<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


(Mark One)

[X]    Quarterly report pursuant to Section 13 or 15(d) of the Securities 
       Exchange Act of 1934 for the quarterly period ended September 30, 1998

[ ]    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 0-27988


                          MICROWARE SYSTEMS CORPORATION
             (Exact name of registrant as specified in its charter)


                   IOWA                             42-1073916
          (State of incorporation)     (I.R.S. Employer Identification No.)

                 1500 N.W. 118TH STREET. DES MOINES, IOWA 50325
                     (Address of principal executive office)

                                 (515) 223-8000
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the  
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

                                Yes  X    No
                                    ---      ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

        COMMON STOCK: 14,639,242 SHARES OUTSTANDING AS OF SEPTEMBER 30, 1998


                                  1 of 16
<PAGE>


                          MICROWARE SYSTEMS CORPORATION

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The accompanying financial information is unaudited but, in the opinion of 
management, reflects all adjustments (which include only normally recurring 
adjustments) necessary for a fair presentation of the results for the periods 
shown. The unaudited consolidated financial statements and analyses should be 
read in conjunction with the audited consolidated financial statements and 
notes thereto for the year ended March 31, 1998 included in the Annual Report 
on Form 10-K previously filed with the Securities and Exchange Commission.

The results for the quarter ended September 30, 1998 are not necessarily 
indicative of the results to be expected for the entire year.


                                  2 of 16
<PAGE>

                          MICROWARE SYSTEMS CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                   ($ in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                SIX MONTHS ENDED
                                                              SEPTEMBER 30,                    SEPTEMBER 30,
                                                       -------------------------        -------------------------
                                                           1998           1997              1998           1997
                                                       -------------------------        -------------------------
<S>                                                    <C>            <C>               <C>            <C>
REVENUES:
   Product                                             $    3,330      $   2,841         $   6,930      $   5,552
   Services                                                   868          1,437             2,479          2,805
                                                       ----------      ---------         ---------      ---------
                                                            4,198          4,278             9,409          8,357
                                                       ----------      ---------         ---------      ---------
COST OF REVENUES:
   Product                                                    661            577             1,283          1,155
   Services                                                   602            925             1,307          1,628
                                                       ----------     ----------         ---------      ---------
                                                            1,263          1,502             2,590          2,783
                                                       ----------     ----------         ---------      ---------

       GROSS PROFIT                                         2,935          2,776             6,819          5,574

OPERATING EXPENSES:
   Research & development                                   1,778          1,775             3,516          3,656
   Sales & marketing                                        2,807          2,225             5,572          4,688
   General & administrative                                 1,136          1,388             1,789          2,168
   Special charges                                              -            940                 -            940
                                                       ----------     ----------         ---------      ---------
       TOTAL OPERATING EXPENSES                             5,721          6,328            10,877         11,452
                                                       ----------     ----------         ---------      ---------

       OPERATING LOSS                                      (2,786)        (3,552)           (4,058)        (5,878)
                                                       ----------     ----------         ---------      ---------

OTHER INCOME (EXPENSE):
   Foreign currency gain (loss), net                          102            (78)               73            (91)
   Interest income                                            134            200               292            421
   Interest expense                                          (134)          (130)             (268)          (160)
                                                       ----------     ----------         ---------      ---------
                                                              102             (8)               97            170
                                                       ----------     ----------         ---------      ---------
       LOSS BEFORE INCOME TAX EXPENSE                      (2,684)        (3,560)           (3,961)        (5,708)
Income tax expense                                             79             26               190             60
                                                       ----------     ----------         ---------      ---------
       NET LOSS                                        $   (2,763)    $   (3,586)        $  (4,151)     $  (5,768)
                                                       ----------     ----------         ---------      ---------
                                                       ----------     ----------         ---------      ---------

BASIC LOSS PER SHARE                                   $    (0.19)    $    (0.25)        $   (0.28)     $   (0.40)
                                                       ----------     ----------         ---------      ---------
                                                       ----------     ----------         ---------      ---------

SHARES USED IN PER SHARE CALCULATION - BASIC               14,617         14,422            14,593         14,250
                                                       ----------     ----------         ---------      ---------
                                                       ----------     ----------         ---------      ---------

DILUTED LOSS PER SHARE                                 $    (0.19)    $    (0.25)        $  (0.28)      $   (0.40)
                                                       ----------     ----------         ---------      ---------
                                                       ----------     ----------         ---------      ---------

SHARES USED IN PER SHARE CALCULATION - DILUTED             14,617         14,422            14,593         14,250
                                                       ----------     ----------         ---------      ---------
                                                       ----------     ----------         ---------      ---------
</TABLE>

See accompanying notes to consolidated financial statements.


