SECURITIES AND EXCHANGE COMMISSION
                                   WASHINGTON, D.C. 20549

                                       FORM 10-K

                                       (MARK ONE)

            [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                  SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended March 31, 1997

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

                              Commission file number 0-27988
                             -------------------------------

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

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


         IOWA                                             42-1073196
 (State or other jurisdiction                 (I.R.S. Employer incorporation 
       of organization)                           or Identification Number)

  1900 N.W. 114TH ST.
    DES MOINES, IOWA                                      50325-7077
  (Address of principal                                    (Zip Code)
  executive offices)



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

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

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 ninety 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 in any amendment to 
this Form 10-K. 

The approximate value of the voting stock held by non-affiliates of the 
registrant as of June 12, 1997 was $37,986,886.

Number of shares outstanding as of June 12, 1997: 14,322,659.

Documents Incorporated by reference:  Definitive Proxy Statement to be filed 
for the 1997 Annual Meeting of Shareholders (Part III).


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MICROWARE SYSTEMS CORPORATION

INDEX 
                                                          Page
Part I
Item 1.  Business                                           3
Item 2.  Properties                                        16
Item 3.  Legal Proceedings                                 17
Item 4.  Submission of Matters to a Vote of Security  
         Holders                                           18
Item 4A. Executive Officers of the Registrant              19

Part II
Item 5.  Market for the Registrant's Common Equity 
         and Related Stockholder Matters                   20
Item 6.  Selected Consolidated Financial Data              21
Item 7.  Management's Discussion and Analysis of 
         Financial Condition and Results of Operations     23
Item 7A. Quantitative and Qualitative Disclosures about 
         Market Risk                                       31
Item 8.  Financial Statements and Supplementary Data       32
Item 9.  Changes in and Disagreements with Accountants 
         on Accounting and Financial Disclosures           34
Part III
Item 10. Directors and Executive Officers of the 
         Registrant                                        34
Item 11. Executive Compensation                            34
Item 12. Security Ownership of Certain Beneficial 
         Owners and Management                             34
Item 13. Certain Relationships and Related Transactions    34

Part IV
Item 14. Exhibits, Financial Statements, Schedule, and 
         Reports on Form 8-K                               35

Signatures                                                 37
Index to Exhibits                                          39


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Part I

CAUTIONARY NOTE:
     IN ADDITION TO HISTORICAL FINANCIAL INFORMATION, THIS DISCUSSION OF THE 
COMPANY'S BUSINESS AND OTHER ITEMS IN THIS ANNUAL REPORT ON FORM 10-K INCLUDE 
FORWARD-LOOKING STATEMENTS ABOUT MICROWARE'S BUSINESS.  THESE STATEMENTS 
SHOULD BE EVALUATED IN THE CONTEXT OF THE RISKS AND UNCERTAINTIES INHERENT IN 
MICROWARE'S BUSINESS, INCLUDING THE VARIABILITY OF THE COMPANY'S QUARTERLY 
OPERATING RESULTS; THE SUCCESSFUL DEVELOPMENT OF THE DIGITAL TELEVISION, 
WIRELESS COMMUNICATIONS AND OTHER EMERGING MARKETS AT WHICH THE COMPANY'S 
PRODUCTS ARE TARGETED; THE COMPANY'S ABILITY TO SUCCESSFULLY MANAGE GROWTH AND 
KEEP PACE WITH ITS COMPETITION AND WITH RAPID TECHNOLOGICAL CHANGE; THE RISK 
OF MATERIAL  LITIGATION RELATED TO THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS 
AND LICENSES; AND OTHER FACTORS MENTIONED THROUGHOUT THIS FORM 10-K AND IN THE 
COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.


Item 1. Business
     Microware Systems Corporation is a corporation which was organized under 
the laws of the state of Iowa in 1977.  Its principal executive offices are 
located at 1900 N.W. 114th Street, Des Moines, Iowa 50325-7077 (telephone 
number 515-223-8000; Internet: info@microware.com or 
http://www.microware.com).  References in this Annual Report on Form 10-K to 
"Microware" or "the Company" are to Microware Systems Corporation and its 
subsidiaries.

