developed with a wide variety of features and
brought to market quickly and in a cost-effective manner. Today's programmer
must balance optimization and use of memory and systems resources with time-to-
market considerations.

The introduction and increasing use of Reduced Instruction Set Computing
("RISC") technology such as the PowerPC microprocessors now used in the Power
Macintosh computer and the modified RISC architectures of the Pentium, Pentium
Pro and Pentium II microprocessors, has also affected the applications software
market. RISC-based microprocessors utilize different instruction sets than the
traditional complex instruction set utilized in other common microprocessors
such as Intel's X86 or Motorola's 68K family of microprocessors. Because of
their relatively low cost, 32-bit RISC-based microprocessors are being utilized
in embedded systems applications in consumer electronics products, hand-held
computers, set-top boxes, game machines, telecommunications products, automotive
products and other electronic systems. These 32-bit microprocessors permit more
features and functionality than can be programmed into 4-, 8- or 16-bit
microprocessors, which have lower computing power and memory capability.

4
<PAGE>
 
                                                            NEEDS OF PROGRAMMERS

The Company believes that software companies and their programmers regard the
following as critical attributes of programming tools:

 * BUILD TIME. The company believes that today, programmers are somewhat less
 concerned with optimizing a software product to the maximum extent possible and
 are more concerned with developing a reliable product with a wide variety of
 features and bringing it to the market quickly and in a cost-effective manner.
 Therefore, "build time," the time it takes to convert a set of source code
 instructions into a finished application, has become critically important to
 programmers. Shorter build times allow programmers more time to add features to
 an application and to test and debug the software.

 * SPEED, SIZE AND QUALITY OF OBJECT CODE. The speed at which a microprocessor
 runs object code or instructions can affect the product development process and
 marketability of the finished software applications. As software applications
 become more complex, the object code to be run by the microprocessor becomes
 increasingly longer. As a result, microprocessors run software applications at
 slower speeds and more memory is required to run the software. Therefore, while
 compilers must produce object code that is reliable and that can accurately run
 all of the features of the software, the object code must be compact enough so
 that the software applications runs quickly and does not require excessive
 memory.

 * EASE OF USE. Because of the sophisticated nature of software development and
 the large number and geographic dispersion of programmers, customer on-site
 visits are not always practical. Therefore, programming tools should be
 contained in a development environment that permits the use of tools in an
 integrated and user-friendly manner.
 
 * FREQUENCY OF UPDATES. Due to the increased pace of microprocessor innovation,
 changes in operating systems and evolving standards for programming languages,
 programming tools must be updated frequently. Programmers must keep current
 with these changes so that the development process is not delayed by requiring
 programmers to spend time modifying the software applications to reflect such
 changes.
 
 * SOPHISTICATED DEBUGGING. Because of the increasing complexity of software,
 programming tools must provide debugging capabilities sophisticated enough to
 permit programmers to test software quickly and thoroughly to identify and
 correct "bugs" in the software being developed. This need is particularly
 critical for developers of embedded applications, which are usually burned into
 read-only memory ("ROM").

                                                                               5
<PAGE>
 
                                                                        STRATEGY

The Company's vision is to be the leading high-volume provider of cost-effective
standardized programming tools for software developers in the desktop and
embedded systems markets. The Company has focused on providing developers with a
single IDE that allows programmers to write software applications in a variety
of programming languages targeted at a variety of microprocessors and operating
systems used in the desktop and embedded systems markets. The key elements of
the Company's strategy are as follows:

BROADEN PRODUCT OFFERINGS. The Company believes that its future success is
highly dependent on its ability to market CodeWarrior products that have a
variety of front-ends and back-ends in order to reach as large a group of
potential customers as possible. In furtherance of this element of its strategy,
the Company intends to:

     Expand By Developing Back-Ends for Embedded Platforms. The Company's
     initial products had back-ends for Motorola 68K and PowerPC microprocessors
     used by the Macintosh computer. The Company has since developed back ends
     for the x86 and MIPSfamilies of microprocessors. The Company is in the
     process of developing back ends for the NECVR/V8xx , ARMand Hitachi SuperH
     families of microprocessors which are popular in the embedded systems
     market.
     
     Increase Support for a Variety of Operating Systems. The Company currently
     supports development for desktop operating systems such as Windows 95 and
     Windows NT; and Mac OS; RTOS such as Nucleus OS, OS-9, Precise/MQX OS; and
     Tacit OS and proprietary embedded operating systems such as PlayStation OS
     and Palm OS. The Company anticipates supporting additional multi-purpose,
     RTOS and proprietary operating systems in the future. The Company's
     intention is to provide developers with the ability to target a variety of
     operating systems and the related microprocessors from the CodeWarrior IDE.

     Partnering Agreements. The Company has entered into product development
     agreements with various companies. The details of these arrangements vary,
     but generally they provide that Metrowerks will develop programming tools
     and receive payments for both its development efforts and either ownership
     of, or a license to market, the developed programming tools. The other
     party to these agreements is generally permitted to utilize the developed
     tools for its own internal use, or in certain instances, to bundle the
     tools with hardware developed by such party. These partnering agreements
     have provided the Company with a significant amount of revenue,
     constituting approximately 26% of its revenue for fiscal 1997. As a result,
     the Company is able to devote more of its financial resources to research
     and development than it would otherwise be able to do. There can be no
     assurance that the Company will be able to continue to enter into these
     arrangements in the future.

CONTINUED ENHANCEMENTS TO THE COMPANY'S WINDOWS 95 AND WINDOWS NT-HOSTED
PRODUCTS. In fiscal 1997, the Company completed the port of its programming
tools to be hosted on the Windows 95 and Windows NT operating systems which
allows the Company's products to be used by programmers who are PC-hosted. The
Company plans to add several functions to these tools in the near future,
including a resource editor and rapid application development tools. These
additions to the Company's Windows-95 and Windows-NT hosted tools will make the
product more competitive with existing tools in this market. The Company
believes that the majority of software applications for the embedded systems
market is, and will continue to be, programmed on the Window 95 and Windows NT-
based desktop computers or UNIX-based workstations. By improving the quality of
its tools in this market, the Company hopes to expand its base of potential
embedded systems programmers as well s increase its penetration into the market
of Windows-hosted programmers developing applications for the Window 95 and the
Windows NT operating systems.

6
<PAGE>
 
TARGET THE EDUCATIONAL MARKET.  The Company currently markets its CodeWarrior
Academic product to universities, colleges and high schools and many have
standardized on CodeWarrior for computer programming classes. Use of CodeWarrior
as a standardized programming tool in the teaching of programming eliminates the
need for professors to teach students one development environment on Windows and
a different one on Macintosh. The Company believes that if computer programming
students become familiar with the Company's programming tools while they are in
school they may be more likely to utilize its products when they enter the job
market.

DISTRIBUTION.  Because of the relatively low retail price of the Company's 
products, it is not economically feasible for the Company to emphasize direct 
sales as a method of distribution.  Accordingly, the Company relies and intends 
to continue to rely on indirect methods of distribution, such as distributors 
and mail order catalogs, for its products.  The embedded systems market has 
historically been a direct sales market and there can be no assurance that the 
Company will be able to locate these distributors for its embedded systems 
products.

MAINTAIN LEADERSHIP IN THE MACINTOSH COMPUTER MARKET.  The Company believes that
its CodeWarrior product have become the industry standard for Macintosh 
computer-hosted programming tools and that its CodeWarrior products have been 
used to program over 75% of all commercially available software applications for
the Power Macintosh computer.  The Company's intention is to maintain this 
position through continued enhancements to its Macintosh tools.

                                                                               7
<PAGE>
 
                                                                        PRODUCTS

The following is a listing of the Company's products which represent over 90 
percent of the Company's total product revenues:

<TABLE> 
<CAPTION> 

DESKTOP PRODUCTS
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                                                <C>    
PRODUCT NAME                                            DESCRIPTION                                        RETAIL PRICE $US(1)(2) 

CODEWARRIOR PROFESSIONAL                                Our flagship product which includes: the           $599
                                                        CodeWarrior IDE hosted on Windows 95 and        
                                                        Windows NT, and MacOS operating systems;
                                                        C, C++, Pascal, Java and Assembly front
                                                        ends; back ends for developing software
                                                        applications to run on Windows 95 and
                                                        Windows NT on x86 microprocessors or Mac
                                                        OS running on 68K or PowerPC micro-
                                                        processors.

CODEWARRIOR PROFESSIONAL ACADEMIC(3)                    This product is identical to CodeWarrior           $119
                                                        Professional and is marketed to the 
                                                        academic community.  This product is 
                                                        limited to noncommercial use.

CODEWARRIOR DISCOVER PROGRAMMING(TM)                    Entry-level product designed to enable             $79     
EDITION FOR MACINTOSH(3)                                people to teach themselves programming.
                                                        This edition contains the CodeWarrior
                                                        IDE hosted on Mac OS; C, C++, Java and
                                                        Pascal front-ends. 
                         
CODEWARRIOR DISCOVER PROGRAMMING EDITION                Entry level product designed to enable             $79  
FOR WINDOWS 95 AND WINDOWS NT(3)                        people to teach themselves programming.
                                                        This edition contains the CodeWarrior 
                                                        IDE hosted on Windows 95 and Windows NT
                                                        operating systems; C, C++, Java and
                                                        Pascal front-ends.

METROWERKS VISUAL SOURCESAFE                            This product is a cross-platform version           $499     
FOR MACINTOSH(TM)                                       control solution for Mac OS. It is 
                                                        specifically designed for large software
                                                        development teams to increase productivity.

CODEWARRIOR FOR BEOS(TM)                                This product includes the CodeWarrior IDE          $299
                                                        which runs native on the BeOS; C, C++, and             
                                                        Java front-ends; back-end for developing
                                                        applications to run on the BeOS. 

CODEWARRIOR LATITUDE(TM)                                A porting tool designed to assist developers       $399     
                                                        in moving applications running on the Mac OS
                                                        to Apple's next generation operating system,
                                                        Rhapsody.

----------------------------------------------------------------------------------------------------------------------------------
(1) Represents current retail price. Future prices are subject to change.

(2) Each CodeWarrior product entitles the registered user to receive one additional update during the year. In subsequent years, the
    registered user may re-register for a year and receive two updates that year for an annual fee which currently ranges from US$75
    to US$299.

(3) Users of CodeWarrior Academic are only permitted to utilize CodeWarrior Academic for academic purposes and not for commercial
    programming. Updates are not available for the Company's Discover Programming product and a new product must be purchased if an
    updated version is released. This product is sold primarily in retail outlets.

</TABLE> 

8
<PAGE>
 
<TABLE> 
<CAPTION> 

EMBEDDED SYSTEMS PRODUCTS
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                                                <C>    
PRODUCT NAME                                            DESCRIPTION                                        RETAIL PRICE $US(1)(2) 

CODEWARRIOR FOR PALMPILOT(TM)                           The product includes the CodeWarrior IDE           $369      
                                                        hosted on Windows 95 and Windows NT and 
                                                        Mac OS operating systems; contains a C 
                                                        front-end; back-end for developing soft-
                                                        ware applications to run on the Palm OS 
                                                        used in the 3COM(R) Mark PalmPilot.

CODEWARRIOR FOR SONY PLAYSTATION                        This product includes the CodeWarrior IDE          $899      
                                                        hosted on Windows 95 and Windows NT and 
                                                        Mac OS operating systems; C, C++ and 
                                                        Assembly front-ends; back-end for developing 
                                                        applications to run on the Sony PlayStation 
                                                        Development System.

CODEWARRIOR FOR POWERPC EMBEDDED SYSTEMS                This product includes the CodeWarrior IDE          $899 
                                                        hosted on Windows 95 and Windows NT operating 
                                                        systems; C,  C++ and Assembly front-ends; 
                                                        back-ends for developing applications software 
                                                        to run on Motorola(R) MPC 821/860
                                                        microprocessors.        
----------------------------------------------------------------------------------------------------------------------------------
(1) Represents current retail price. Future prices are subject to change.

(2) Each CodeWarrior product entitles the registered user to receive one additional update during the year. In subsequent years, the
    registered user may re-register for a year and receive two updates that year for an annual fee which currently ranges from
    US$75 to US$899.


The Company is currently developing additional back-ends and front-ends to its CodeWarrior products and has announced that future 
versions of CodeWarrior will provide programming tools for the following platforms:
</TABLE> 


<TABLE> 
<CAPTION> 

CODEWARRIOR PRODUCTS UNDER DEVELOPMENT
----------------------------------------------------------------------------------------------------------------------------------
PRODUCT NAME                                                            DESCRIPTION
<S>                                                                     <C>         

CODEWARRIOR FOR OS-9                                                    This product will include the CodeWarrior IDE coupled with
                                                                        Microware's Ultra C/C++ compiler; hosted on Windows 95 and
                                                                        Windows NT;  back-end for developing software applications
                                                                        to run on Microware's OS-9 on PowerPC and Motorola's 68K 
                                                                        microprocessors.

CODEWARRIOR FOR MIPS EMBEDDED SYSTEMS                                   This product will include the CodeWarrior IDE hosted on 
                                                                        Windows 95 and Windows NT; C, C++ and Assembly front-ends;
                                                                        back-ends for developing software applications to run on 
                                                                        MIPS RISC microprocessors.