                                  3 of 16
<PAGE>

                          MICROWARE SYSTEMS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                   ($ in thousands, except per share amounts)

<TABLE>
<CAPTION>
                               ASSETS                                September 30,
                                                                    1998 (unaudited)       March 31, 1998
                                                                    -----------------      ----------------
<S>                                                                 <C>                    <C>
CURRENT ASSETS:
    Cash and cash equivalents                                           $   3,805              $   2,009
    Short-term investments                                                  5,684                 11,611
    Trade receivables, net of allowance for doubtful
      accounts of $387 and $502, respectively                               4,372                  4,064
    Income taxes receivable                                                     3                      6
    Inventories                                                                67                     66
    Prepaid royalties                                                         242                    370
    Prepaid expenses and other current assets                                 706                    780
    Deferred tax assets                                                       382                    465
                                                                    -----------------      ----------------
        TOTAL CURRENT ASSETS                                               15,261                 19,371

PROPERTY AND EQUIPMENT:
    Land and improvements                                                   2,529                  2,529
    Building                                                                8,426                  8,426
    Furniture, fixtures & equipment                                         3,604                  3,264
    Research and development equipment                                      2,699                  2,570
    Leasehold improvements                                                     52                     50
                                                                    -----------------      ----------------
                                                                           17,310                 16,839
    Accumulated depreciation and amortization                               3,680                  3,176
                                                                    -----------------      ----------------
        NET PROPERTY AND EQUIPMENT                                         13,630                 13,663

OTHER ASSETS:
    Intangible assets, net of amortization                                  2,700                  3,050
    Deposits and other                                                      1,411                  1,415
                                                                    -----------------      ----------------
        TOTAL OTHER ASSETS                                                  4,111                  4,465
                                                                    -----------------      ----------------
                                                                        $  33,002              $  37,499
                                                                    -----------------      ----------------
                                                                    -----------------      ----------------
</TABLE>


                                  4 of 16
<PAGE>

                          MICROWARE SYSTEMS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (Continued)

<TABLE>
<CAPTION>
                             LIABILITIES                              September 30,
                                                                          1998             
                                                                       (unaudited)         March 31, 1998
                                                                     ----------------     -----------------
<S>                                                                  <C>                  <C>
CURRENT LIABILITIES:
    Notes payable to banks                                              $     293            $     300
    Current portion of long-term debt                                          68                   66
    Accounts payable                                                          851                1,386
    Accrued expenses                                                        2,275                2,317
    Deferred revenues                                                         824                  832
    Income taxes payable                                                      125                   56
                                                                     ----------------     -----------------
        TOTAL CURRENT LIABILITIES                                           4,436                4,957
Long-term debt, less current installments                                   6,883                6,918
Deferred income taxes                                                         349                  268
                                                                     ----------------     -----------------
        TOTAL LIABILITIES                                                  11,668               12,143
                                                                     ----------------     -----------------


                        SHAREHOLDERS' EQUITY
Series A preferred  stock, $14.71 par value; 340,000
    shares authorized; none issued or outstanding                               -                    -
Series I preferred  stock, no par value; 500,000 shares
    authorized; none issued or outstanding                                      -                    -
Common stock, voting, no par value;
    50,000,000 shares authorized; 14,864,342 and
    14,778,092 shares issued; 14,639,242 and 14,552,992
    shares outstanding                                                     36,830               36,735
Accumulated deficit                                                       (14,008)              (9,857)
Accumulated other comprehensive loss                                         (711)                (745)
                                                                     ----------------     -----------------
                                                                           22,111               26,133
Less cost of common shares acquired for the treasury,
    225,100 and 225,100 shares                                                777                  777
                                                                     ----------------     -----------------
        TOTAL SHAREHOLDERS' EQUITY                                         21,334               25,356
                                                                     ----------------     -----------------
                                                                        $  33,002            $  37,499
                                                                     ----------------     -----------------
                                                                     ----------------     -----------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                  5 of 16
<PAGE>

                          MICROWARE SYSTEMS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         SIX MONTHS ENDED SEPTEMBER 30,
                                                                     --------------------------------------
                                                                          1998                  1997
                                                                     ----------------     -----------------
<S>                                                                  <C>                  <C>
                                                                               ($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                              $ (4,151)            $ (5,768)
       Adjustments to reconcile net loss to net cash used in
         operating activities:
         Depreciation and amortization                                      1,415                  825
         Write-off of intangible assets                                         -                  940
         Deferred income taxes                                                163                   52
       Change in assets and liabilities:
         Trade receivables, net                                              (204)               2,754
         Inventories                                                           (1)                  77
         Prepaid royalties                                                    127                 (211)
         Other current assets                                                  82                 (275)
         Income taxes receivable                                                3                   87
         Other assets                                                        (381)              (1,566)
         Accounts payable                                                    (537)              (1,058)
         Accrued expenses                                                     118                   52
         Deferred revenues                                                   (204)                  89
         Income taxes payable                                                  66                   21
                                                                     ----------------     -----------------
   NET CASH USED IN OPERATING ACTIVITIES                                   (3,504)              (3,891)
                                                                     ----------------     -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Capital expenditures                                                  (646)              (4,148)
       Purchase of short-term investments                                  (1,008)             (11,283)
       Maturities of short-term investments                                 6,935               14,093
                                                                     ----------------     -----------------
   NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                      5,281               (1,338)
                                                                     ----------------     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments on notes payable to banks and long-term debt
                                                                              (33)                (617)
   Proceeds from issuance of notes payable to banks and long-term
       debt                                                                     -                3,710
   Proceeds from issuance of common stock                                     100                  570
   Cost of issuance of common stock                                            (5)                 (47)
                                                                     ----------------     -----------------
   NET CASH PROVIDED BY FINANCING ACTIVITIES                                   62                3,616
                                                                     ----------------     -----------------