General Development of Business
     Microware develops, markets and supports sophisticated real time 
operating system software and development tools for advanced consumer and 
business products and other embedded computers. Microware's product line is 
built around its OS-9 real time operating system, which was first introduced 
in 1980 and has been continually refined to incorporate advances in 
technology. OS-9 is a real  time operating system targeted at "embedded 
systems" - computers dedicated to specialized tasks embedded within 
application-specific industrial or computer products.  

     Microware's business is focused on developing and marketing OS-9 for use 
in high volume embedded systems for consumer and business uses - "smart 
products" such as digital televisions, hand-held communications and computing 
devices such as advanced wireless telephones and pagers, and Internet 
appliances and other network computers.  Microware believes that these markets 
are a potentially large growth area within the embedded systems market, and 
that its technological advantages and relationships with strategic customers 
make Microware well-positioned to establish OS-9 as a solution within these 
emerging markets.  However, because these are emerging markets which are not 
well established, this strategy exposes Microware's business to significant 
risks and uncertainties, as discussed throughout this Report.

Products and Services
     Microware offers a broad range of software products based on the OS-9 
real time operating system that can be configured to suit a range of 
applications in a variety of industries. Substantially all of the Company's 
revenues are derived from OS-9 and related tools. 

     Because the Company's current revenues and future growth are dependent 
upon the continued acceptance of OS-9 technology in its current markets and 
the successful application of OS-9 technology in new markets, impairment of 
the OS-9 software in any market for any reason could have a material adverse 
effect on the Company's current business or future revenues. 


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     Microware's products are designed for use with leading microprocessors, 
including the Motorola 68xxx, Intel x86/Pentium, Motorola/IBM PowerPC, Hitachi 
SH, ARM, and other processor families.  The Company also provides 
engineering and training services to support its customers' development 
efforts. The Company's products and services include the following: 

Operating System Products:
     Microware's operating system products are based on the OS-9 Developers' 
Pak, which includes the OS-9 kernel, a range of I/O and file managers, various 
networking protocols, and device drivers.  OS-9 is combined with more 
specialized software modules to create operating system products targeted at 
specific advanced consumer and business products markets.

     DAVID combines OS-9 with a graphics API and support for various digital 
audio/video transmission and networking protocols to provide a full operating 
environment for the developers of interactive digital television decoders.  
DAVIDLite is a streamlined implementation of DAVID targeted at digital 
broadcast and satellite decoder manufacturers.

     Wireless OS-9 combines OS-9 with a graphics API, power management 
software, and other specialized functionality for the manufacturers of 
wireless devices.

     Microware has also ported a number of third party technologies to its 
operating systems which are available as extensions to the standard OS-9 
packages, including the following:

      - Java support 
      - Internet browsers
      - PCCard support
      - IrDA infrared communications support
      - Data encryption.

     Microware's operating system products are available through OEM license 
agreements which generally provide licensees (i) the right to use a specific 
configuration of OS-9 modules for internal product development in 
consideration of payment of an initial license fee; and (ii) the right to 
distribute copies of OS-9 and related software embedded in the licensee's 
product in consideration of the licensee's payment of a per copy royalty for 
every copy of OS-9 distributed.

Tools Products:
     Development Tools are developed and sold by Microware to OS-9 licensees 
for developing OS-9 applications. Most tools run on Microsoft Windows and 
popular UNIX workstations, as well as on OS-9.  The tools are designed to 
reduce the cost and increase the speed of the development of OS-9 
applications. The operating system and development tools are well integrated 
and are updated on a coordinated schedule. Customers therefore avoid potential 
incompatibility among competing vendors. These development tools include: 

     - Ultra C and Ultra C++ Compilers, which provide high-level language 
support for real time applications; 
 
     - Source Level Debugger, which identifies the source of program 
application errors during software testing; 
 
     - OS-9 Utility Set, which provides over 100 utilities to enhance 
application development and execution; 


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     - FasTrak, which integrates the above tools with supporting functions 
into a comprehensive automation, management and development environment; 
 
     - OS-9 Developer's Kit, which allows programmers to develop embedded OS-9 
applications; 
 
     - OS-9 Board Support Paks, which provide developers' versions of OS-9 
configured for industry-standard hardware configurations; and 

     - DAVID Developer's Kit, which contains additional utilities for 
developing digital multimedia applications for digital television. 
 