CODEWARRIOR FOR NEC EMBEDDED SYSTEMS                                    This product will include the CodeWarrior IDE hosted on 
                                                                        Windows 95 and Windows NT; C, C++ and Assembly front-ends;
                                                                        back-ends for developing software applications to run on 
                                                                        NEC VR/V8xx microprocessors.

CODEWARRIOR FOR ARM EMBEDDED SYSTEMS                                    This product will include the CodeWarrior IDE hosted on 
                                                                        Windows 95 and Windows NT; C, C++ and Assembly front-ends;
                                                                        back-ends for developing software applications to run on 
                                                                        ARM microprocessors.

CODEWARRIOR FOR SUPERH EMBEDDED SYSTEMS                                 This product will include the CodeWarrior IDE hosted on 
                                                                        Windows 95 and Windows NT; C, C++ and Assembly front-ends;
                                                                        back-ends for developing software applications to run on 
                                                                        Hitachi SuperH microprocessors.

CODEWARRIOR FOR WINDOWS CE EMBEDDED SYSTEMS                             This product will include the CodeWarrior IDE hosted on 
                                                                        Windows 95 and Windows NT; C, C++ and Assembly front-ends;
                                                                        back-ends for developing software applications to run on 
                                                                        various microprocessors.

CODEWARRIOR FOR JAVA ON SOLARIS                                         This product will include the CodeWarrior IDE and 
                                                                        CodeWarrior Java tools to be hosted on Sun's Solaris(TM) 
                                                                        based workstations.                  

</TABLE> 

                                                                               9
<PAGE>
 
There can be no assurance that any of these new platforms, operating systems or
programming languages or that any of the Company's proposed programming tools
will achieve commercial success. Failure of a particular platform for which the
Company has developed a back end or a programming language for which the Company
has developed a front end would result in reduced demand for software
applications that run on the platform or in the programming language, which in
turn could adversely affect the Company's business, financial condition and
results of operations. See "Additional Risk Factors-Importance of New Products
and Technological Change."


                                                        RESEARCH AND DEVELOPMENT

The Company continues to make substantial investments in research and
development. While the Company believes that its future performance will depend
upon the success of its research and development efforts, it believes that the
modular design of its CodeWarrior products provides it with the ability to
incrementally add a new back end (for a new platform or operating system) or a
new front-end (for a new programming language), thereby significantly reducing
both the cost and the time-to-market required to release new tools for such new
platform, operating system or programming language, than it would otherwise face
if it had to develop an entirely new set of programming tools.

The Company has a program, "Metrowerks Permanent Testing Partners," which helps
supplement the Company's product testing efforts. The Company has a testing
group of over 1,000 customers. This testing group is provided with product
updates or new releases in advance of their release to the public. The members
of this group utilize the product and notify the Company of any errors in the
product, which are then subsequently corrected by the Company's research and
development department prior to the general release of the product. The Company
believes that its Metrowerks Permanent Testing Partners program provides it with
additional product testing and quality control capabilities at very little
additional cost.

The Company has also supplemented its internal product development efforts
through external product development agreements. Such funding is generally
pursuant to agreements with third parties which provide for the Company to
develop programming tools for a specific platform designed by the third party.
The Company receives product development fees, generally to be paid subject to
the Company meeting performance standards and development milestones, which are
usually sufficient to cover all or a substantial portion of the Company's
research and development costs. The Company either owns, or is generally granted
a license to market, these programming tools with its products. The Company
recorded revenues of approximately US$613,000, US$2.3 million and US$4.7 million
pursuant to these product development agreements for fiscal 1995, 1996 and 1997,
respectively. While the Company believes that such development funding will
continue to be available in varying amounts in the future, there can be no
assurance that the Company will continue to be able to enter into such software
development arrangements.

Because of the need to develop new products, the Company has invested, and
continues to invest, substantial resources in its product development efforts.
At July 31, 1997, the Company's research and development staff constituted
approximately 54% of the Company's employees, having grown from 65 employees at
July 31, 1996 to 90 employees at July 31, 1997. The Company also relies on
independent contractors for some of its research and development projects. The
Company incurred costs of approximately US$1.6 million, US$3.3 million and
US$6.5 million on research and development activities for fiscal 1995, 1996 and
1997. Such expenditures constituted 31%, 31% and 35% of revenue, respectively,
for such periods.

The Company has historically released new versions of, or updates for, its
CodeWarrior products at least three times a year. Beginning with the release
of CodeWarrior Professional in May 1997, the Company changed its policy of
releasing, or updating, new versions of its CodeWarrior products to twice a
year. The success of new product introductions and updates depends upon
several factors, including recognition of market requirements, product cost,
timely completion and introduction of new products and the targeted platform,
operating system or programming languages, and quality of new products and
such platforms, operating systems or programming languages. There can be no
assurance that the Company will not encounter delays in the development and
introduction of future products. Software products as complex as those
offered by the Company may also contain undetected errors when first
introduced or as updates are released. Although the Company has 

10
<PAGE>
 
not experienced any material errors in its products, there can be no assurance
that, despite testing by the Company, errors will not be found in new products
after commencement of commercial shipments, resulting in a loss of or delay in
market acceptance. There can also be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that the Company's products will be
accepted by its targeted customers or utilized in connection with its targeted
applications or that products or technologies developed by other companies will
not render the Company's products or technologies obsolete or noncompetitive.
Further, the success of certain of the Company's new tools will depend in part
on the amount of software applications developed for a new platform, operating
system or programming language, which in turn will depend upon the commercial
success of such platform, operating system or programming language introduced by
other companies. The failure of the Company's new product development efforts or
the lack of market acceptance for the Company's new tools would have a material
adverse effect on the Company's business, financial condition and results of
operations. The failure of any new platform, operating system or programming
language for which the Company may have devoted substantial resources in
developing new tools would also have a material adverse effect on the Company's
business, financial condition and results of operations. See "Additional Risk
Factors-Importance of New Products and Technological Change" and "Risk Factors-
Software Defects."


                                                             SALES AND MARKETING

SALES. Because of the relatively low retail price of the Company's products, it
is not economical for the Company to, and the Company does not, emphasize direct
sales for its product distribution. The Company sells its products through major
distributors such as Ingram Micro, Inc., and Merisel Americas, Inc., which sell
to retail stores and mail-order catalogs in the United States and Canada and
through distributors that sell to academic institutions. CodeWarrior is listed
in a variety of mail-order catalogs, including MacWarehouse and
PC/MacConnection, two of the largest mail-order software distribution catalogs
specializing in the North American computer market. The Company believes that
software programmers, which are its primary target customers, frequently utilize
mail-order channels rather than retail stores because of the lower prices
offered through such mail order companies. Accordingly, the Company continues to
emphasize mail-order distribution as a significant method of marketing.

Outside of the United States and Canada, the Company sells through distributors
in 22 countries. In fiscals 1995, 1996 and 1997, sales outside of North America
were US$856,000, US$1.9 million and US$4.4 million, respectively. Approximately
24% of the Company's registered users are located outside the United States. The
Company relies primarily on distributors to generate international sales. The
Company generally enters into distribution agreements with these distributors
for a one or two year term, with provisions for annual renewals thereafter.
Product localization (such as translation of user interface prompts and
packaging) is performed for the Company by third parties and by the Company's
Japanese subsidiary.

The Company also maintains a direct sales force of 11 persons at its Austin,
Texas facilities. For the fiscal year ended July 31, 1997, direct sales,
including subscription renewals, accounted for approximately 18% of the
Company's product sales. The Company's direct sales force is primarily
responsible for negotiating site licenses with larger U.S. customers and
fulfilling subscription renewals.

The Company also offers a toll free telephone number for orders which are
processed and filled by the Company's operations center in Austin, Texas. In the
event of the emergence of new distribution channels such as on-line services and
other electronic distribution, the Company may, if cost effective, explore
additional methods of distribution.

MARKETING. The Company markets its products through trade show exhibits and
conferences, presentations to large groups of end-users and advertisements in
various software catalogs and magazines. All marketing, advertising and
public relations activities are performed by the Company's marketing group.

                                                                              11
<PAGE>
 
                                                                       CUSTOMERS

As of July 31, 1997, the Company had over 100,000 registered users of its
CodeWarrior products. Most of the Company's customers are small independent
software vendors who generally purchase one copy of the Company's products. A
large number of students, researchers in academia and university computer
science labs use the Company's academic product line. During fiscal 1997, no one
end user accounted for more than 1% of the Company's product sales.

                                         CUSTOMER AND TECHNICAL SUPPORT SERVICES

The Company believes in providing timely, high quality technical support, which
it believes is critical to maintaining customer satisfaction and is an important
element of the value it provides to customers. The Company provides telephone,
electronic mail and fax-based customer support from 8:00 a.m. to 7:00 p.m.,
C.S.T., five days per week and has a nine member technical support staff.
Members of the Company's technical support staff typically have several years of
experience in areas such as software engineering, software testing or tools
development. Most customer support services for the Company's customers outside
North America are provided through its international distributors; however, the
Company provides the distributors with any needed technical assistance.

                                                                     COMPETITION

The marketplace for professional programming tools is intensely competitive.
Given the variety of platforms and operating systems on or for which the
Company's products operate, the Company faces competition from many companies.
While many of the Company's competitors are software vendors or other technology
companies who offer products for sale to the public, the Company also faces
competition, particularly in the embedded systems market, from platform
manufacturers who develop software applications and programming tools
internally, and who are therefore less inclined to purchase programming tools
from a third party. See "Additional Risk Factors - Competition." The Company
believes that it must continue to develop new products and introduce
enhancements to its existing products in a timely manner to remain competitive.
Even if the Company introduces new and enhanced products, it may not be able to
compete effectively because of the significantly larger resources available to
many of its competitors. The Company's ability to compete successfully also
depends on a number of other factors both within and outside of its control,
including: product pricing; product quality and performance; its ability to
attract and retain key employees; effectiveness of its sales and marketing;
timing of new product introductions by the Company, its competitors and creators
of new hardware platforms; general market and economic conditions; and
government actions throughout the world. There can be no assurance that the
Company will be able to compete successfully or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.

     EMBEDDED SYSTEMS. The market for programming tools for the embedded systems
     market is fragmented, highly competitive and characterized by rapid
     technology advances. The Company's success will depend on the continued
     enhancement of its current products. The Company's products compete with
     tools developed internally by companies and tools offered by third parties.
     Many platform manufacturers, telecommunications companies and automotive
     manufacturers, to name a few, develop software applications and programming
     tools internally (proprietary systems), and accordingly, the Company
     believes they are less inclined to purchase tools from a third party. In
     addition, the Company faces competition from third-party embedded software
     providers of operating systems and tools such as Wind River Systems, Inc.,
     Integrated Systems, Inc., Microsoft Corporation, GreenHills Software, Inc.
     and Cygnus Solutions. Many of the Company's existing and potential
     competitors have substantially greater financial, technical, marketing and
     sales resources than the Company.

12
<PAGE>
 
     WINDOWS 95 AND WINDOWS NT PROGRAMMING TOOLS. The Company's PC-hosted tools
     are new to the market and will need to add additional features to compete
     with other PC-hosted programming tools. The Company faces significant and
     intense competition from Microsoft, Borland and Watcom in this market. All
     of these companies are well established, have strong brand name
     recognition, and have substantially greater financial, technical and
     marketing re-sources than the Company. There can be no assurance that the
     Company will be able to compete successfully with these companies.

     MACINTOSH PROGRAMMING TOOLS. With respect to its programming tools for the
     MacOS, the Company faces competition from Symantec's Java-based tools. For
     Rhapsody, Apple Computer's next generation operating system, the Company
     faces significant potential competition from Apple Computer. Symantec and
     Apple Computer have substantially greater financial, technical and
     marketing resources than the Company. The Company estimates that over 75%
     of the Power Macintosh applications available today were built with
     CodeWarrior. As Apple Computer ("Apple") is expected to move to Rhapsody in
     the second half of 1998, the Company has announced that it will release
     development tools for the new operating system. Apple has also announced
     their intentions of developing tools for the new operating system, and
     there can be no assurance that the Company will be able to maintain its
     current market share.

                                                           INTELLECTUAL PROPERTY

The Company regards its software as proprietary and attempts to protect it with
copyrights, trademarks, trade secret laws, restrictions on disclosure and
transferring title and other methods, rather than patents. Despite these
precautions, it may be possible for unauthorized third parties to copy certain
portions of the Company's products and obtain and use information the Company
regards as proprietary. While the Company's competitive position may be affected
by its ability to protect its proprietary information, the Company believes that
copyright protections are less significant to the Company's success than other
factors, such as trade secret protection, the knowledge, ability and experience
of the Company's personnel, name recognition and ongoing product development and
support.

The Company licenses its products primarily under "shrink wrap" licenses (that
is, licenses included as part of the product packaging). Shrink wrap licenses
are not negotiated with or signed by individual licensees and purport to take
effect upon the opening of the product package. Certain provisions of such
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In keeping with industry standards, the Company
does not copy protect its software. Accordingly, it may be possible for
unauthorized parties to copy or reverse engineer the Company's products or
otherwise obtain and use information that the Company regards as proprietary.
Furthermore, there can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's products. Policing unauthorized use of the Company's products
is difficult, and while the Company is unable to determine the extent of
software piracy of its products, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States and Canada.

As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.
Any such assertion could require the Company to enter into license or royalty
arrangements or result in costly litigation. There can be no assurance that such
license or royalty agreements will be available on reasonable terms or at all.