Effect of foreign currency exchange rate changes on cash                      (43)                  74
                                                                     ----------------     -----------------
 Net increase (decrease) in cash and cash equivalents                       1,796               (1,629)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            2,009                6,758
                                                                     ----------------     -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $  3,805             $  5,129
                                                                     ----------------     -----------------
                                                                     ----------------     -----------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                                    $260             $    359
                                                                     ----------------     -----------------
                                                                     ----------------     -----------------
   Cash paid for taxes                                                        $26             $     23
                                                                     ----------------     -----------------
                                                                     ----------------     -----------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                  6 of 16
<PAGE>

                          MICROWARE SYSTEMS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                (UNAUDITED)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In accordance with the rules and regulations of the Securities and Exchange 
Commission, the preceding unaudited financial statements omit or condense 
certain information and footnote disclosure normally required for complete 
financial statements prepared in accordance with generally accepted 
accounting principles. In the opinion of management, all adjustments (which 
include reclassifications and normal recurring adjustments) necessary to 
present fairly the financial position, results of operations and cash flows 
at September 30, 1998 and for all periods presented, have been made.

Certain amounts in the fiscal 1998 consolidated financial statements have 
been reclassified to conform to the fiscal 1999 presentation.

2.   REVENUE RECOGNITION

The Company has adopted the provisions of Statement of Position ("SOP") 97-2, 
"Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the 
Effective Date of Certain Provisions of SOP 97-2", effective April 1, 1998. 
SOP 97-2 and SOP 98-4 provide guidance on recognizing  revenue on software 
transactions and supercede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 
did not have a significant impact on the Company's current licensing or 
revenue recognition practices. However, should the Company adopt new, or 
change its existing, licensing practices, the Company's revenue recognition 
practices may be subject to change to comply with the accounting guidance 
provided in SOP 97-2 and 98-4.

3.   COMPUTATION OF NET LOSS PER SHARE

Net loss per share is calculated in accordance with the provisions of 
Financial Accounting Standards Board ("FASB") Statement of Financial 
Accounting Standards ("SFAS") No. 128, "Earnings per Share". Basic EPS has 
been computed by dividing net loss by the weighted average number of common 
shares outstanding during the periods presented. Diluted EPS is computed by 
dividing net loss by the weighted average common and, when dilutive, common 
equivalent shares outstanding during the periods presented. Dilutive common 
equivalent shares are calculated using the treasury stock method and consist 
of common stock issuable upon the exercise of options and warrants. Prior 
period EPS calculations have been restated.

4.   COMPREHENSIVE INCOME

On April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive 
Income". Comprehensive income is defined as the change in equity of a company 
during a period from transactions and other events and circumstances, 
excluding transactions resulting from investments by owners and distributions 
to owners. For the Company, the primary difference between net income and 
comprehensive income results from foreign currency translation adjustments.

Comprehensive loss for the three and six months ended September 30, 1998 and 
1997 is as follows:

<TABLE>
<CAPTION>
                                                Three Months Ended            Six Months Ended
                                                   September 30,                September 30,
                                             --------------------------    ------------------------
                                                1998          1997            1998         1997
                                                ----          ----            ----         ----
<S>                                          <C>            <C>            <C>            <C>
Net loss                                       $(2,763)     $(3,586)        $(4,151)      $(5,768)
Foreign currency translation adjustment             21          (57)             34            81
                                               -------      -------         -------       -------
TOTAL COMPREHENSIVE LOSS                       $(2,742)     $(3,643)        $(4,117)      $(5,687)
                                               -------      -------         -------       -------
                                               -------      -------         -------       -------
</TABLE>


                                  7 of 16
<PAGE>



5.   RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an 
Enterprise and Related Information". This statement establishes standards for 
reporting information about operating segments in annual financial 
statements. It also establishes standards for related disclosures about 
products and services, geographic areas and major customers. The disclosures 
prescribed by SFAS No. 131 will be effective for the Company's consolidated 
financial statements for the year ending March 31, 1999.

In April 1998, the American Institute of Certified Public Accountants issued 
SOP 98-1, "Accounting for the Costs of Computer Software Developed or 
Obtained for Internal Use". SOP 98-1 provides guidance for determining 
whether computer software is internal-use software and for accounting for the 
proceeds of computer software originally developed or obtained for internal 
use and then subsequently sold to the public. It also provides guidance on 
capitalization of the costs incurred for computer software developed or 
obtained for internal use. The Company has not yet determined the impact, if 
any, of adopting this statement. The disclosures prescribed by SOP 98-1 will 
be effective for the year ending March 31, 2000 consolidated financial 
statements.

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

FORWARD-LOOKING INFORMATION IS SUBJECT TO UNCERTAINTY
This discussion and analysis of the Company's financial condition and results 
of operations  includes  forward-looking  statements  that  involve risk and 
uncertainty,  including management's expectations for fiscal 1999, issues 
relating to Year 2000 disclosure and known trends and uncertainties in the 
business. Actual future results and trends may differ materially depending on 
a variety 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, changes in pricing, product 
life cycles, seasonality of customer buying patterns, the existence of 
product errors, extraordinary events, such as litigation or acquisition, 
including related charges, and economic conditions generally or in various 
geographic areas. All of the foregoing factors, and others not mentioned, 
make operating results difficult to forecast. The Company's operating results 
have varied significantly from quarter to quarter in the past, and the future 
operating results of the Company may fluctuate as a result of the above and 
other risk factors detailed in the Company's Annual Report on Form 10-K for 
the fiscal year ended March 31, 1998 and other documents filed by the Company 
with the Securities and Exchange Commission. 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. In prior years, the Company's 
actual financial performance has not always met market expectations. It is 
likely that, in some future quarter, the Company's financial performance will 
again fall below market expectations.