     Microware is also working with Metrowerks Corporation, a leading provider 
of development tools for desktop computer application developers, to develop a 
version of Metrowerks' Codewarrior integrated development environment for OS-
9.

      Development Tools are generally licensed under "shrink-wrap" terms on a 
per-seat basis.

Software Maintenance and Upgrade Services:
     Licenses of Microware's operating system and tools products are typically 
bundled with maintenance support contracts that provide updates of the 
licensed software and routine technical support. 

Professional Services:
      Professional services cover a wide range of activities including 
consulting, custom engineering, technical support and training. A high level 
of customer service and support is essential because many of the Company's 
customers depend on the Company's products to support the development and 
operation of complex applications. Custom engineering revenues are typically 
generated from discrete software engineering projects adapting OS-9 to 
specific customer requirements. The Company also selectively engages in custom 
development in order to extend its product line.  Professional services are 
generally provided based on the number of engineering hours devoted to a given 
project.  

Markets, Applications and Customers
     Microware's strategy is to leverage its advanced technology, strategic 
customer relationships, commitment to quality, and expertise based on years of 
experience in the embedded systems market to establish OS-9 as a standard 
operating environment for high volume smart products.  To achieve this goal, 
Microware focuses its marketing and product development efforts on those 
emerging smart products markets it believes have the greatest potential to 
increase Microware's future revenue: (i) digital television, (ii) wireless 
hand-held communications devices, and (iii) Internet appliances and other 
network-based computing devices.  In product development, the Company tailors 
OS-9 packages for each specific market, typically by adding new modules 
providing specialized functionality for that market.  For example, Microware 
provides motion picture file manager support for digital television products, 
power management software for hand-held, battery-operated wireless devices, 
and Java support for Internet access devices.  In sales and marketing, this 
means developing strategic customer relationships with market leaders, such as 
Motorola in the wireless products market or IBM in the network computer 
market, and working closely with the providers of complementary technologies. 

     While the Company believes this vertical market strategy holds great 
potential for long-term revenue growth, it also involves some risk.  Focusing 
on large account customers in select vertical markets diverts the Company's 
engineering, sales, and marketing resources from the traditional general 
purpose embedded systems market.  The Company's increasing focus on licensing 


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and service revenue from large customers and the proportionate decline in 
revenues from traditional industrial and scientific licensees makes the 
Company's earnings variable on both a quarterly and annual basis.  
Substantial expenditures are necessary to establish and maintain the Company's 
position in these markets, which may or may not develop as expected by the 
Company. Because most of these expenses are fixed costs related to increased 
headcount, they are not amenable to rapid adjustments based on revenues and 
may impact profitability in the short term. While the Company believes it has 
achieved notable success in obtaining new design wins with promising new 
advanced consumer and business products, there can be no assurance that the 
Company's vertical market strategy will be successful, that the markets 
targeted by the Company will grow as expected, or that the Company will be 
able to generate significant revenues or earnings from its efforts.

     These emerging markets are at early stages and are not well-defined.  
Significant uncertainty exists regarding the economic viability of these new 
services and products, and consequently demand for such products and services 
is uncertain.  Moreover, these markets are very competitive and technically 
demanding.  Developing software solutions for smart products requires 
substantially more engineering effort than a traditional real time system for 
industrial or scientific uses.  It involves developing a system with all the 
real time multitasking ability and robustness of a factory system, with much 
of the application functionality of a desktop computer, while using a very 
small amount of memory and supporting a wide array of microprocessor 
architectures.  There can be no assurance that these markets will develop as 
planned, that Microware will be able to successfully establish its products as 
standards within these markets, that Microware will continue to derive 
substantial revenues from these markets, or that Microware's revenues will 
exceed its investment in these markets.

      In its effort to establish its products in these emerging markets, the 
Company is relying on a relatively small group of strategic customers. These 
companies include leading telecommunications, computer and consumer 
electronics companies which have licensed various Microware products for 
incorporation into a variety of devices. Microware's success is a function of 
these customers' ability to successfully develop and market new products based 
on OS-9.  There can be no assurance that any strategic customer will 
successfully be able to market such products.