Although the Company believes that it currently owns or has adequate rights to
utilize all material technologies relating to its existing products, as it
develops new back ends and front ends for its CodeWarrior products, it
anticipates that it may find it desirable or necessary to obtain other licenses
from third parties entitling it to use certain technologies. There can be no
assurance that such licenses would be available to the Company on acceptable
terms, if at all. The Company currently

                                                                              13
<PAGE>
 
has non-exclusive licenses to certain software programs from Microsoft, a
competitor of the Company. The licensed technologies are incorporated in the
Company's Windows 95 and Windows NT hosted products. These licenses will expire
upon the next major release of Windows 95 and Windows NT. The Company licenses
operating system software from Apple pursuant to a non-exclusive license. The
Company pays a license fee to Apple for this licensed technology. The agreement
has a term of one year and is automatically renewable for successive one-year
terms, subject to earlier termination by Apple upon nine month's written notice.
In connection with the development of its programming tools for the Java
programming language, the Company has a non-exclusive license with Sun Microsy
stems ("Sun") to use or modify the Java programming language for the purpose of
developing a Java-based CodeWarrior product. This license is for an initial 
five-year term and is renewable by the Company for up to five successive one-
year terms. The Company pays Sun a royalty based upon the number of CodeWarrior
products sold that incorporate the Java technology. Termination by Microsoft,
Apple or Sun or the lapse of these agreements would require product redesign and
could significantly increase research and development costs or would require the
Company to obtain licenses from third parties, which may not be available to the
Company on acceptable terms, if at all. The Company's loss or inability to
obtain necessary or desirable licenses from third parties could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Additional Risk Factors-Proprietary Technology."

                                                          PRODUCTION AND BACKLOG

The Company's manufacturing operations consist of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
All fulfillment and shipping is currently performed in Austin, Texas. The
Company's products are CD-ROM based. The Company produces its own CD-ROM master
disks, with disk duplication performed by third parties. Other than software
user documentation, the Company does not ship documentation such as user manuals
with its product, although a copy of such documentation is available on the CD-
ROM disk and a printed version is available to users for an additional fee.

The Company does not believe that backlog is a meaningful indicator of sales
that can be expected in future periods, particularly in view of the fast pace of
technological change in the software industry. The Company generally ships its
products within a few days after acceptance of a customer purchase order and,
therefore, has insignificant product backlog. Product development agreement
revenue backlog was approximately US$780,000 as of July 31, 1997.

                                                                       EMPLOYEES

As of July 31, 1997, the Company employed 167 full-time personnel, including 90
in research and development; 9 in technical support; 37 in sales and marketing;
and 31 in management and administration. The Company's employees are not
represented by any collective bargaining organization, and the Company has never
experienced a work stoppage. The Company believes its success will depend in
part on its continued ability to attract and retain highly qualified personnel
in a competitive market for experienced and talented software engineers and
sales and marketing personnel. See "Additional Risk Factors - Dependence on Key
Personnel."

                                                         ADDITIONAL RISK FACTORS

FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced significant
period-to-period fluctuations in revenues and operating results and anticipates
that such fluctuations will continue. These fluctuations may be attributable to
a number of factors, including the volume and timing of orders received during
the quarter, the timing and acceptance of new products and product enhancements
by the Company or its competitors, stages of product life cycles, purchasing
patterns of customers and distributors, market acceptance of products sold by
the Company's customers, competitive conditions in the industry, business cycles
affecting the markets in which the Company's products are sold, extraordinary
events, such as acquisitions, including related charges, and economic conditions
generally or in specific geographic areas. The future operating results of the
Company may fluctuate as a result of these and other factors, including the
Company's ability to continue

14
<PAGE>
 
to develop innovative and competitive products. In addition, the Company
has not entered into long-term product development agreements with its
customers, and the timing of product development agreement fees is difficult to
predict. The procurement process of the Company's customers is often several
months or longer from initial inquiry to order and may involve competing
considerations. Further, as licensing of the Company's products increasingly
becomes a more strategic decision made at higher management levels, there can be
no assurance that sales cycles for the Company's product will not lengthen.
Product revenue in any quarter depends on the volume and timing of orders
received in that quarter. Because the Company's staffing and operating expenses
are based on anticipated total revenue levels and a high percentage of the
Company's costs are fixed in the short term, small variations between
anticipated orders and actual orders, as well as non-recurring or large orders,
could cause disproportionate variations in the Company's operating results from
quarter to quarter.

A number of additional factors may cause the Company's revenues and operating
results to vary significantly from period to period. These factors include:
software "bugs" or other product quality problems, changes in operating
expenses, changes in Company strategy, personnel changes, foreign currency
exchange rates, and mix of products sold. Although the Company has seen
significant revenue growth for the last several years, there can be no assurance
that the Company will be able to continue its growth in revenue or profits on a
quarterly or annual basis. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. It is possible that, in some future quarters, the Company's
operating results could be below the expectations of stock market analysts and
investors. In such event, the price of the common stock could be materially and
adversely affected.

IMPORTANCE OF NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The market for embedded
programming tools is fragmented and the market for desktop and embedded
programming tools is characterized by ongoing technological developments,
evolving industry standards and rapid changes in customer requirements. The
Company's success depends upon its ability to continue to develop and introduce
in a timely manner new products that take advantage of technical advantages, to
continue to enhance its existing product lines, to offer its products across a
spectrum of microprocessor families and operating systems used in the embedded
systems market and to respond promptly to customers' requirements. The Company
must continuously update its existing products to keep them current with
changing technology and must develop new products to take advantage of new
technologies that could render the Company's existing products obsolete. The
Company has historically experienced minor delays in the development of new
products. Such delays are common in the software industry and are likely to be
experienced by the Company in the future. The Company's future prospects depend
upon the Company's ability to increase the functionality of existing products in
a timely manner and to develop new products that address new technologies and
achieve market acceptance. New products and enhancements must keep pace with
competitive offerings, adapt to evolving industry standards and provide
additional functionality. There can be no assurance that the Company will be
successful in developing and marketing, on a timely basis or at all, competitive
products, product enhancements and new products that respond to technological
change, changes in customer requirements and emerging industry standards, or
that the Company's new or enhanced products will adequately address the changing
needs of the marketplace. The inability of the Company, due to resource
constraints or technological or other reasons, to develop and introduce new
products or product enhancements in a timely manner could have a material
adverse effect on the Company's business, financial condition or results of
operations. From time to time, the Company or its competitors may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will not
cause customers to defer purchasing existing Company products. Any failure by
the Company to anticipate or respond adequately to changing market conditions ,
or any significant delays in product development or introduction, would have a
material adverse effect on the Company's business, financial condition and
results of operations. If the results of product development efforts are
inadequate or delayed, the Company's business, financial condition and results
of operations would be materially adversely affected.

                                                                              15
<PAGE>
 
DEPENDENCE ON KEY PERSONNEL The Company has experienced, and expects to continue
to experience, significant growth in the number of employees, the scope and
complexity of its operating and financial systems and the geographic dispersion
of its operations. The Company's continued success will depend significantly on
its ability to integrate new operations and new personnel. There can be no
assurance that the Company will be successful in achieving such integration
efficiently. In addition, the Company anticipates the need to relocate its
management, engineering, marketing, sales and customer support and distribution
and fulfillment operations to a new facility in the near future. There can be no
assurance that any such relocation will be accomplished efficiently, or that the
Company's operations will not be materially and adversely affected by such
relocation. The Company's future performance depends to a significant degree
upon the continued contributions of its key management, product development,
marketing, sales, customer support and operations personnel, several of whom
have joined the Company only recently. In addition, the Company believes its
future success will depend in large part upon its ability to attract and retain
highly-skilled managerial, product development, marketing, sales, customer
support and operations personnel, many of whom are in great demand. Competition
for such personnel is intense and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The failure of
the Company to attract, integrate and retain the necessary personnel could have
a material adverse effect on the Company's business, financial condition and
results of operations.

PROPRIETARY TECHNOLOGY. The Company's success is heavily dependent upon its
proprietary technology. To protect its proprietary rights, the Company relies on
a combination of copyright, trade secret, trademark laws, nondisclosure and
other contractual restrictions on copying, distribution and technical measures.
The Company seeks to protect its software, documentation and other written
materials through trade secret and copyright laws, which provide only limited
protection. As a part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants,
distributors and corporate partners and limits access to and distribution of its
software, documentation and other proprietary information.

SOFTWARE DEFECTS. As a result of their complexity, software products may contain
undetected errors or compatibility issues, particularly when first introduced or
as new versions are released. There can be no assurance that, despite testing by
the Company and testing and use by current and potential customers, errors will
not be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

INTERNATIONAL SALES. In the fiscal years ended July 31, 1995, 1996 and 1997, the
Company derived approximately 17%, 18%, and 24%, respectively, of its total
revenue from sales outside of North America. The Company expects that
international sales will continue to generate a significant percentage of its
total revenue in the foreseeable future. International operations are subject to
certain risks, including foreign government regulation; more prevalent software
piracy; longer payment cycles; unexpected changes in, or imposition of,
regulatory requirements, tariffs, import and export restrictions and other
barriers and restrictions; greater difficulty in accounts receivable collection;
potentially adverse tax consequences; the burdens of complying with a variety of
foreign laws; staffing and managing foreign operations; political and economic
instability; changes in diplomatic and trade relationships; possible
recessionary environments in economies outside the United States; and other
factors beyond the control of the Company. Sales by the Company's Japanese
subsidiary are denominated in the local currency, and an increase in the
relative value of the dollar against such currencies would reduce the Company's
revenues in dollar terms or make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. There can be no
assurance that the Company's future results of operations will not be adversely
affected by currency fluctuations. The Company relies on distributors for sales
of its products in certain foreign countries and, accordingly, is dependent on
their ability to promote and support the Company's products. The Company's
international distributors generally offer products of several different
companies, including in some cases products that are competitive with the
Company's products, and such distributors are not subject to any minimum
purchase or resale requirements. There can be no assurance that the Company's
international l distributors will continue to purchase the Company's products or
provide them with adequate levels of support.

16
<PAGE>
 
FLUCTUATION IN STOCK PRICE. The market price of the Company's common stock has
fluctuated in the past, and is likely to fluctuate in the future. The Company
believes that various factors, including quarterly fluctuations in results of
operations, announcements of new products by the Company or by its competitors,
and changes in the software industry in general cause, and may continue to
cause, the market price of the common stock to fluctuate, perhaps substantially.
In addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on the market prices of securities
issued by the Company and other high technology companies, often for reasons
unrelated to the operating performance of the specific companies. There can be
no assurance that the market price of the common stock will remain at or near
its current level. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against that company. Such litigation, if instituted against the
Company, could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations, even if the
Company is successful in such suits. These market fluctuations, as well as
general economic, political and market conditions such as recessions, may
adversely affect the market price of the common stock.

ITEM 2.   Properties

The Company's headquarters are located in a leased facility in Austin, Texas,
consisting of approximately 23,000 square feet of office space. This lease
expires in February 1998. The Company leases an additional 14,000 square feet in
Austin, Texas for fulfillment, distribution and administrative operations. This
lease expires in 2001. The Company also leases offices in Cupertino, California;
Boston, Massachussettes; Saint Laurent, Quebec, Canada; and Tokyo, Japan for
sales, marketing and engineering operations. The Company anticipates the need to
relocate both of its Austin operations to a new facility in the near future.
There can be no assurance that any such relocation n will be accomplished
efficiently, or that the Company's operations will not be materially and
adversely affected by such relocation.

ITEM 3.   Legal Proceedings

There are no material pending legal proceedings to which the Company is a party
or to which any of the Company's properties are subject.

ITEM 4.   Submission of Matters to a Vote of Security Holders
None.

                                                                              17
<PAGE>
 
PART  II.

ITEM 5.   Market for Registrant's Common Equity and Related Stockholder Matters

Metrowerks' common stock is traded on the Nasdaq National Market under the
symbol MTWKF and The Toronto Stock Exchange and the Montreal Exchange under the
symbol MWK.

The closing price of the Company's common stock as reported by the Nasdaq
National Market as of July 31, 1997 was US$6.38 per share. The price per share
in the following table sets forth the low and high prices in the Nasdaq National
Market for the quarter indicated (all amounts in US $):

<TABLE>
<CAPTION>
 
                                                                                      LOW    HIGH
                                                                                      ---   -----
<S>                                                                                  <C>     <C>
FISCAL 1996
    First quarter ended October 31, 1995                                             $    -  $    -
    Second quarter ended January 31, 1996                                                 -       -
    Third quarter ended April 30, 1996                                                    -       -
    Fourth quarter ended July 31, 1996                                                10.72   13.61
 
 
FISCAL 1997
    First quarter ended October 31, 1996                                             $ 9.25  $12.00
    Second quarter ended January 31, 1997                                              7.00   11.25    
    Third quarter ended April 30, 1997                                                 4.88    9.75
    Fourth quarter ended July 31, 1997                                                 4.00    7.75
 
</TABLE> 

The closing price of the Company's common stock as reported by The Toronto
Stock Exchange as of July 31, 1997 was Canadian $9.35 per share. The price
per share in the following table sets forth the low and high prices in The
Toronto Stock Exchange for the quarter indicated (all amounts in Canadian $):
 
<TABLE>
<CAPTION>
 
                                                                                      LOW    HIGH
                                                                                      ---    -----
<S>                                                                                  <C>     <C>

FISCAL 1996
    First quarter ended October 31, 1995                                             $ 4.75  $ 6.12
    Second quarter ended January 31, 1996                                              6.37   21.50
    Third quarter ended April 30, 1996                                                12.00   18.25
    Fourth quarter ended July 31, 1996                                                12.50   18.55
 
 
FISCAL 1997
    First quarter ended October 31, 1996                                             $12.75  $16.15
    Second quarter ended January 31, 1997                                              9.50   14.30
    Third quarter ended April 30, 1997                                                 7.00   12.75
    Fourth quarter ended July 31, 1997                                                 5.50   10.50

</TABLE>

The Company has not paid dividends and does not plan to pay dividends on its
common stock in the foreseeable future. The Company presently intends to
reinvest earnings to fund future growth. At July 31, 1997, there were
approximately 59 stockholders of record of the Company. Certain record holders
are represented by brokers and other institutions on behalf of stockholders. The
Company believes the total number of beneficial owners of its common stock to be
1,000.