OVERVIEW
Microware develops, markets and supports sophisticated real-time operating 
system  software and  development  tools for the  traditional  embedded, 
communications and consumer products markets. Microware's product line is 
built around the OS-9 family of real-time operating systems for advanced 
16-bit and 32-bit microprocessors. The Company's OS-9 product family includes 
options for programming languages, networking, graphical interfaces and 
productivity tools.

The Company has historically derived revenues from development licenses and 
run-time license royalty fees along with sales of related software 
productivity tools, maintenance support and custom contract engineering work. 
Custom contract engineering revenues are typically derived from discrete 
software engineering projects porting the OS-9 operating system along with 
customized software products to a customer's product. Commonly, license 
royalty fees follow the completion of these contracts and the successful 
deployment of the customer's product. For financial reporting purposes, 
product revenues primarily consist of software licenses and software 
development tool products, along with license run-time royalty fees earned, 
including non-refundable prepaid royalties. Services revenues  principally  
consist of revenues from custom contract engineering and maintenance support 
agreements, along with consulting and training activity.


                                  8 of 16
<PAGE>

A key element of the Company's long-term strategy is to develop products that 
can be embedded into successful,  high volume customer products thereby 
significantly increasing license run-time royalty fees. Any increase in the 
percentage of revenues attributable to license run-time royalties will depend 
on the Company's successful negotiation of run-time royalty arrangements and 
on the successful commercialization by the Company's customer of the 
underlying product. Recently, the Company has been negatively impacted by 
target markets, such as cellular phones, two-way paging, personal Internet 
devices and digital and interactive television, emerging much slower than 
anticipated. In addition, there can be no assurances that the Company will be 
successful when the markets, for which the Company's products are targeted, 
emerge. In an effort to lessen the variability of its quarterly operating 
results and attain profitability, the Company has substantially increased its 
emphasis on the traditional embedded and communications markets in the past 
year. While the Company believes all these markets present significant 
opportunities for growth, this change in market emphasis, along with the 
Company's continued involvement in emerging consumer products markets whose 
development is uncertain, exposes the Company's business to significant risks 
and uncertainties.

The Company has entered into software license and custom contract engineering 
agreements with Motorola, Inc. (Motorola) to provide or develop various 
software solutions. Motorola has maintained a significant equity position in 
the Company since July 1995. Product revenues of approximately $50,000 and 
$1,340,000 resulted from such agreements in the first six months of fiscal 
1998 and 1999, respectively. Services revenues of approximately $435,000 and 
$730,000 resulted from custom contract engineering services for Motorola in 
the first six months of fiscal 1998 and 1999, respectively. A portion of 
these revenues relates to products under development which Motorola has not 
yet begun to distribute. The Company believes that all transactions with 
Motorola have been, and the Company's Board of Directors has adopted a policy 
stating that any future transactions with significant equity owners will be, 
on terms which are considered to be no less favorable to the Company than 
those obtained in arm's length transactions with unaffiliated third parties.

RESULTS OF OPERATIONS

SECOND QUARTER OF FISCAL 1999 COMPARED TO THE SECOND QUARTER OF FISCAL 1998

REVENUES

Total revenues decreased 2% or $80,000 from $4.3 million in the second 
quarter of fiscal 1998 to $4.2 million in the second quarter of fiscal 1999. 
Product revenues increased 17% or $489,000 from $2.8 million in the second 
quarter of fiscal 1998 to $3.3 million in the second quarter of fiscal 1999. 
The increase in product revenues between periods resulted primarily from an 
increase in DAVID distribution license fees received from existing customers. 
Services revenues decreased 40% or $569,000 from $1.4 million in the second 
quarter of fiscal 1998 to $868,000 in the second quarter of fiscal 1999. 
During the second quarter of fiscal 1999 the Company reorganized its 
professional services group. The decrease in services revenues resulted from 
lower margin work being performed in the second quarter of fiscal 1999 as 
compared to the second quarter of fiscal 1998. In addition, during the second 
quarter of fiscal 1999 the Company supported certain customer product 
launching efforts for which, in some cases, no revenue was recognizable, but 
which the Company hopes will lead to future revenues.

International revenues represented 63% or $2.7 million and 57% or $2.4 
million of total revenues in the second quarter of fiscal 1998 and 1999, 
respectively. The decrease in international revenues as a percentage of total 
revenues between periods was due to a decline of $533,000 from the Company's 
operations in Japan. The decline in revenues from Japan resulted primarily 
from a decrease in funded porting and custom services work, compounded by the 
increased strength of the U.S. Dollar against the Japanese Yen. The reduction 
in revenues from the Company's operations in Japan was offset, in part, by an 
increase of $248,000 in revenues from the Company's operations in Europe. The 
increase in revenues from Europe resulted from an increase in OEM license 
sales. The Company expects international sales to continue to represent a 
significant portion of its revenues, although the percentage may fluctuate 
significantly from period to period. In Europe and Japan, revenues and 
expenses are primarily denominated in local currencies. The Company's 
operating and pricing strategies take into account changes in exchange rates 
over time, however, the Company's results of operations may be significantly 
affected in the short-term by fluctuations in foreign currency exchange rates.