Traditional Embedded Systems Business
     The traditional real time embedded system software market remains an 
important component of Microware's business.  Licenses to manufacturers of 
process control, scientific and medical instrumentation, and other relatively 
low-volume products are a significant source of revenue. Emerging markets for 
the Company's traditional embedded systems business include intelligent 
transportation systems, private network computer systems, gaming devices, 
office automation and medical instrumentation. The Company derives a 
substantial amount of its revenues from license fees, support and custom 
contract engineering work for its traditional embedded systems business 
customers. The Company believes that the market for its operating system 
software in the general embedded systems market is large and diversified, and 
continues to develop, market, support and license its products to and for 
customers in the traditional embedded systems market. Microware believes that 
it has a significant share of the third party embedded operating system 
market.

Digital Television Business
     In 1993 Microware leveraged its early multimedia experience with the CD-i 
system to develop a new operating system configuration targeted at the 
emerging digital television business -- DAVID.  Digital television represents 
a new market opportunity for the Company, driven by the worldwide deployment 
of new telecommunications networks - ranging from currently available digital 


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broadcast satellite ("DBS") networks to the broadband networks under 
development by certain regional telephone companies. In the immediate term, 
these networks will provide higher quality digital video and audio, increased 
channel capacity, and more user options for one-way conditional access 
programming such as premium channels and pay-per-view. In the long term, as 
broadband networks develop, a wide array of interactive services are expected, 
such as Internet access, video on demand, home shopping, gaming, information 
retrieval, and video mail. DAVID is designed to operate the digital decoders 
that turn standard televisions into smart clients on these networks with 
interactive processing, graphics, video and audio functionality.  This decoder 
can be an external device ("set-top box") or embedded within the television. 

     DAVID has emerged as a standard operating system for digital decoders, 
having been licensed by over 20 set-top box manufacturers and used in trial 
deployments around the world.  A critical element of the DAVID software is its 
modular architecture, which allows components to be added and removed 
dynamically over a network while the operating system is running.  DAVID's 
scaleable architecture and efficient system software enable operators to add 
digital features to already-deployed DAVID set-top boxes at an acceptable 
incremental cost. 

      Manufacturers can license and deploy streamlined configurations of DAVID 
today which can be upgraded as network infrastructures develop and the desired 
levels of interactivity and related functionality increase. Microware believes 
this is especially important for manufacturers and network operators who wish 
to improve network capacity and service incrementally as the underlying 
technologies develop and consumer demand grows.

     DAVIDLite is a streamlined configuration of DAVID targeted at digital-
video broadcast products for existing cable systems, new multichannel 
multipoint distribution systems ("MMDS") and DBS networks. Content and 
hardware developed using DAVIDLite will be fully compatible with DAVID-based 
broadband systems.  DAVIDLite has been licensed by Zenith Electronics 
Corporation, among others, for use in set-top boxes it is providing to 
Americast, a consortium of Ameritech, SBC, Bell South, GTE, and Disney.

     To date, most of the Company's digital television revenues have been from 
DAVID and DAVIDLite license agreements and custom contract engineering with 
digital decoder manufacturers. The Company's current activities relating to 
its new media markets remain focused upon licensing DAVID and DAVIDLite for 
digital television uses. There can be no assurance that the Company will be 
able to sustain development license revenues at their current levels, that the 
Company will receive substantial run-time license revenues from any digital 
television industry participant, or that the Company will be able to establish 
and maintain DAVID as an industry standard.

     Despite the announced intentions of many companies, and the Company's 
belief that DAVID is well positioned as a standard for the digital television 
market, the Company believes the digital television market is at a very early 
stage and is not well defined.  Many  prominent deployments have been delayed, 
and there can be no assurance that the digital television market will develop 
in any predictable or immediate way. These delays may erode DAVID's time-to-
market advantage to the benefit of the Company's competitors.  There is 
significant uncertainty about the economics of delivering such services, 
including the willingness of consumers to pay for digital television and the 
profitability of these services. Furthermore, many of the announced intentions 
involve architectures, operating systems and hardware which are proprietary to 
the parties involved and which could compete or conflict with each other and 
with the Company's digital television strategy. It is therefore difficult to 
make reliable estimates of the size of the digital television market or the 
Company's likely market share.


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Wireless Products Business
     In 1996 Microware released a new configuration of its operating system 
targeted at the manufacturers of wireless hand-held communications devices. 
Wireless OS-9 combines OS-9 with the MAUI graphics API and new software 
modules created for key wireless functions such as power management, which is 
critical to allow personal communications devices to obtain longer battery 
life.