18
<PAGE>
 
ITEM 6.   Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements, including the Notes to Consolidated
Financial Statements included elsewhere in this report.

<TABLE> 
<CAPTION> 

                                                                                  YEAR ENDED JULY 31,
                                                               1993       1994           1995          1996       1997
                                                           -----------------------------------------------------------------
                                                           (in thousands of U.S. dollars, except share and per share amounts)
STATEMENT OF OPERATIONS DATA:
<S>                                                        <C>          <C>            <C>          <C>         <C>
Revenue, net                                               $   184       $ 2,040        $ 5,143      $ 10,619   $ 18,293
 
Cost of sales                                                   33           207            910         2,664      4,563
 
Gross margin                                                   151         1,833          4,233         7,955     13,730
 
Operating expenses:
        Research and development                               514         1,080          1,574         3,250      6,486
        Selling, administrative and technical support          218         1,053          2,348         4,622      8,109
        Depreciation of property and equipment                  13            66            155           355      1,154
        Non-recurring charge                                     -             -              -             -      4,297
 
                Total operating expenses                       745         2,199          4,077         8,227     20,046
 
Operating income (loss) from operations                       (594)         (366)           156          (272)    (6,316)
 
Other income:
        Interest income and other                                5            34             98           377        341
 
Net earnings (loss)                                        $  (589)      $  (332)       $   254      $    105   $ (5,975)
 
Net earnings (loss) per share(1)                           $ (0.09)      $ (0.05)       $  0.03      $   0.01   $  (0.52)

Weighted average number of common and
 common equivalent shares outstanding (1)                    6,336         6,904          7,956        10,620     11,523




                                                                                  YEAR ENDED JULY 31,
                                                               1993       1994           1995          1996       1997
                                                           -----------------------------------------------------------------
                                                                             (in thousands of U.S. dollars)

<S>                                                        <C>          <C>            <C>          <C>         <C>

BALANCE SHEET DATA:

Cash and cash equivalents                                   $   377      $  767         $  4,746      $  11,498   $   5,042
Total assets                                                    691        1677            6,634         18,305      14,168
Long-term debt, less current portion                            329         201                -              -           -
Total stockholders' equity                                     (691)        473            5,571         16,437      10,562


</TABLE> 
----------------------------
(1)  For an explanation of the determination of the number of shares used in
     computing per share amounts and the weighted average number of common stock
     outstanding, see Note 1 to the Financial Statements.

                                                                              19
<PAGE>
 
ITEM 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

ALL DOLLAR AMOUNTS REFERRED TO IN THIS SECTION ARE IN THOUSANDS OF U.S. DOLLARS.

                                                     FORWARD-LOOKING INFORMATION

Statements in this report concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Relevant risks and uncertainties include, among others, those discussed in Item
1 of Part I under the heading "Additional Risk Factors" and elsewhere in this
report and those described from time to time in the Company's other filings with
the Securities and Exchange Commission, press releases and other communications.

                                                                        OVERVIEW

Metrowerks designs, develops, markets and supports professional software
programming tools. The Company's products are used primarily by professional
software programmers, and by programmers in the academic community, to develop
software application for a variety of platforms, including Windows 95 and
Windows NT operating systems used by PCs; the Mac OS operating system used by
the Macintosh and Power Macintosh computers; and for proprietary and multi-
purpose real-time embedded operating systems. The Company derives substantially
all of its revenue from a limited number of products. The Company's future
revenue is substantially dependent upon the continued acceptance of its
CodeWarrior products. The Company is also in the process of developing a number
of new products and new versions of existing products and believes that its
future revenue will depend upon the commercial success of these new products.
There can be no assurance that the Company's new products will achieve market
acceptance.

The Company also derives a significant portion of its revenue from product
development agreements pursuant to which the Company receives payments from a
third party for developing programming tools for a particular platform,
operating system or programming language. The amount of revenue the Company
receives from this particular source will depend upon the number of such
agreements to which the Company is a party during such quarter and the timing of
deliverables under such agreements. Further, there can be no assurance that the
Company will be able to continue to enter into such development agreements in
the future. The Company's product development efforts have also entailed
significant research and development expenditures. In addition, to enhance its
competitive position in the future, it will be necessary for the Company to
broaden its product offerings. This objective may require expansion of the
Company's internal product development efforts or acquisitions of or investments
in complementary businesses, products or technologies. Furthermore, if the
Company were unable to enter into new software development agreements in the
future, the Company would, at a minimum, have to increase its internal research
and development expenditures. These higher expense levels combined with
fluctuations in revenue could affect the Company's quarterly and annual results
and result in fluctuations in its operating results. The Company intends to
continue to invest significant amounts in expanding its product line, and,
accordingly, may continue to experience losses and volatility of revenue and
operating results in future periods. The Company believes that the recent
revenue growth rates should not be relied upon as an indication of revenue
growth rates for future periods.

The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. The
financial impact to the Company has not been and is not anticipated to be
material to its financial position or results of operations in any given year.

On August 1, 1995, the Company adopted the United States dollar as its reporting
currency, and the historical consolidated financial statements have been
restated to present amounts in United States dollars.

20
<PAGE>
 
                                                           RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's consolidated
statement of income as a percentage of revenue for the periods indicated.

<TABLE> 
<CAPTION> 

                                                                           AS A PERCENTAGE OF REVENUE
                                                                              YEARS ENDED JULY 31,
                                                              ----------------------------------------------------
                                                               1993        1994       1995        1996       1997

<S>                                                           <C>         <C>         <C>        <C>        <C> 
Revenue, net                                                  100.0%      100.0%      100.0%     100.0%     100.0%

Cost of sales                                                  17.9        10.2        17.7       25.1       24.9

Product margins(1)                                             82.1        85.9        77.5       63.2       62.8

Operating expenses:
    Research and development                                  279.3        52.9        30.6       30.6       35.5
    Selling, administrative and technical support             118.5        51.6        45.7       43.5       44.3
    Depreciation of property and equipment                      7.1         3.2         3.0        3.3        6.3
    Non-recurring charge                                          -           -           -          -       23.5
         Total operating expenses                             404.9       107.7        79.3       77.4      109.6

Operating income (loss) from operations                      (322.8)      (17.9)        3.0       (2.5)      (34.5)
Other income:
    Interest income and other                                   2.7         1.7         1.9        3.5         1.8

Net earnings (loss)                                          (320.1)%     (16.2)%       4.9%       1.0%      (32.7%)


(1)  Product margins are based on product revenues and costs of product sales only.
</TABLE> 

                                                                         REVENUE

The Company recognizes revenue from the sale of its products upon the later of
shipment or the satisfaction of all significant Company obligations. All revenue
is derived from unaffiliated customers. Product returns are estimated and
provided for at the time of sale. Such return allowances as a percentage of
revenue have varied significantly over recent years and periods, reflecting the
Company's experience in product returns as it has significantly expanded the
proportion of its sales through third-party distribution channels and increased
its product portfolio. The Company expects return allowances will continue to
vary in the future. The Company's agreements with its distributors generally
provide the distributors with limited rights to return unsold inventories under
a stock balancing program. The Company monitors activities of its distributors
in an effort to minimize excessive returns and establishes its return allowances
based on its estimates of expected returns. While historically the Company's
returns have been within expectations, the establishment of return allowances
requires judgments regarding such factors as future competitive conditions and
product acceptance, which can be difficult to predict.

The Company also derives revenue from product development agreement fees.
Product development agreement fees related to software development are
recognized on a percentage of completion over the term of the contract, and are
included in revenue in the income statement.

Total revenue, a substantial portion of which has been derived from sales of the
Company's CodeWarrior professional programming tools, increased from $5,143 in
fiscal 1995 to $10,619 in fiscal 1996 and increased 72% in fiscal 1997 to

                                                                              21
<PAGE>
 
$18,293. The increase in total revenue in fiscal 1996 was due primarily to
increased product sales of CodeWarrior for Mac OS as our subscriber base
increased from approximately 20,000 registered users at July 31, 1995 to 50,000
users at July 31, 1996. In fiscal 1997, product revenues increased $5,222 from
$8,356 in fiscal 1996 to $13,578 in fiscal 1997. The increase in product
revenues in fiscal 1997 is due primarily to the introduction of new products in
the embedded systems market. In fiscal 1997, the Company launched CodeWarrior
for PalmPilot, CodeWarrior for Sony PlayStation and CodeWarrior for PowerPC
Embedded Systems. All three products contributed significantly to the increase
in product revenue for fiscal 1997. In addition, the Company saw an increase in
sales of desktop products as we added CodeWarrior hosted on Windows 95 and
Windows NT to our product list. In particular, academic sales increased from
fiscal 1996 to fiscal 1997 as universities adopted CodeWarrior for its multi-
language, cross-platform development capabilities. The Company's subscriber base
increased to over 100,000 registered users at July 31, 1997.

In 1996, alliances with new partners such as Microsoft, Sony and Motorola
resulted in an increase in product development agreement revenues of $1,650 from
$613 in fiscal 1995 to $2,263 in fiscal 1996. Product development agreement
revenues increased to $4,715 in fiscal 1997, an increase of 108%. The increase
was the result of new product development agreements in fiscal 1997, including
partnerships with NEC, Motorola, Microsoft and Microware.

                                                COST OF SALES AND PRODUCT MARGIN

Cost of sales consists primarily of the cost of product media and duplication,
the cost of packaging materials, amortization of capitalized research and
development costs, royalties and shipping expenses. Costs associated with
product development agreement revenues are included in research and development
expenses and are not separately identified and approximate revenue. Cost of
sales increased from $910 in fiscal 1995 to $2,664 in fiscal 1996 and increased
71% to $4,563 in fiscal 1997, representing 22%, 37% and 37% of product revenue,
respectively. The increase in cost of sales as a percentage of product revenue
from fiscal 1995 to fiscal 1996 resulted from royalty payments paid by the
Company in 1996 which did not exist in 1995. Margins were also adversely
affected by increased sales of hardware, such as General Magic Inc.'s Magic Cap
Communicator and the 3Com PalmPilot, which have lower margins than software
products. Cost of sales as a percentage of product sales remained flat from
fiscal 1996 to fiscal 1997. The Company changed its production and fulfillment
operations in fiscal 1997 by bringing in-house all packaging, fulfillment and
shipping operations. The effects of this adjustment were not felt until the
fourth quarter of fiscal 1997 when cost of sales, as a percentage of product
sales, decreased to 21%.

                                                              OPERATING EXPENSES

Selling, administrative and technical support costs increased from $2,348 in
fiscal 1995 to $4,622 in fiscal 1996 and increased 75% to $8,109 in fiscal 1997,
representing 46%, 44% and 44% of total revenue, respectively. The increases in
1996 and 1997 resulted from the Company's focus on developing the infrastructure
necessary to provide support for the Company's growth and expansion into new
markets. These costs are primarily personnel related, as the Company's selling,
administrative and technical support headcount has increased from 21 at July 31,
1995 to 60 at July 31, 1996 and to 77 at July 31, 1997, with the majority of the
increase in headcount between 1995 and 1996 having occurred in the later part of
1996.

Depreciation costs increased from $155 in fiscal 1995 to $355 in fiscal 1996 and
increased 225% to $1,154 in fiscal 1997, representing 3%, 3%, and 6% of total
revenue, respectively. The increase in 1997 resulted from significant
investments in property and equipment necessary to provide support for the
Company's personnel growth during these periods.

Research and development costs increased from $1,574 in fiscal 1995 to $3,250 in
fiscal 1996 and increased 100% to $6,486 in fiscal 1997, representing 31%, 31%
and 35% of total revenue, respectively. Research and development expenditures
consisted primarily of personnel-related costs. Increases in expenses were due
primarily to the growth of the Company's research and development team required
to expand and enhance the Company's product line. The Company's research and
development headcount increased from 36 at July 31, 1995 to 65 at July 31, 1996
and to 90 at July 31, 1997.

22
<PAGE>
 
                                                            NON-RECURRING CHARGE

The Company recorded a non-recurring charge of $4,297 in the quarter ended April
30, 1997 related to the write-off of certain assets associated with the Mac OS.
The decision to record this charge was based on the significant decline in sales
of Mac OS-related products. In 1997, the Company accelerated its diversification
efforts to focus on the Windows and embedded systems markets and believed that
the Mac OS-related assets were significantly impaired.

                                                      PROVISION FOR INCOME TAXES

As a result of accumulated operating losses, the Company did not record any
provisions for income taxes in 1995, 1996 or 1997. As of July 31, 1997, the
Company had net operating loss carryforwards of approximately $4,670, which
begin to expire in 2000. If the Company records profits in future periods, such
losses may reduce the amount of taxes payable.