                                  9 of 16
<PAGE>

COST OF REVENUES

Cost of revenues decreased 16% or $239,000 from $1.5 million in the second 
quarter of fiscal 1998 to $1.3 million in the second quarter of fiscal 1999. 
As a percentage of product revenues, the cost of product revenues was 20% for 
both the second quarters of fiscal 1998 and 1999. The increase in real 
dollars was principally due to an increase in the amortization of prepaid 
royalties. Cost of services revenues decreased 35% or $323,000 from the 
second quarter of fiscal 1998 to the second quarter of fiscal 1999, but 
increased as a percentage of services revenues from 64% in the second quarter 
of fiscal 1998 to 69% in the second quarter of fiscal 1999. The reduction in 
gross margin on services work primarily resulted from reduced volume and 
lower margin work being performed in the second quarter of fiscal 1999 as 
compared to the second quarter of fiscal 1998. In addition, the Company 
supported certain customer product launching efforts for which, in some 
cases, no revenue was recognizable, but which the Company hopes will lead to 
future revenues

RESEARCH AND DEVELOPMENT

Research and development expense totaled $1.8 million for both the second 
quarters of fiscal 1998 and 1999. Research and development expense fell due 
to reductions in engineering staff, however these reductions were offset by 
increases in software support, depreciation on building and equipment, and 
consulting services utilized by the Company between periods.

SALES AND MARKETING

Sales and marketing expense increased 26% or $582,000 from $2.2 million in 
the second quarter of fiscal 1998 to $2.8 million in the second quarter of 
fiscal 1999. The increase in sales and marketing expense between the periods 
was primarily due to an increase in salaries and related costs resulting from 
personnel increases in the Company's direct sales force. Commission expense 
also increased as a result of the increase in product sales between periods. 
The Company has continued to experience turnover in its sales personnel, 
which has had, and may continue to have, an interim adverse affect on the 
operations of the Company. While the Company has made significant progress in 
filling sales positions as turnover occurs, the costs of training and 
recruiting new sales personnel remains substantial.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expenses decreased 18% or $252,000 from $1.4 
million to $1.1 million in the second quarters of fiscal 1998 and 1999, 
respectively. The decrease resulted from a reduction in costs stemming from 
organizational changes made in the Company's operations. Included in general 
and administrative charges for the three month period ended September 30, 
1997 were severance and related benefits of $170,000, costs of moving to the 
Company's new headquarters facility of $80,000 and recruiting and relocation 
costs associated with the hiring of new executive management personnel of 
approximately $260,000. Included in general and administrative charges in the 
three-month period ended September 30, 1998 were severance and related 
benefits of $190,000 and relocation costs associated with the hiring of key 
management personnel of $105,000.

OTHER INCOME (EXPENSE)

Other income (expense) increased from ($8,000) to $102,000 in the second 
quarters of fiscal 1998 and 1999, respectively. Overall, the increase is 
attributable to an increase in foreign exchange gains resulting primarily 
from the strengthening of the Japanese Yen against the U.S. Dollar and the 
U.S. Dollar against the German Mark. Offsetting the increase in foreign 
exchange gains was a reduction in interest income due to cash used in 
operations.


                                  10 of 16
<PAGE>

SIX MONTHS YEAR-TO-DATE OF FISCAL 1999 COMPARED TO SIX MONTHS YEAR-TO-DATE OF 
FISCAL 1998

REVENUES

Total revenues increased 13% or $1.0 million from $8.4 million for the 
six-month period ended September 30, 1997 to $9.4 million for the six-month 
period ended September 30, 1998. Product revenues increased 25% or $1.4 
million from $5.5 million for the six month period ended September 30, 1997 
to $6.9 for the six month period ended September 30, 1998. The increase in 
product revenues was due to an increase in DAVID and Java distribution 
license and non-refundable prepaid royalty fees. Services revenues decreased 
12% or $326,000 from $2.8 million for the six-month period ended September 
30, 1997 to $2.5 million for the six-month period ended September 30, 1998. 
The decrease in services revenues between periods primarily resulted from 
smaller, lower margin work being performed in the second quarter of fiscal 
1999 as compared to the second quarter of fiscal 1998. In addition, the 
Company supported certain customer product launching efforts for which, in 
some cases, no revenue was recognizable, but which the Company hopes will 
lead to future revenues

COST OF REVENUES

Total cost of revenues decreased 7% or $193,000 from $2.8 million for the 
six-month period ended September 30, 1997 to 2.6 million for the six-month 
period ended September 30, 1998. As a percentage of product revenues, cost of 
product revenues decreased from 21% for the six month period ended September 
30, 1997 to 19% for the six month period ended September 30, 1998. The 
percentage decrease resulted from the increase in product revenues partially 
offset by increased amortization of purchased software and third party 
royalty expense between periods. As a percentage of services revenues, cost 
of services revenues decreased from 58% for the six month period ended 
September 30, 1997 to 53% for the six month period ended September 30, 1998. 
The percentage decrease between periods resulted from high margin custom 
contract work being performed during the first three months of fiscal 1999.

RESEARCH AND DEVELOPMENT

Research and development expense decreased 4% or $140,000 from $3.7 million 
for the six-month period ended September 30, 1997 to $3.5 million for the 
six-month period ended September 30, 1998. Research and development expense 
fell due to reductions in engineering staff, however, these reductions were 
offset by increases in software support, depreciation on building and 
equipment, and consulting services utilized by the Company between periods.