     Microware believes there is an emerging market for new categories of 
wireless communications devices combining the small size and low cost of 
traditional pagers with the more advanced interactivity and computing power of 
personal digital assistants -- new types of pagers and wireless telephones 
which include small screen displays and keyboards and use the Internet to 
enable transmission and receipt of electronic mail and in some cases World 
Wide Web browsing.  The Company believes OS-9 is well suited to operate such 
devices.

     Microware's wireless strategy is to provide a wide variety of products 
and services for licensing to leading wireless equipment manufacturers.  The 
core of this strategy is the development of strategic customer relationships 
with leading manufacturers of wireless devices.

     Under a July 1995 software development and license agreement, Microware 
is providing OS-9 as the operating system for various wireless devices under 
development by Motorola, Inc. In July 1995, Motorola also purchased 1,526,232 
shares of Microware Common Stock and warrants to purchase up to 1,803,728 
additional shares which warrants expire at various  dates from July 31, 1998 
through July 31, 2001. Pursuant to the Stock and Warrant Purchase Agreement, a 
designee of Motorola, Motorola's President and Chief Operating Officer, Robert 
L. Growney, serves on Microware's Board of Directors.

     During the fiscal year ended March 31, 1997, Microware also licensed 
Wireless OS-9 to Ericsson, Inc. for use in new wireless products, and to 
Northern Telecom, Ltd. ("Nortel") for its new range of mobile Java terminals. 
Nortel also distributes GSM and PCS digital phones manufactured by an 
affiliate under license from Microware.

     During the past fiscal year, the Company's revenues from its wireless 
activities primarily consisted of license fees, non-refundable prepaid 
royalties and custom contract engineering fees received from wireless 
customers.  The Company's future operating results will depend significantly 
on the development of its products and personal wireless communication 
devices.  To date some of the wireless device projects for which OS-9 has been 
licensed and customized have been delayed due to factors beyond Microware's 
control.  Such delays may continue in the future. While the wireless 
communications market is established, the Company's strategy depends on the 
incorporation of the Company's software into new products, such as two-way 
pagers and smart wireless telephones, for which demand is uncertain.  There 
can be no assurance that such products will be successfully developed or 
commercialized or that the Company will derive significant revenues or 
earnings from such products.

Investment in Unwired Planet
     In October 1996, Microware made a $5.0 million equity investment in 
Unwired Planet, Inc., a privately held company based in Redwood Shores, 
California.  Unwired Planet develops, markets, and supports Internet browser 
products targeted at the manufacturers of wireless telephones and pagers.  
Prior to the investment, Microware and Unwired Planet ported Unwired Planet's 
browser technology to OS-9.  Microware believes its strategic investment in 


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Unwired Planet will further the Company's efforts to establish OS-9 as a 
standard operating system for wireless devices.

Internet Appliance Business
     In all aspects of its business, Microware is expanding its Internet 
product offerings to enable OEMs to offer consumers and business Internet 
access through smart devices. The core of this effort is Microware's support 
for the Java programming language and application environment developed by the 
JavaSoft business unit of Sun Microsystems, Inc. Java has achieved wide market 
acceptance as a programming language which allows developers to write 
applications which will be interoperable across any Java-compatible operating 
system/processor platform.  

     In May of 1997, Microware entered into an Addendum to its February 1996 
license agreement with JavaSoft which extends the license to cover an array of 
additional Java packages targeted at memory-constrained consumer and business 
devices such as those under development by many of Microware's customers.  
Microware believes access to these more specialized Java technologies will 
make OS-9 a more competitive solution for the manufacturers of Internet-
enabled smart products. 

     Microware has also licensed Internet browser products, including Spyglass 
Mosaic and the HotJava browser.  Microware has expended substantial resources 
during the past fiscal year to license and develop Java and browser support 
for OS-9, but there can be no assurance that its revenues from those products 
will recoup that investment. Microware also has joint marketing relationships 
with certain providers of browser technology for digital television and 
wireless devices, such as Unwired Planet.