                                                 LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its cash requirements from cash
generated from operations, the sale of equity securities, bank lines of credit
and long-term and short-term debt. At July 31, 1997 the Company has cash and
cash equivalents of $5,042 and no long-term debt. Metrowerks has working capital
of approximately $7,516 at July 31, 1997 compared to $13,519 at July 31, 1996.

In fiscal 1996 and 1997, the Company's operating activities consumed cash of
approximately $1,405 and $2,867, respectively. In both fiscal 1996 and 1997, the
primary cause of the use in cash from operations was the increase in receivables
resulting from increased sales and increased use of third party distributors. In
fiscal 1997, the Company's net loss of $5,975 included a non-cash charge of
$4,297 related to the write-off of certain assets as described above.

The Company has made significant investments in technology in both fiscal 1996
and 1997 and had cash expenditures of $1,599 and $2,385, respectively, for
property and equipment. Total cash used for investment activities was $2,604 and
$3,689, in fiscal 1996 and 1997, respectively.

In March 1996, the Company completed an offering of 1,000,000 common shares for
net proceeds of $10,341 to obtain the financial resources needed for execution
of its expansion into the embedded systems, Windows and Java markets. Total cash
provided by financing activities was $10,761 and $100 in fiscal 1996 and 1997,
respectively.

The Company currently anticipates that existing funds together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months. To the
extent that these sources of funds are insufficient to meet these requirements,
the Company will be required to raise additional funds. Possible sources of
financing include the sale of equity securities or borrowings from banks. The
sale of additional equity or convertible debt securities could be dilutive.
There can be no assurance that the Company will be able to obtain financing on
commercially reasonable terms, if at all, in the future.

                                                                              23
<PAGE>
 
ITEM 7a.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

ITEM 8.   Financial Statements and Supplementary Data

See "Index to Consolidated Financial Statements" on F-1 for a listing of the
consolidated financial statements filed with this report.

ITEM 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures

None.

24
<PAGE>
 
                                                                       PART III.

ITEM 10.  Directors and Executive Officers of the Registrant

The directors of the Company, and certain information about them as of July 31,
1997, are as follows:


<TABLE>
<CAPTION>
                                                                                                 PRINCIPAL OCCUPATION
          NAME AND OFFICE                                 DIRECTOR SINCE                         FOR PAST FIVE YEARS
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>                         <C> 
JEAN BELANGER                                             January 1, 1990             Chairman and Chief Executive Officer of the
Director, Chairman of the Board & CEO                                                 Company; prior to July 1996, Chairman of the
                                                                                      Board of the Company

GREG GALANOS(2)(3)                                        January 1, 1990             President and Chief Technology Officer of the
Director, President & Chief Technology Officer                                        Company; prior to July 1996, President and 
                                                                                      Chief Executive Officer of the Company

DAVID PERKINS                                             June 29, 1995               Senior Vice President, Sales and Business
Director, Senior VP Sales & Business Development                                       of the Company; from May 1995
                                                                                      to July 1996, Vice President, Finance and 
                                                                                      Chief Financial Officer of the Company; from
                                                                                      October 1991 to April 1995, Partner, Coopers &
                                                                                      Lybrand

STEPHEN LOCKYER(1)(2)(3)(4)                               May 4, 1992                 President of Cornwallis Financial Corporation,
Director                                                                              a financial services company

TOM WOODS(1)(4)                                           January 30, 1996            Managing Director, CIBC Wood Gundy Securities
Director                                                                              Inc., a securities dealer

GEOFF BEATTIE(1)(4)                                       October 28, 1996            Partner, Tory Tory DesLauriers & Binnington,
Director and Secretary                                                                a law firm

PETER TOLNAI(1)(2)(4)                                     August 21, 1997             President of Orchard Capital Group, Inc., a 
Director                                                                              private equity investment fund; from January
                                                                                      1995 to March 1997, Vice President of Citibank
                                                                                      Canada; prior to January 1995, Managing 
                                                                                      Director, Clairvest Group Inc.
------------------------------------------------------------------------------------------------------------------------------------


(1) Member of the Company's Audit Committee.
(2) Member of the Company's Stock Option Committee.
(3) Member of the Company's Compensation Committee.
(4) Member of the Company's Corporate Governance and Nominating Committee.
</TABLE> 

                                                                              25
<PAGE>
 
The executive officers of the Company, and certain information about them as
of July 31, 1997, are as follows:

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------


NAME                 AGE               POSITION WITH THE COMPANY
<S>                  <C>     <C>
Jean Belanger        43      Chairman, Chief Executive Officer & Director
 
Greg Galanos         39      President, Chief Technology Officer & Director
 
David Perkins        35      Senior Vice President, Sales & Business Development & Director
 
Berardino Baratta    27      Vice President, Research and Development
 
John Cheuck          29      President, Metrowerks Co., Ltd., Japanese Subsidiary
 
Dave Mark            39      Vice President, Discover/Academic Products
 
James Walker         28      Vice President, Operations
 
Jim Welch            31      Vice President, Finance & Chief Financial Officer

------------------------------------------------------------------------------------------------------------------------------------

</TABLE> 

Jean Belanger became Chairman of Metrowerks in 1989 and joined the Company full-
time in that capacity in 1991. Mr. Belanger earned an M.Sc. (Finance) from the
London School of Economics and a B.Comm. from the University of Ottawa, and is a
Chartered Accountant. Mr. Belanger is located in Austin, Texas.

Greg Galanos founded Metrowerks in 1985. Mr. Galanos is President and Chief
Technology Officer of the Company. Mr. Galanos oversees the Company's research
and development efforts. Mr. Galanos earned an M.Sc. (Computer Science) from the
University of Quebec at Montreal. Mr. Galanos is located in Cupertino,
California.

David Perkins joined Metrowerks in May 1995, as Vice President, Finance and
Chief Financial Officer. Mr. Perkins was appointed Senior Vice President, Sales
and Business Development in 1997. Prior to joining Metrowerks, Mr. Perkins was
an audit partner with Coopers & Lybrand. Mr. Perkins earned a B.Comm. from
McGill University and is a Chartered Accountant. Mr. Perkins is located in
Austin, Texas.

Berardino Baratta is Vice President, Research and Development. Mr. Baratta
joined Metrowerks in 1992 and played an essential role in the early stages of
development of CodeWarrior development tools, the Company's flagship product
line. Mr. Baratta earned a B.Eng. from McGill University. Mr. Baratta is located
in Austin, Texas.

John H.M. Cheuck is President, Metrowerks Co., Ltd. (Tokyo) and leads the
companies efforts in the Asian region with a focus on the Japanese market. Mr.
Cheuck holds a B.A.Sc. (Systems Design Engineering) from the University of
Waterloo and an M.B.A. from the Japan America Institute of Management
Science/University of Hawaii. Mr. Cheuck is located in Tokyo, Japan.

26
<PAGE>
 
Dave Mark is Vice President, Discover/Academic Products. Mr. Mark joined
Metrowerks in 1995. Mr. Mark has written more than a dozen books on programming
and programming-related topics. He has a BS (Math) from Carnegie-Mellon
University and an M.Sc. in Computer Science and Computer Engineering from
Stanford University. Mr. Mark is located in Washington, DC.

James Walker is Vice President, Operations. Prior to joining Metrowerks in
January 1997, Mr. Walker was a Manager with Price Waterhouse in Dallas. He is a
CPA and earned his B.S. from Kansas State University. Mr. Walker is located in
Austin, Texas.

Jim Welch is Vice President, Finance and Chief Financial Officer. Before joining
Metrowerks in June 1996, Mr. Welch was a Senior Manager at Coopers & Lybrand in
Austin. He is a CPA and earned his B.B.A. from The University of Texas at
Austin. Mr. Welch is located in Austin, Texas.

ITEM 11.  Executive Compensation

The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the fiscal years ended July 31, 1997, 1996, and 1995 by
the Company's Chief Executive Officer and the four most highly compensated
executive officers other than the Chief Executive Officer, collectively the
"Named Executive Officers."

<TABLE> 
<CAPTION> 
                                                                         OTHER ANNUAL   SECURITIES UNDER
   NAME                        YEAR    SALARY (US$)     BONUS (US$)      COMPENSATION       OPTIONS
                                                                           GRANTED      SHARE UNITS (US$)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>           <C>              <C>                 <C> 
Jean Belanger,                 1997      118,615            0                  0            15,000        
Chairman of the Board          1996      106,498            0                  0                 0    
& CEO                          1995      100,868            0                  0                 0    
                                                                                                      
Greg Galanos,                  1997      118,615            0                  0            15,000    
President &                    1996      106,498            0                  0            15,000    
Chief Technology Officer       1995      100,868            0                  0            15,000    
                                                                                                      
David Perkins,                 1997      118,615            0                  0            20,500(4) 
Senior VP, Sales &             1996      106,498            0                  0            15,000    
Business Development           1995(1)    25,000            0                  0            50,000    
                                                                                                      
John Cheuck,President,         1997(2)   146,667            0             27,500            30,000(5) 
Metrowerks Co., Ltd.                                                                                  
                                                                                                      
Dave Mark,Vice President,      1997       80,000       40,000                  0             8,500(6) 
Discover/Academic Products     1996(3)    63,333       25,000                  0             32,500     

------------------------------------------------------------------------------------------------------------------------------------

</TABLE> 
(1) Three month period
(2) Eleven month period.
(3) Eleven month period.
(4) 7,500 of these options were originally granted in the financial year ended
    July 31, 1996 at an exercise price of US$12.20 (C$17.00) and were repriced
    during the financial year ended July 31, 1997 by reducing the exercise price
    to US$7.00 (C$9.75). The remainder of these options were granted at an
    exercise price of US$10.70 (C$14.90) (as to 5,500) and at an exercise price
    of US$8.50 (C$11.85) (as to 7,500) and were repriced by reducing the
    exercise price to US$7.00 (C$9.75) during the financial year ended July 31,
    1997.
(5) These options were granted at an exercise price of US$10.70 (C$14.90) and
    were repriced by reducing the exercise price to US$7.00 (C$9.75) in both
    cases during the financial year ended July 31, 1997. (6) 3,500 of these
    options were granted at an exercise price of US$10.70 (C$14.90) and were
    repriced by reducing the exercise price to US$7.00 (C$9.75) in both cases
    during the financial year ended July 31, 1997.
(6) 3,500 of these options were granted at an exercise price of US$10.70
    (C$14.90) and were repriced by reducing the exercise price to US$7.00
    (C$9.75) in both cases during the financial year ended July 31, 1997.

                                                                              27
<PAGE>
 
OPTIONS GRANTED DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR

For the purposes herein, a change in the exercise price of an outstanding option
is considered to be a grant of a new option. Accordingly, the following table
sets forth the individual grant of stock options as well as grants resulting
from the repricing of certain stock options which occurred during the fiscal
year ending July 31, 1997 to the Named Executive Officers.

<TABLE> 
<CAPTION> 

                                                                                                            POTENTIAL REALIZABLE
                                                                                                              VALUE AT ASSUMED
                                                                                                               ANNUAL RATES OF
                                             % OF TOTAL OPTIONS                                                  STOCK PRICE
                       SECURITIES UNDER     GRANTED TO EMPLOYEES    EXERCISE OR BASE                           APPRECIATION FOR
NAME                OPTIONS GRANTED (#)(1)  IN FINANCIAL YEAR(2)  PRICE (US$/SECURITY)  EXPIRATION DATE         OPTION TERMS(5)
                                                                                                              $US            $US
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>                    <C>                    <C>                <C>                <C>             <C> 
Jean Belanger            7,500                    0.9                  11.75              Sept. 16/01        24,347          53,801
                         7,500                    0.9                   9.35              Feb. 14/02         19,374          42,812
                                 
Greg Galanos             7,500                    0.9                  11.75              Sept. 16/01        24,347          53,801
                         7,500                    0.9                   9.35              Feb. 14/02         19,374          42,812
                                 
David Perkins            7,500(3)                 0.9                   7.00              June 6/01          14,505          32,052
                         5,500(4)                 0.7                   7.00              Sept. 16/01        10,637          23,505
                         7,500(3)                 0.9                   7.00              Feb. 14/02         14,505          32,052
                                 
John Cheuck             30,000(4)                 3.6                   7.00              Sept. 16/01        58,019         128,207
                                 
Dave Mark                3,500(4)                 0.4                   7.00              Sept. 16/01         6,769          14,957
                         5,000                    0.6                   5.06              April 24/02         6,990          15,446
------------------------------------------------------------------------------------------------------------------------------------

</TABLE> 
(1) Options granted are for common stock of the Company. These Options vest at
    the rate of one-third per year after each of the three years following the
    grant. The Options have a maximum term of 5 years. No financial assistance
    is provided by the Company for the purchase of common stock on the exercise
    of options.
(2) Based on total option grants/repricings of 837,050.
(3) Granted in fiscal 1996 and repriced in fiscal 1997.
(4) Granted and repriced in fiscal 1997.
(5) Potential realizable value is based on the assumption that common stock of
    the Company appreciated the annual rate shown (compounded annually) from the
    date of grant until the expiration of the five-year term. These numbers are
    calculated based on Securities and Exchange Commission requirements and do
    not reflect the Company's estimate of future price growth.


AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR-END OPTION VALUES

The following table sets forth the total number of securities underlying
unexercised options of the Named Executive Officers and their dollar value
during the financial year ended July 31, 1997 to the Named Executive Officers
exercised stock options during the fiscal year ended July 31, 1997.

<TABLE> 
<CAPTION> 

                     SECURITIES                          UNEXERCISED OPTIONS       VALUE OF UNEXERCISED IN-THE-MONEY
NAME                 ACQUIRED ON   AGGREGATE VALUE          AT FY-END (#)                OPTIONS AT FY-END (1)
                     EXERCISE (#)   REALIZED ($)    EXERCISABLE     UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE 
------------------------------------------------------------------------------------------------------------------------------------

<S>                      <C>          <C>              <C>             <C>           <C>              <C> 
Jean Belanger             0            N/A              0               15,000                 0               0

Greg Galanos              0            N/A              0               15,000                 0               0

David Perkins             0            N/A              55,000          23,000        US$239,080       US$14,600
                                                                                      (C$332,750)      (C$20,500)

John Cheuck               0            N/A              0               30,000                 0               0

Dave Mark                 0            N/A              10,833          30,167         US$31,912       US$72,450
                                                                                       (C$44,415)     (C$100,835)
------------------------------------------------------------------------------------------------------------------------------------

</TABLE> 

(1) Based on a closing stock price of US$6.70 (C$9.35) per common stock on July
    31, 1997, the last day the common stock were traded prior to the Company's
    1997 financial year end.

28
<PAGE>
 
STOCK OPTION PLAN

The current stock option plan of the Company (the "Plan") was adopted by the
Board of Directors on June 21, 1995, was approved by the shareholders of the
Company at the annual general meeting of shareholders held on October 26, 1995
and was amended by resolution of the shareholders of the Company at the annual
and special meeting of shareholders held on October 28, 1996 to increase the
number of Shares reserved for issuance under the Plan by 1,000,000 Shares to
2,600,000 Shares. The Plan will terminate in June, 2005. As of July 31, 1997,
there were currently outstanding under the Plan options to purchase a total of
1,166,267 Shares, representing approximately 9% of the issued and outstanding
Shares on a fully-diluted basis.

The Plan provides that options may be granted to the Company's employees,
officers, directors, or consultants, based on the eligibility criteria set out
in the Plan. Under the Plan, the Company may grant either ISOs or Non-ISOs. An
ISO is defined in the Plan as an "incentive stock option", as such term is
defined in section 422 of the United States Internal Revenue Code of 1986, as
amended from time to time (the "Code") and is therefore subject to favorable tax
treatment under the Code. A Non-ISO is defined in the Plan as a stock option
that is not an ISO and is therefore not subject to favorable tax treatment under
the Code.

The options issued pursuant to the Plan will be exercisable at a price which is
equal to the fair market value of the shares at the time the option is granted.
So long as the Company is listed on a stock exchange or over the counter market
and the optionee does not own more than 10% of the total voting power of all
classes of shares of the Company or an affiliate of the Company, fair market
value will be determined as the closing market price for the Shares of the
Company on the Canadian stock exchange which is the principal trading market for
the Shares, as determined by the Committee, on the day immediately preceding the
date of grant.

Options under the Plan are granted for a term not to exceed ten years, but
generally have five year terms from the date of their grant and subject to
certain exceptions in the Plan relating to the death or disability of the
Optionee, the options are non-assignable and non-transferable. The Committee has
full discretion to impose a vesting schedule on the options issued pursuant to
the Plan.

EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS

The Company currently has no employment contracts with any Named Executive
Officers. The Company also has no compensatory plans or arrangements with such
Named Executive Officers where the amounts to be paid exceed $100,000 and which
are activated upon resignation, termination, retirement or upon a change in
control of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Galanos serves on the Compensation Committee for the Board and is President
and Chief Technology Officer of the Company. Mr. Galanos does not participate in
any decisions regarding his compensation.

COMPENSATION OF DIRECTORS

Directors of the Company are able to participate in the Company's Stock Option
Plan. To date, outside directors have been granted 5,000 options each. The
directors are also reimbursed for their reasonable expenses in attending the
meetings of the Board.

                                                                              29
<PAGE>
 
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of July 31, 1997 as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company (iii) each
of the Named Executive Officers (as defined above) and (iv) all directors and
officers as a group.

                                                                  Percentage
Name of Shareholder                            Number of Shares Ownership(1)(2)
--------------------------------------------------------------------------------
Jean Belanger(3)                                    1,980,239         17.2 %
Greg Galanos(4)                                     1,980,239         17.2 %
Stephen Lockyer(5)                                    506,517          4.4 %
Geoff Beattie(6)                                        5,667            *  
Tom Woods(7)                                            3,667            *  
David Perkins(8)                                       91,833            *  
Dave Mark(9)                                           12,000            *  
John Cheuck(10)                                        10,000            *   
 
All executive officers as a group (10 persons)(11)  4,607,528         39.4 %
--------------------------------------------------------------------------------

*Less than 1% of the Company's outstanding common stock

(1)  Applicable percentage ownership is based on 11,537,500 shares of common
     stock outstanding as of July 31, 1997 together with applicable options for
     such stock-holder. Beneficial ownership is determined in accordance with
     rules of the Securities and Exchange Commission (the "SEC") and includes
     voting and investment power with respect to shares. Shares of common stock
     subject to options currently exercisable or exercisable within 60 days
     after July 31, 1997 are deemed outstanding for computing the percentage
     ownership of the person holding such options, but are not deemed
     outstanding for computing the percentage of any other person.
(2)  This table is based upon information supplied by officers, directors and
     principal stockholders and Schedules 13G filed with the SEC. Unless
     otherwise indicated in the footnotes to this table and subject to community
     property laws where applicable, the Company believes that each of the
     stockholders named in this table has sole voting and investment power with
     respect to the shares indicated as beneficially owned.
(3)  Includes 2,500 shares subject to options exercisable within 60 days of July
     31, 1997. Mr. Belanger is Chairman and Chief Executive Officer of the
     Company. Mr. Belanger's address is c/o Metrowerks Inc., 2201 Donley Dr.,
     Suite 310, Austin, TX 78758.
(4)  Includes 2,500 shares subject to options exercisable within 60 days of July
     31, 1997. Mr. Galanos is President and Chief Technology Officer of the
     Company. Mr. Galanos' address is c/o Metrowerks Inc., 2201 Donley Dr.,
     Suite 310, Austin, TX 78758.
(5)  Includes 1,667 shares subject to options exercisable within 60 days of July
     31, 1997. Mr. Lockyer is a director of the Company.
(6)  Includes 1,667 shares subject to options exercisable within 60 days of July
     31, 1997. Mr. Beattie is a director of the Company.
(7)  Includes 1,667 shares subject to options exercisable within 60 days of July
     31, 1997. Mr. Woods is a director of the Company.
(8)  Includes 61,833 shares subject to options exercisable within 60 days of
     July 31, 1997. Mr. Perkins is the Company's Vice President, Sales and
     Business Development.
(9)  All shares are subject to options exercisable within 60 days of July 31,
     1997. Mr. Mark is the Company's Vice President, Discover and Academic
     Products.
(10) All shares are subject to options exercisable within 60 days of July 31,
     1997. Mr. Cheuck is President, Metrowerks Co. Ltd.
(11) Includes an additional 17,366 shares subject to options exercisable within
     60 days of July 31, 1997, held by executive officers not otherwise listed
     in this table.


ITEM 13.  Certain Relationships and Related Transactions

Mr. Geoff Beattie, a director of the Company, is a partner in the law firm of
Tory Tory DesLauriers & Binnington of Toronto, which was retained by the Company
during its last fiscal year. Total fees paid by the Company to the firm did not
exceed five percent of such law firm's gross revenues for such law firm's last
full fiscal year.

30
<PAGE>
 
                                                                        PART IV.

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on 8-K

(a)  The following documents are filed as part of this report
     
     (1)  Consolidated Financial Statements - See "Index to Consolidated
          Financial Statements" on F-1

     (2)  Consolidated Financial Statement Schedule - See"Index to Consolidated
          Financial Statements" on F-1

     (3)  Exhibits

          The following exhibits are filed herewith:
          
            Exhibit Number     Exhibit Title

                3.1            Amended Articles of Incorporation of the Company

                3.2            By-Laws of Metrowerks

               10.1            Incentive Stock Option Plan and related 
                                 agreements

               10.2            1995 Stock Option Plan and related agreements

               10.3            Lease agreement between the Company and Modular
                                 Power Facilities Limited Partnership

               10.4            401(K) Plan of the Company

               11              Statement Regarding Computation of Per Share
                                 Earnings

               21              List of Subsidiaries

               27              Financial Data Schedule

(b)  Reports on Form 8-K -

     None

                                                                              31
<PAGE>
 
                                        MANAGEMENT'S STATEMENT OF RESPONSIBILITY

The financial statements and other information contained in this Annual Report
are the responsibility of Management. They have been prepared in accordance with
generally accepted accounting principles and present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company. Where necessary, Management has made informed judgements and
estimates of the outcome of events and transactions, with due consideration
given to materiality.

As a means of fulfilling its responsibility for the integrity of financial
information included in this Annual Report, Management relies on the Company's
system of internal control. This system has been established to ensure, within
reasonable limits, that the assets are safeguarded, that transactions are
properly recorded and executed in accordance with Management's authorization and
that the accounting records provide a solid foundation from which to prepare the
financial statements.

The Company's independent public accountants are responsible for auditing the
financial statements and giving an opinion on them. As part of that
responsibility, they review and assess the effectiveness of internal accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management emphasizes the need
for constructive recommendations as part of the audit process.

The Board of Directors carries out its responsibility for the consolidated
financial statements principally through its Audit Committee, consisting solely
of outside directors, which reviews the financial statements and reports thereon
to the Board. The Committee meets periodically with the independent public
accountants and Management to review their respective activities and the
discharge of their responsibilities. The independent public accountants have
free access to the Committee, with or without Management, to discuss the scope
of their audit, the adequacy of the system of internal control and the adequacy
of financial reporting.

Management recognizes its responsibility for fostering a strong ethical climate
so that the Company's affairs are carried out according to the highest standards
of personal and corporate conduct. This responsibility is characterized in the
code of business conduct which is publicized throughout the Company.

32
<PAGE>
 
                                                                      SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the 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.


                                    Metrowerks Inc.


                                    By:  /s/ Jean Belanger
                                         -------------------------------
                                         (Jean Belanger)
                                         Chairman & Chief Executive Officer
                                         Dated:  September 29, 1997
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on September 29, 1997.

NAME                 TITLE                                    DATE

/s/ Jean Belanger    Chairman & Chief Executive Officer       September 29, 1997
--------------------
   (Jean Belanger)


/s/ Greg Galanos     President & Chief Technology Officer     September 29, 1997
--------------------
    (Greg Galanos)


/s/ David Perkins    Senior VP, Sales & Business Development  September 29, 1997
--------------------
   (David Perkins)


/s/ Geoff Beattie    Director                                 September 29, 1997
--------------------
   (Geoff Beattie)


/s/ Stephen Lockyer  Director                                 September 29, 1997
--------------------
   (Stephen Lockyer)


/s/ Peter Tolnai     Director                                 September 29, 1997
--------------------
   (Peter Tolnai)


/s/ Tom Woods        Director                                 September 29, 1997
--------------------
   (Tom Woods)


/s/ Jim Welch        VP of Finance & Chief Financial Officer  September 29, 1997
--------------------
   (Jim Welch)    (Principal Financial and Accounting Officer)

                                                                              33
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Financial Statements:

   Report of Independent Accountants                               F-2
   Consolidated Balance Sheets as of July 31, 1995, 1996
     and 1997                                                      F-3
   Consolidated Statements of Operations for the years
      ended July 31, 1995, 1996 and 1997                           F-4
   Consolidated Statements of Changes in Stockholders' Equity 
      for the years ended July 31, 1995, 1996 and 1997             F-5
   Consolidated Statements of Cash Flows for the years
      ended July 31, 1995, 1996 and 1997                           F-6
   Notes to Consolidated Financial Statements                      F-7

Financial Statements Schedule:

   Report of Independent Accountants                               S-1

   Schedule II - Valuation and Qualifying Accounts                 S-2

All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes, or other schedules.

                                                                             F-1
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders of
Metrowerks Inc.

We have audited the accompanying consolidated balance sheets of Metrowerks
Inc. and Subsidiaries (the "Company") as of July 31, 1995, 1996 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as
of July 31, 1995, 1996 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States and Canada.

/s/ COOPERS AND LYBRAND L.L.P.

COOPERS AND LYBRAND L.L.P.