SALES AND MARKETING

Selling and marketing expense increased 19% or $884,000 from $4.7 million to 
$5.6 million in the six months ended September 30, 1997 and 1998, 
respectively. The overall increase in selling and marketing expense was 
primarily due to an increase in salaries and related costs resulting from an 
increase in the Company's U.S. direct sales force. Commission expense also 
increased as a result of the increase in product sales between periods. The 
Company has continued to experience turnover in its sales personnel, which 
has had, and may continue to have, an interim adverse affect on the 
operations of the Company. While the Company has made significant progress in 
filling sales positions as turnover occurs, the costs of training and 
recruiting new sales personnel remains substantial.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expenses decreased 17% or $379,000 from $2.2 
million for the six-month period ended September 30, 1997 to $1.8 million for 
the six-month period ended September 30, 1998. The decrease resulted from a 
reduction in costs stemming from organizational changes made in the Company's 
operations. Included in general and administrative charges for the six month 
period ended September 30, 1997 were severance and related benefits of 
$175,000, costs of moving to the Company's new headquarters facility of 
$80,000 and recruiting and relocation costs associated with the hiring of new 
executive management personnel of approximately $330,000.  


                                  11 of 16
<PAGE>

Included in general and administrative charges in the six-month period ended 
September 30, 1998 were severance and related benefits of $190,000 and 
relocation costs associated with the hiring of key management personnel of 
$105,000.

SPECIAL CHARGES

For the six month period ended September 30, 1997, the Company determined 
that due to revised estimates of the marketability of certain products under 
development, a special charge of $940,000 was appropriate to more adequately 
reflect the residual value of certain intangible assets. Included in this 
charge was approximately $566,000 of deferred development costs in the form 
of prepaid royalties, approximately $202,000 relating to goodwill associated 
with Micromall, Inc., an inactive wholly owned subsidiary of the Company, and 
approximately $172,000 relating to the write-off of previously capitalized 
purchased technology.

OTHER INCOME (EXPENSE)

Other income decreased $73,000 from $170,000 for the six month period ended 
September 30, 1997 to $97,000 for the six month period ended September 30, 
1998. This decrease is attributable to a reduction of interest income due to 
cash used in operations and an increase in interest expense related to the 
Company's new headquarters facility offset by a favorable change in foreign 
currency exchange rates.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1998, the Company had working capital of $10.8 million and 
approximately $9.5 million in cash, cash equivalents and short-term 
investments as compared to $14.4 million in working capital and $13.6 million 
in cash, cash equivalents and short-term investments at March 31, 1998. 
Generally, the decreases in working capital, cash, cash equivalents and 
short-term investments resulted from the net loss of $4.2 million incurred 
during the first six months of fiscal 1999.

Net cash used in operating activities in the first six months of fiscal 1998 
and 1999 totaled $3.9 million and $3.5 million, respectively. In the first 
six months of fiscal 1998, the net loss of $5.8 million, an increase in other 
assets of $1.6 million and a decrease in accounts payable of $1.1 million 
were partially offset by a decrease in trade receivables of $2.8 million. The 
increase in other assets was due primarily to additional purchases of third 
party software to be bundled with the Company's software products. The net 
loss of $4.2 million along with the reduction in accounts payable of $537,000 
were the primary reasons for the cash being used in operations in the first 
six months of fiscal 1999.

Net cash provided by (used in) investing activities in the first six months 
of fiscal 1998 and 1999 totaled ($1.3) million and $5.3 million, 
respectively. Uses of cash in the first six months of fiscal 1998 resulted 
from construction expenditures made on the Company's new headquarters 
facility offset by net maturities of short-term investments. Cash provided 
from investing activities during the first six months of fiscal 1999 resulted 
from net maturaties of short-term investments of $5.9 million offset by 
capital expenditures of $646,000.

Net cash provided by financing activities in the first six months of fiscal 
1998 and 1999 totaled $3.6 million and $62,000, respectively. The cash 
provided by financing activities in the first six months of fiscal 1998 
resulted primarily from proceeds  received on the Company's  construction 
loan for it new headquarters facility.

The Company believes its existing cash and short-term investments along with 
other working capital will be sufficient to meet its operating and capital 
expenditure needs for at least the next 12 months.

"YEAR 2000" ISSUES

The Company is aware of the numerous issues associated with the programming 
code in existing computer systems as the year 2000 approaches. The "Year 
2000" problem is pervasive and complex, as many computer systems will be 
affected in some way by the rollover of the two digit year value to 00. 
Systems that do not properly recognize such information may generate 
erroneous data or cause a system to fail. The "Year 2000" issue creates risk 
for the 


                                  12 of 16
<PAGE>

Company from unforeseen problems in its own computer systems and from third 
parties with whom the Company deals worldwide. Failures in the Company's 
and/or third party's computer systems could have a material adverse impact on 
the Company's operations. To address this concern, the Company has evaluated 
its products to assess their Year 2000 compliance. The Company believes that 
the most current release of all of its products will not cease to perform or 
generate incorrect or ambiguous data or results solely due to a change in 
date to or after January 1, 2000. The Company believes that the current 
versions of its products are in material compliance with Year 2000 
requirements. While copies of old versions of the Company's software may be 
embedded in deployed products developed by OEM licensees, some of which may 
be used in mission critical functions, the Company has made commercially 
available Year 2000 upgrades to its past licensees, and believes that the 
term of its license agreements preclude any liability for Year 2000 related 
failures in such products. The Company is also currently in the process of 
evaluating its infrastructure along with its external suppliers for "Year 
2000" compliance. Management believes its internal infrastructure and 
external suppliers used will be compliant by the year 2000. Management does 
not believe the costs related to achieving "Year 2000" compliance will be 
material. However, there can be no assurance that the systems of other 
companies on which the Company relies have been or will be accurately 
converted to be "Year 2000" compliant and will not have an adverse effect on 
the Company's operations.