Austin, Texas
August 25, 1997

F-2
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
ASSETS                                                 1995        1996        1997
                                                     -------      -------     -------
<S>                                                  <C>          <C>         <C>
Current assets:
    Cash and cash equivalents                        $ 4,746      $11,498     $ 5,042
    Accounts receivable, net                             560        2,838       5,027
    Inventories                                           64          254         302
    Income and other taxes recoverable                   237          224         295
    Prepaid expenses and other current assets            198          573         456
                                                     -------      -------     ------- 
            Total current assets                       5,805       15,387      11,122
 
Property and equipment, net (Note 3)                     357        1,716       3,046
Software development costs, net of accumulated 
  amortization of $83, $358 and $-0-, respectively       472        1,202           -
                                                     -------      -------     ------- 
            Total assets                             $ 6,634      $18,305     $14,168
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:                                                                 
    Accounts payable                                 $   493      $ 1,129     $ 1,913
    Accrued liabilities (Note 4)                         487          550       1,498
    Deferred revenue                                      83          189         195
                                                     -------      -------     ------- 
    Total current liabilities                          1,063        1,868       3,606
 
Commitments (Note 7)                                       -            -           -
 
Stockholders' equity:
  Capital stock (Note 5)
    Preferred stock, Class A and B, no par 
     value, unlimited as to number; none 
     outstanding
    Common Stock, no par value, unlimited as to 
     number; 11,537,500 shares issued and 
     outstanding (1996-11,496,983; 
     1995-8,177,233)                                   2,221       17,446      17,596
    Special Warrants, none issued (1995-2,000,000; 
     1996-0)                                           4,464            -           -
 
  Accumulated deficit                                 (1,114)      (1,009)     (6,984)
  Cumulative translation adjustment                        -            -         (50)
                                                     -------      -------     ------- 
  Total stockholders' equity                           5,571       16,437      10,562
                                                     -------      -------     ------- 
            Total liabilities and stockholders' 
              equity                                  $6,634      $18,305     $14,168
 
</TABLE>

Signed on behalf of the Board of Directors

/s/ Jean Belanger          /s/ Jim Welch

Jean Belanger                   Jim Welch   
   Director                  Vice President, 
                             Finance & Chief 
                            Financial Officer

The accompanying notes are an integral part of these consolidated financial
statements.

                                                                             F-3
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
                                                                      1995             1996        1997
                                                                     ------          -------      -------
<S>                                                                  <C>             <C>          <C>
Revenue, net (Note 10)                                               $5,143          $10,619      $18,293
 
Cost of sales (Note 1)                                                  910            2,664        4,563
 
Operating expenses
 Research and development                                             1,574            3,250        6,486
 Selling, administrative and technical support                        2,348            4,622        8,109
 Depreciation of property and equipment                                 155              355        1,154
 Non-recurring charge (Note 2)                                            -                -        4,297
                                                                     -------         -------      ------- 
   Total operating expenses                                           4,077            8,227       20,046
 
Earnings (loss) from operations                                         156             (272)      (6,316)
 
Other income:
 Interest income and other                                               98              377          341
                                                                     -------         -------      ------- 
Net earnings (loss)                                                  $  254          $   105      $(5,975)
 
Net earnings (loss) per common and common equivalent share            $0.03          $  0.01       $(0.52)
 
Weighted average number of common shares and common
equivalent shares outstanding                                         7,956           10,620       11,523
 
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE> 
<CAPTION> 
                                           Common Stock               Special Warrants                      Cumulative    Total
                                      ----------------------      -------------------------   Accumulated  Translation Stockholders'
                                       Shares        Amount         Shares          Amount       Deficit    Adjustment    Equity 
                                      ---------     --------      -----------     ---------   -----------  ----------- ------------ 

<S>                                   <C>           <C>            <C>             <C>           <C>           <C>       <C> 
Balance at August 1, 1994             7,823,433      $ 1,855               -       $     _       $(1,368)     $   -      $   487    
  Issuance of common stock              353,800          366               -             -             -          _          366    
  Issuance of special warrants                -            -       2,000,000         4,464             -          -        4,464    
  Net earnings                                -            -               -             -           254          -          254    
                                     ----------       ------      ----------       -------       -------      -----       ------    
Balance at July 31, 1995              8,177,233        2,221       2,000,000         4,464        (1,114)         -        5,571    
  Conversion of special warrants      2,000,000        4,464      (2,000,000)       (4,464)            -          -            -    
  Issuance of common stock            1,319,750       10,761               -             -             -          -       10,761    
  Net earnings                                -            -               -             -           105          -          105    
                                     ----------       ------      ----------       -------       -------      -----       ------    
Balance at July 31, 1996             11,496,983       17,446               -             -        (1,009)         -       16,437    
  Issuance of common stock               40,517          150               -             -             -          -          150    
  Foreign currency translation                                                                                                      
    adjustment                                -            -               -             -             -        (50)         (50)   
  Net loss                                    -            -               -             -        (5,975)         -       (5,975)   
                                     ----------       ------      ----------       -------       -------      -----       ------    
Balance at July 31, 1997             11,537,500  $    17,596               -       $     -       $(6,984)     $ (50)     $10,562  
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                                                             F-5
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)

<TABLE> 
<CAPTION> 

                                                                      1995         1996       1997
                                                                      ----         ----       ----
<S>                                                               <C>          <C>          <C>
Cash flows from operating activities:
 Net earnings (loss)                                                  $  254      $   105    $(5,975)
 Adjustments to reconcile net earnings (loss) to net cash
   provided by (used in) operating activities:
 Depreciation of property and equipment                                  155          355      1,154
 Amortization of software development costs                               83          275        289
 Loss on sale of property and equipment                                    4            -          -
 Non-recurring charge (Note 2)                                             -            -      4,297
 
 
Changes in assets and liabilities:
  Accounts receivable                                                   (246)      (2,278)    (3,911)
  Inventories                                                            (54)        (190)      (406)
  Income and other taxes receivable                                     (142)          13        (71)
  Prepaid expenses and other assets                                     (116)        (375)       117
  Accounts payable                                                       323          521        685
  Accrued liabilities                                                    420           63        948
                                                                      ------      -------    -------
  Deferred revenue                                                        83          106          6
   Net cash provided by (used in) operating activities                   764       (1,405)    (2,867)
 
Cash flows from investing activities:
 Additions to property and equipment                                    (296)      (1,599)    (2,385)
 Software development costs capitalized                                 (422)      (1,005)      (833)
 Proceeds on sale of property and equipment                               90            -          -
 Acquired in-process research and development                              -            -       (471)
                                                                      ------      -------    -------
   Net cash used in investing activities                                (628)      (2,604)    (3,689)
 
Cash flows from financing activities:
 Net proceeds from issue of common stock net of issuance costs
   of $1,504 in 1996                                                       -       10,341          -
 Net proceeds from issue of special warrants                           4,464            -          -
 Proceeds from exercise of stock options                                 366          420        150
 Repayment of long-term debt                                            (987)           -          -
 Foreign currency translation adjustment                                   -            -        (50)
                                                                      ------      -------    -------
   Net cash provided by financing activities                           3,843       10,761        100
 
Increase (decrease) in cash and cash equivalents                       3,979        6,752     (6,456)
Cash and cash equivalents at beginning of year                           767        4,746     11,498
                                                                      ------      -------    -------
Cash and cash equivalents at end of year (Note 1)                     $4,746      $11,498    $ 5,042
Non-cash investing and financing activities:
  Accrued property and equipment                                      $   19      $   115    $    99
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)



 1.  Summary of Significant Accounting Policies:

     Basis of Presentation

     These financial statements have been prepared by the Company in accordance
 with accounting principles generally accepted in the United States ("USGAAP")
 and in Canada ("Canadian GAAP").

     Basis of Consolidation

     The consolidated financial statements include the accounts of the
 Company and its two wholly-owned subsidiaries, Metrowerks Corporation, a
 Texas corporation, which was formed in June 1994, and Metrowerks Co. Ltd.,
 a Japanese corporation, which was formed in October 1996. All significant
 intercompany transactions and balances have been eliminated.

     Revenue Recognition

     Product revenue, which consists of sales to distributors and from
 corporate license programs, is recognized when the related products are
 shipped, when no significant vendor obligations remain, and collection of
 the receivable, net of provisions for estimated future returns, is
 probable. The allowance for estimated future returns was $248, $275 and
 $1,192 at July 31, 1995, 1996 and 1997, respectively. Allowances for
 estimated future software updates are provided for in the same period as
 the related revenue. The allowance at July 31, 1997 includes approximately
 $917 from the provision for promotional and inventory related costs taken
 in the quarter ended April 30, 1997 (see Note 2).

     Product development agreement revenue is recognized on a percentage
 of completion basis.

     Cost of Sales

     Cost of sales consists primarily of the cost of product media and
 duplication, the cost of packaging materials, amortization of capitalized
 research and development costs, royalties and shipping expenses. Cost
 associated with product development agreement revenues are included in
 research and development expenses and are not separately identified and
 approximate revenue.

     Cash and Cash Equivalents

     The Company considers investments in highly liquid instruments
 purchased with original maturities of 90 days or
 less to be cash equivalents. All of the Company's cash equivalents consist
 principally of government guaranteed instruments and are reported at cost
 which approximates fair market value.

     Credit Risk

     The Company performs ongoing credit reviews of all its customers
 and records an allowance for doubtful accounts receivable when accounts
 are determined to be uncollectible. The allowance for doubtful accounts at
 July 31, 1995, 1996 and 1997 was $9, $9 and $75, respectively.

                                                                             F-7
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)


1.   Summary of Significant Accounting Policies, continued:

     Inventories

     Inventories, consisting of product documentation, magnetic media
 and hardware are stated at the lower of cost or net realizable value. Cost
 is determined using the average cost method.

     Software Development Costs

     Research and development expenditures are charged to operations as
 incurred. The Company capitalizes certain software development costs
 subsequent to the establishment of technological feasibility, if material.
 In addition, the Company periodically reviews its software development
 costs to access net realizable value. Any impairments are recognized in
 operating results when a permanent diminution in value occurs. Based on
 the Company's product development process, technological feasibility is
 established upon completion of a working model. In fiscal 1997, costs
 incurred by the Company between completion of the working model and the
 point at which the product is ready for general release have been
 insignificant.

     For the years ended July 31, 1995, 1996 and 1997, amortization
 expense amounted to $83, $275 and $289, respectively.

     Research and software development costs are reduced by investment
 tax credits.

     Property and Equipment

     Purchased property and equipment is recorded at cost. Depreciation
 is provided using the straight-line method over the estimated useful lives
 of the respective assets as follows:


     Office equipment          5 years
     Computer equipment      2-5 years
     Software                  3 years

     The Company provides for depreciation of leasehold improvements over the
term of the related lease. Expenditures for maintenance and repairs are expensed
as incurred. Upon retirement or other disposotion of assets, the cost and
related accumulated depreciation are eliminated from the accounts and the
resulting gain or loss is reflected in operations.

     Deferred Revenue

     Deferred revenue consists of amounts received in advance for
 product, documentation, magnetic media and development services to be
 delivered in future periods.

F-8
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)


1.   Summary of Significant Accounting Policies, continued:

     Foreign Currency Translation

     The financial statements of the parent company and its non-U.S.
 subsidiaries have been translated into U.S. dollars in accordance with the
 FASB Statement No. 52, "Foreign Currency Translation." Monetary asset and
 liability amounts have been translated using the exchange rates in effect
 at the applicable year end. Inventories, property, and non-monetary asset
 and liability amounts have been translated at historical exchange rates.
 Income statement amounts have been translated using the weighted average ex
 change rate for the applicable year. The gains and losses resulting from the
 changes in exchange rates from year to year have been reported as a
 separate component of Stockholders' Equity. Currency transaction gains or
 losses are immaterial for all periods presented.

     Effective August 1, 1995, the Company changed its reporting
 currency from Canadian dollars to U.S. dollars. The consolidated financial
 statements at July 31, 1995 have been restated as if the U.S. dollar had
 always been the currency of measurement.

     Federal Income Taxes

     The Company accounts for income taxes in accordance with Statement
 of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
 This method requires that deferred taxes be computed annually utilizing
 the liability method and adjusted when new tax laws or rates are enacted.
 Valuation allowances are established when necessary to reduce deferred tax
 assets to the amounts expected to be realized. The Company recorded no
 income tax expense in 1995, 1996 or 1997, and has provided a full valuation
 allowance to reduce the net deferred tax asset to $-0- because the
 realization of tax benefits associated with net operating loss
 carryforwards is not assured (see Note 9).

     Advertising Costs

     Advertising costs are expensed as incurred. For the years ended
 July 31, 1995, 1996 and 1997, advertising expense amounted to $498, $1,179
 and $1,865, respectively. Advertising expense consists of costs from
 catalog advertising, trade journal advertising, mass mailings and various
 other promotional items.

     Net Earnings (Loss) Per Common Share

     The net earnings (loss) per common share is calculated by using the
 weighted average number of common shares and common share equivalents
 outstanding during the year.

     Fair Value of Financial Instruments

     The Company's financial instruments as defined by SFAS No. 107,
 "Disclosures about Fair Value of Financial Instruments," include cash and
 cash equivalents, accounts receivable, accounts payable and accrued
 liabilities, and are accounted for on a historical cost basis, which, due
 to the nature of these financial instruments approx-imates fair value at
 July 31, 1995, 1996 and 1997.

                                                                             F-9
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)


1.   Summary of Significant Accounting Policies, continued:

     Use of Estimates

     The preparation of financial statements in conformity with
 generally accepted accounting principles 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 periods. Actual results could differ from
 those estimates.

     Reclassifications

     Certain prior year financial statement items have been reclassified
 to conform to the current year presentation.

 2.  Non-Recurring Charge:

     The Company recorded a non-recurring charge of $4,297 for the
 quarter ended April 30, 1997 related to the write-off of certain assets
 associated with Apple Computer's Macintosh Operating System ("Mac OS").
 The decision to record this charge was based on the significant decline in
 sales of Mac OS related products. The Company had accelerated its
 diversification efforts to focus on the Windows and embedded systems
 markets and believed that the Mac OS related assets were significantly
 impaired.

     The components of the write-off were as follows:

          Software development costs              $1,746
          Provision for promotional and 
            inventory related costs                1,722
          Write-off of inventories                   358
          Acquired in-process research and 
            development                              471
                                                  ------
                 Total                            $4,297


     The $1,746 write-off of software development costs relates to
 previously capitalized Mac OS IDE development costs. The provision for
 accounts receivable primarily relates to promotional costs in assisting
 distributors and retail outlets in selling Mac OS related products already
 existing in the distribution channel. The write-off of inventories relates
 to Mac OSinventory on-hand as of quarter ended April 30, 1997. The
 write-off of acquired in-process research and development relates to the
 purchase of substantially all of the assets of a software company. The
 assets of the software company acquired will be developed to assist in
 porting Mac OS applications to Apple's next generation operating system,
 Rhapsody. At the time of acquisition, technological feasibility had not
 been reached.

F-10
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)


3.   Property and Equipment:

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
 
                                                        July 31, 1995        
                                                -----------------------------
                                                         Accumulated         
                                                 Cost    Amortization    Net 
                                                ------   ------------  ------ 
<S>                                             <C>         <C>        <C>
    Office equipment                            $   63      $   20     $   43
    Computer equipment                             440         170        270
    Software                                        60          18         42
    Leasehold improvements                           7           5          2
                                                ------      ------     ------
                                                $  570      $  213     $  357

                                                        July 31, 1996         
                                                ----------------------------- 
                                                         Accumulated          
                                                 Cost    Amortization    Net  
                                                ------   ------------  ------ 
 
    Office equipment                            $  464      $   62     $  402
    Computer equipment                           1,288         403        885
    Software                                       505          91        414
    Leasehold improvements                          17           2         15
                                                ------      ------     ------
                                                $2,274      $  558     $1,716
 
                                                        July 31, 1997        
                                                -----------------------------
                                                         Accumulated         
                                                 Cost    Amortization    Net 
                                                ------   ------------  ------ 

    Office equipment                            $1,336      $  265     $1,071
    Computer equipment                           2,372       1,077      1,295
    Software                                       798         306        492
    Leasehold improvements                         275          87        188
                                                ------      ------     ------
                                                $4,781      $1,735     $3,046
</TABLE> 
 
 
4.   Accrued Liabilities:


                                                  1995          1996     1997
                                                ------        ------   ------
    Accrued compensation and related costs      $   93        $  241   $  550
    Professional fees                              302           115      250
    Provision for costs of software updates         67            59      169
    Royalties                                        -            47      113
    Other                                           25            88      416
                                                ------        ------   ------
                                                $  487        $  550   $1,498

                                                                            F-11
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

5.   Capital Stock:

     Preferred Stock

     The Class A preferred shares are non-voting, non-cumulative
 preferred shares, redeemable at the option of the Company or the holder at
 their stated amount. Dividends on Class A shares, having priority over all
 other classes of shares may be paid at the discretion of the Board of
 Directors up to a maximum of 10% of the stated capital.

     The terms of the Class B preferred shares will be determined by the
 Board of Directors at the time of issuance of the shares.

     As of July 31, 1997, there were no issued Class A or Class B
 preferred shares.

     Stock Option Plan

     The Company maintains an incentive stock option plan ("Plan") for the
 benefit of directors, officers and employees. The exercise price of the
 incentive stock option is the fair market value of the shares as at the date of
 the grant. Stock options generally become vested ratably over a three-year
 period.

     Stock options outstanding were as follows:

<TABLE> 
<CAPTION> 
                                                                                                               Weighted-average
                                                                                            Weighted-average   Fair Value Granted
                                                                                  Options    Exercise Price    During the Period
                                                                                 --------   ----------------  --------------------
<S>                                                                               <C>            <C>             <C> 
 Outstanding and exercisable balance at August 1, 1994                            497,000        $ 1.53
  Granted                                                                         348,750          2.66          $        -
  Exercised                                                                      (153,800)         2.15
  Canceled                                                                        (79,000)          1.61
 
 Outstanding and exercisable balance at July 31, 1995                             612,950          2.15
  Granted                                                                         443,050          9.64                3.00
  Exercised                                                                      (317,250)         1.83
  Canceled                                                                       (124,600)         5.65
 
 Outstanding and exercisable balance at July 31, 1996                             614,150          7.01
  Granted                                                                         758,500          9.49                1.80
  Exercised                                                                       (40,517)         3.70
  Canceled                                                                       (165,866)         8.50
 
 Outstanding and exercisable balance at July 31, 1997                           1,166,267
 
</TABLE>

F-12
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)


5.   Capital Stock, continued:

     Stock Option Plan, continued

     The Company has applied Accounting Principles Board Opinion No. 25,
 "Accounting for Stock Issued to Employees," and related interpretations, in
 accounting for the Plan. Accordingly, no compensation expense has been
 recognized for the Plan. Had compensation cost for the Plan been determined
 based upon the fair value at the grant date for awards under the Plan
 consistent with the methodology prescribed under Statement of Financial
 Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and
 the Company's net earnings (loss) would have changed to the pro forma amounts,
 indicated below:
 
                                                  July 31, 1996   July 31, 1997
                                                  -------------   -------------
  Net earnings (loss) - as reported                    $  105       $(5,975)   
  Net earnings (loss) - pro forma                        (189)       (6,435)   
  Net earnings (loss) per share - as reported            0.01         (0.52)   
  Net earnings (loss) per share - pro forma             (0.02)        (0.56)   

     The fair value of each option grant is estimated on the date of
 grant using an option-pricing model, the Black-Scholes model, with the
 following weighted average assumptions: dividend yield of 0.0%, risk-free
 interest rate of 6.06%, expected life of three years and volatility of
 53.00%.

     The following table summarizes information about fixed stock
 options outstanding at July, 31, 1997:

<TABLE> 
<CAPTION> 
                                       Options Outstanding and Exercisable
                                     ---------------------------------------
                                      Number Outstanding   Weighted-Average 
                                       and Exercisable        Remaining    
Range of Excessive Prices              at July 31, 1997    Contractual Life
-------------------------            -------------------  ------------------ 
<S>                                        <C>               <C>      
$3.78 - $13.14                             408,267           4.3 years
$5.06 - $10.70                             758,000           4.7 years 
                                         --------- 
                                         1,166,267
</TABLE> 

     On July 17, 1997, the Company repriced 618,500 options to a price
 equal to 110% of the then market value. These options were repriced from a
 range of between $8.50 and $13.14 to $7.00.

6.   Employee Benefits:

     In January 1996, the Company established a 401(k) retirement
 savings plan (the "Plan") for all employees. All employees meeting minimum
 age requirements are eligible to enroll in the Plan after 250 hours of
 employment. The Company did not provide matching contributions to employee
 accounts for the years ended July 31, 1995, 1996 and 1997.

                                                                            F-13
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)


7.   Commitments:

     The Company leases various facilities under noncancelable operating
 leases. Future minimum lease payments required under operating leases that
 have initial or remaining noncancelable lease terms in excess of one year
 as of July 31, 1997 are as follows:

           1998                          $465
           1999                           237
           2000                           101
           2001                             7
                                         ----
                                         $810

     Total rent expense for noncancelable operating leases was $69, $139
 and $422 for the years ended July 31, 1995, 1996 and 1997, respectively.

     The Company engages the services of individual contractors to
 assist in research and development related to the Company's software
 products.

8.   Risks and Uncertainties:

     The Company has accounts receivable in excess of 10% of its total accounts
 receivable with one unrelated party, Ingram Micro Inc. (a major distributor),
 for the year ended July 31, 1997, aggregating approximately $2,146 (34% of
 total accounts receivable). Historically, the Company has not incurred any bad
 debt expense in connection with any transactions with Ingram Micro Inc.
 Additionally, the Company had sales in excess of 10% of its net sales to Ingram
 Micro Inc. for the year ended July 31, 1997, aggreg ating approximately $3,050
 (15.6% of total sales).

9.   Income Taxes:

     The components of the deferred tax assets are as follows at July 31:

<TABLE> 
<CAPTION> 

                                                                                           1995    1996     1997
                                                                                          -----   -----   -------
      <S>                                                                                  <C>    <C>      <C>  
      Deferred tax assets:
        Net operating loss carryforwards                                                  $ 273   $ 272   $ 2,043
        Property and equipment                                                               12      30       178
        Reserves                                                                             10     120       546
        Investment tax credit                                                               160      98       270
        Other                                                                               (33)   (119)       46
        Net deferred tax asset before valuation allowance                                   422     401     3,083
        Valuation allowance                                                                (422)   (401)   (3,083)
                                                                                          -----   -----   -------                  
        Net deferred tax asset                                                            $   -   $   -    $    -

</TABLE> 

     Net operating loss carryforwards of $4,670 expire 2000 through  2002.

F-14
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)

9.   Income Taxes, continued:

     The difference between the actual income tax provision computed by
 applying the statutory income tax rate to earnings (loss) before taxes is
 attributed to the following:

<TABLE> 
<CAPTION> 
                                            1995       1996       1997
                                              %          %          %
                                           -------   -------    -------
<S>                                        <C>       <C>        <C>
Statutory tax rate                          37.86      38.01      38.00
Future benefit of timing differences 
  not recognized                           (30.04)    (43.12)    (39.40)
Permanent differences                       (7.82)      5.11       1.40
 
</TABLE> 
 
 
10.  Revenue:
 
    Revenue is comprised of the following:

    Revenue                                 1995       1996       1997
                                           -------    -------    ------- 
      Product                              $4,044    $ 7,246    $12,254
      Product development agreement           613      2,263      4,715
      Hardware and other                      486      1,110      1,324
                                           ------    -------    -------
                                           $5,143    $10,619    $18,293
 
11.  Geographic Data:
 
     The Company's revenues by geographic location are as follows:

    Revenue                                 1995       1996       1997
                                           -------    -------    -------
      United States                        $4,029    $ 8,583    $13,685
      Canada                                  258        156        243
      Japan                                   512        851      2,596
      European Union                          235        723      1,452
      Other                                   109        306        317
                                           ------    -------    -------
                                           $5,143    $10,619    $18,293

                                                                            F-15
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
JULY 31, 1995, 1996 AND 1997
(U.S. THOUSANDS OF DOLLARS)


11.  Geographic Data, continued:

 The Company's assets by geographic location are as follows:

                                        1995      1996         1997
                                       ------   -------      --------
          United States                $  270   $ 4,466      $  8,183
          Canada                        6,376    17,990        17,366
          Japan                             -         -         1,024
          Intercompany eliminations       (12)   (4,151)      (12,405)
                                       ------   -------      --------
                                       $6,634   $18,305      $ 14,168


12.  Recent Pronouncements:

     In February 1997, the the Financial Accounting Standards Board
 ("FASB") issued SFAS No. 128, "Earnings Per Share" which establishes
 standards for computing and presenting earnings per share. SFAS No. 128 is
 effective for fiscal years ending after December 15, 1997. Management does
 not believe the implementation of SFAS No. 128 will have a material effect
 on its consolidated financial statements.

     In February 1997, the FASB issued SFAS No. 129, "Disclosure of
 Information About Capital Structure" which establish-es disclosure
 requirements for an entity's capital structure. SFAS No. 129 is effective
 for fiscal years periods ending December 15, 1997. Management does not
 believe the implementation of SFAS No. 129 will have a material effect on
 its consolidated financial statements.

     In June 1997, the FASB issued SFAS No. 130, "Reporting
 Comprehensive Income," which establishes standards for reporting and
 display of comprehensive income and its components in a full set of
 general-purpose financial statements. SFAS No. 130 is effective for fiscal
 years beginning after December 15, 1997.

     Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
 Segments of an Enterprise and Restated Information," and the Canadian
 Institute of Chartered Accountants (CICA)issued Section 1701, which
 establishes standards for the way that public business enterprises report
 information about operating segments in annual financial statements and
 requires that those enterprises report selected information about
 operating segments in interim financial reports issued to shareholders. It
 also establishes standards for related disclosures about products and
 services, geographic areas, and major customers. SFAS No. 131 is effective
 for financial statements for periods beginning after December 15, 1997.

     Management does not believe the implementation of SFAS No. 130 and
 No. 131 will have a material effect on its financial statements.

F-16
<PAGE>
 
Report of Independent Accountants

To the Stockholders of
Metrowerks Inc. and Subsidiaries

Our report on the consolidated financial statements of Metrrowerks Inc. and
subsidiaries is included on page F-2 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the
consolidated financial statement schedule listed in the index on page F-1 of
this Form 10-K herein.

In our opinion, the financial statements referred to above, when considered
in relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information required to be included
therein.

/s/COOPERS AND LYBRAND L.L.P.
-----------------------------
COOPERS AND LYBRAND L.L.P.

Austin, Texas
August 25, 1997

                                                                             S-1
<PAGE>
 
METROWERKS INC. AND SUBSIDIARIES
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
(U.S. THOUSANDS OF DOLLARS)
 
<TABLE> 
<CAPTION> 

                                                     Balance at         Charged to Costs                    Balance at End
Description                                      Beginning of Period      and Expenses        Deductions      of Period
                                                 -------------------    ----------------      ----------    --------------
<S>                                              <C>                    <C>                   <C>           <C> 
Allowance for doubtful accounts and returns                                                               
1995                                                    $146                $  458             $  347           $  257
1996                                                     257                   901                874              284
1997                                                     284                 2,623              1,640            1,267
</TABLE>

S-2