"EURO" ISSUES

The Economic and Monetary Union ("EMU") and the introduction of a new 
currency (the "Euro"), will begin in Europe on January 1, 1999. The new 
currency intended to enable the European Union ("EU") to blend the economies 
of the EU's member states into one large market with unrestricted and 
unencumbered trade and commerce across borders. Eleven European countries are 
expected to participate in the first membership wave, comprising the 
Netherlands, Belgium, Luxembourg, Germany, France, Ireland, Finland, Austria, 
Italy, Spain and Portugal. Other member states are expected to join in the 
years to come. The Company continues to evaluate the impact of the 
introduction of the new currency and currently does not anticipate it will 
have a material adverse effect on the Company's financial position, results 
of operations or cash flows.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

VARIABILITY OF QUARTERLY OPERATING RESULTS

The Company has experienced significant operating losses for the past two 
fiscal years. While the Company has taken a number of measures to increase 
its revenues, decrease its operating expenses, and attain profitability, 
there can be no assurance that these measures will succeed or that the 
Company will become profitable. Furthermore, the Company's revenues and 
operating results have varied substantially from quarter to quarter, remain 
difficult to foresee due to the nature of the embedded systems market and the 
Company's business, and should not be relied upon as an indication of future 
performance. The Company believes its revenues may fluctuate from quarter to 
quarter depending upon such factors as new product introductions by the 
Company or others, seasonality of customer buying patterns, the Company's 
sales commission plan, renewals of product licenses by customers, product 
development expenses, changes in Company and competitors' pricing policies, 
the timing of significant orders, the mix of products sold, the mix of 
international versus domestic revenues, currency fluctuations, the existence 
of product errors and the hiring and training of additional staff. 
Furthermore, delays in closing product licensing transactions or in 
completion of custom contract engineering work during any quarter could cause 
quarterly revenues and net earnings for that quarter to fall below 
anticipated levels. The Company derives a significant portion of its revenues 
from a relatively small number of large account customers, therefore any 
delay in the consummation of business with this small number of customers 
could significantly impact the Company's quarterly performance. The majority 
of the Company's revenues in a quarter has been historically derived from 
orders received in the last month of that quarter, which makes the Company's 
financial performance more susceptible to an unexpected downturn in business 
and makes quarterly results difficult to forecast. In addition, the Company's 
expense levels are based on present expectations of future revenue levels, 
and a shortfall in revenues could result in a disproportionate decrease in 
the Company's net earnings. As the markets in which the Company competes 
mature and as new and existing companies compete for customers, price 
competition is likely to intensify and such competition could adversely 
affect quarterly operating results. Variations in product mix may also affect 
gross profit margin percentages. Therefore, although the Company's revenues 
and gross profit in any period may increase in absolute terms, such an 
increase may result in lower gross profit margin percentages.


                                  13 of 16
<PAGE>

MARKET RISKS

The Company has invested substantial resources in the development of certain 
emerging markets, in particular the digital television and wireless and 
Internet communications devices markets. While the Company has achieved a 
substantial number of OEM licenses in these markets and a number of the 
devices are currently in commercial deployment, these markets remain at an 
early stage and are increasingly competitive, and there can be no assurance 
that the Company will receive substantial revenues or earnings from products 
or services in these markets.

The Company has in the past fiscal year re-emphasized its focus on the 
traditional embedded systems business in an effort to lessen the variability 
of its quarterly operating results and attain profitability. The traditional 
embedded systems business is diverse and increasingly competitive, and there 
can be no assurance that the Company will be able to substantially increase 
its revenues from that market. Moreover, there is a risk that the shift in 
market emphasis will weaken the Company's position in the consumer markets.

The communications infrastructure device market is a new area of emphasis for 
the Company, and is highly fragmented, very competitive, and technically 
demanding. While Microware believes the technological  sophistication and 
openness of its product architecture for the market will enable it to 
establish a substantial revenue base in the communications infrastructure 
market, there can be no assurance that the Company will be able to do so.

ABILITY TO KEEP PACE WITH COMPETITION AND RAPID TECHNOLOGY CHANGE

The embedded systems markets are highly diverse and devoid of established 
technology standards. A majority of embedded operating systems and 
applications are developed in-house by OEMs, and no single processor platform 
accounts for a majority or even a substantial  minority of the embedded 
systems under development. Moreover, the market is increasingly competitive, 
with a number of industry leading companies with substantially greater 
financial and technical resources than Microware devoting substantial 
resources to the development of significant market share in the embedded 
systems business. While the Company tries to support the industry-leading 
32-bit microprocessors which it believes represent the best market 
opportunities, and to offer the best possible array of incremental software 
functionalities, there can be no assurance that the Company's current 
products will meet the demands of the market in an environment of increasing 
competition and rapid technology change.

RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND TRANSITIONS

The Company has in the past experienced delays in software development, and 
there can be no assurance that the Company will not experience such delays in 
the future. Such delays, which can occur because of resource constraints, 
unforeseen technological obstacles within or outside the Company's control, 
and changes in market requirements, can have a material adverse effect on the 
Company's business.

COMPETITION

The Company has attracted substantial competition in its targeted markets. 
Many of the Company's traditional competitors have grown substantially as a 
result of successful exploitation of growth in the embedded systems market, 
and in some cases have expanded their businesses in a manner which competes 
more directly with the Company. Microsoft Corporation has devoted substantial 
resources to the development of the embedded operating system business with 
its Windows CE product, which is attempting to capture a significant market 
share in the handheld computer market. Sun Microsystems, Inc. has developed 
an embedded operating system product called JavaOS which it markets together 
with its Java technology, and has made a number of business and technology 
acquisitions in the past fiscal year related to the development of its 
embedded systems business. There can be no assurance the Company will be able 
to successfully attain new market share or even maintain its existing market 
share in this increasingly competitive market.

ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL


                                  14 of 16
<PAGE>

The Company's future performance depends to a significant degree upon the 
continued contributions of its key management, product development, marketing 
and sales personnel, many of whom have joined the Company recently. The 
Company has experienced significant turnover in personnel during the past 18 
months, much of which was initiated by the Company. The Company's ability to 
execute its market strategy will depend to a large degree upon its ability to 
integrate new personnel into the Company. Competition for qualified personnel 
throughout the software industry is intense and there can be no assurance 
that the Company will be successful in attracting and retaining such 
personnel.

INTERNATIONAL OPERATIONS

In the past three fiscal years, the Company derived at least 50% of its total 
revenue from sales outside North America, and this trend is anticipated to 
continue in the future. This dependence on international operations subjects 
the Company to certain risks, including difficulty in staffing and managing 
foreign subsidiary operations, difficulty in managing distributors and 
resellers, foreign currency exchange exposure, and other risks inherent in 
international business operations.

DEPENDENCE ON PROPRIETARY TECHNOLOGY AND RISK OF TECHNOLOGY LITIGATION

Because substantially all of the Company's revenues are derived from OS-9 and 
related products, any impairment of OS-9 could have a material adverse impact 
on Microware's business. The Company's business is therefore dependent on the 
adequacy of the Company's intellectual property protection through patents, 
copyrights, trade secrets, and license agreements; the adequacy and continued 
availability of its licenses of integrated technology from third parties; and 
the absence of any material technology litigation related to the Company's 
products.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not Applicable

PART II - OTHER INFORMATION

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

The Annual Meeting of Shareholders of the Company was held on September 8, 
1998. More than 91 percent of the holders of the Company's Common Stock were 
represented at the meeting. Three issues were presented for consideration at 
the meeting and were approved by the shareholders; 1) the election of three 
Class III Directors to hold office until the 2001 Annual Meeting; 2) the 
amendment of the Company's 1995 Stock Option Plan to authorize the issuance 
of an additional 350,000 shares under the plan; and 3) the ratification of 
the selection of KPMG Peat Marwick LLP as independent public accountants of 
the Company for the fiscal year ending March 31, 1999. The results were as 
follows:

<TABLE>
<CAPTION>

1.    Election of Class III Directors
      Shares Entitled to Vote                    Votes at Meeting
      -----------------------                    ----------------
<S>                                              <C>
          14,584,692                                13,276,988

<CAPTION>

          Name                          For           Withhold Authority
          ----                       ----------       ------------------
          <S>                        <C>              <C>
          Arthur Don                 13,143,856       133,132
          Dennis E. Young            13,155,179       121,809

<CAPTION>

2.    Proposal to Amend the Company's 1995 Stock Option Plan

            For                      Against          Abstain         Broker Non-vote
        -----------------           ----------        -------         ---------------
<S>                                 <C>               <C>             <C>
         12,506,662                  734,139           36,187               -0-


                                  15 of 16
<PAGE>

<CAPTION>

3.    Ratification of Selection of KPMG Peat Marwick LLP as Independent
      Public Accountants

            For             Against           Abstain           Broker Non-vote
        ------------        -------           -------           ---------------
<S>                         <C>               <C>               <C>
         13,222,152          39,369           17,467                  -0-
</TABLE>

ITEM 5. OTHER INFORMATION

      (a.)  On August 31, 1998, the Company announced that George E. Leonard
            has been appointed chief financial officer effective August 31,
            1998. Mr. Leonard most recently served as vice president of
            finance and chief financial officer of Western Pacific Airlines,
            Inc. where he was responsible for leading all financial aspects of
            the $300 million organization. He directed the efforts of general
            and revenue accounting,  aircraft  acquisition and financing
            projects, risk management, treasury and investment functions,
            financial reporting and contract negotiation.           


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

      (a.)  Exhibit 27 - Financial Data Schedule (EDGAR version only).

      (b.)  None.

      No other items.

SIGNATURE

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

                       MICROWARE SYSTEMS CORPORATION

        Date: November 14, 1998            /s/ George E. Leonard
                                           ---------------------
                                           Goerge E. Leonard
                                           Executive Vice President,
                                           Chief Financial Officer,
                                           Treasurer and Assistant Secretary


        Date: November 14, 1998            /s/ Kent E. Thompson
                                           -------------------
                                           Kent E. Thompson
                                           Chief Accounting Officer,
                                           Corporate Controller and
                                           Assistant Treasurer



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