     During the fiscal year ended March 31, 1997, Microware entered into a 
number of agreements with customers related to the development of Internet-
enabled smart products.  Microware licensed OS-9 to Uniden America Corporation 
for use in its AXIS telephone, a cordless telephone combined with a small 
computer terminal which allows users to send and receive electronic mail.  
Microware also developed most of the application software in the AXIS phone, 
which is currently available in retail outlets.  Microware has  jointly 
developed with IBM a version of OS-9 for a variety of network computing 
technologies under development by IBM.  Corel Corporation has also licensed 
OS-9 for use with its network computer and PDA products, and is porting its 
Corel Office JV technology (version of the Corel office suite written in Java) 
to OS-9.  Microware also has a license to distribute Corel Office JV and other 
related technologies bundled with OS-9.

     While Microware believes there is demand among embedded systems designers 
for licensing leading Internet technology in conjunction with real time 
operating system software such as OS-9 and DAVID, there are substantial risks 
and uncertainties associated with the Company's Internet efforts.  Most of the 
Company's new Internet product enhancements are licensed from third parties 
under restrictive license agreements requiring the payment of royalties.  
There can be no assurance that the terms of those licenses will be adequate to 
enable Microware to provide its customers with satisfactory terms and 
conditions for those products, or that additional products desired by 
customers will be available for licensing in the future.  Porting those third 
party products to OS-9 requires substantial engineering efforts, not all of 
which may be compensated for by customers.  Significant uncertainty remains 
about the commercial viability of the Internet, and there can be no assurance 
that the current level of demand for Internet products among embedded systems 
designers will continue.


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Technology

OS-9 Operating System
     OS-9 is a full-featured, multitasking, real time operating system that 
goes beyond the base features that are generally provided by the simple task-
switching software traditionally used in embedded systems.  OS-9 currently is 
configured for the Motorola 68xxx, Intel X86/Pentium, Motorola/IBM PowerPC, 
Hitachi SH, ARM, and certain other microprocessor and microcontroller 
families.

     The OS-9 kernel provides prioritized round-robin timeslicing for any 
number of tasks, real time preemptive task switching and comprehensive memory 
management for multiple memory classes.  OS-9 has a modular architecture which 
allows system component modules to be added and removed dynamically, even 
while the operating system is running.  OS-9 provides an application execution 
environment and I/O subsystem similar to UNIX. 

     A key advantage of OS-9 is its highly reliable memory protection. 
Embedded systems used in consumer products and mission critical applications 
must detect and handle system errors in a controlled and predetermined way. 
The file system design is ruggedized to inhibit data loss in the event of 
power failure or catastrophic system faults. This is particularly important 
for new generations of mass-market, intelligent products. 

Expansion Modules
     The OS-9 family contains an extensive library of specialized I/O 
subsystem plug-in modules for OS-9 which may be licensed as required by the 
functional requirements of specific customer hardware configurations. These 
add-on modules include networking support (Internet support, interoperability 
protocols, infrastructural compatibility such as ATM and ISDN), multimedia 
functionality (graphical user interface protocols, MPEG support, graphics file 
managers), advanced communications protocols (serial packet support, 
interprocess communications), memory storage support, and power management 
protocols.  Microware also offers pre-packaged versions of the OS-9 kernel 
bundled with selected expansion modules for specific applications including: 
OS-9 System Developer Kits; Board Support Packages for popular VME, ISA and 
other bus-oriented computer systems; DAVID for digital television; Wireless 
OS-9 for wireless devices; and CD-RTOS for CD-i players. 

     Microware is also adding diverse third party support to complement its 
proprietary expansion modules.  Third party support currently available or 
under development includes Java(tm) support and HotJava(tm) browser, the 
Spyglass Web Technology Kit, PCCard support (SystemSoft Corp.), IrDA infrared 
protocol support (Counterpoint Systems Foundry, Inc.), Corel Office JV, and 
communications security (RSA Data Security, Inc.). 


Development Tools
     The Company produces several development tools and packages. Ultra C 
allows designers of complex real-time systems to precisely control code 
generation and optimization on a local basis for either speed or code size, 
and is designed to be quickly re-configured for any modern 32-bit or 64-bit 
microprocessor. A C++ version of Ultra C was introduced during 1995. 

      FasTrak utilizes contemporary point-&-click and drag-&-drop user 
interface techniques to integrate OS-9 development tools into an integrated 
software development environment. Automation features handle routine software 
development activities and support administrative functions, such as group 
project management and quality assurance. 


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<PAGE>

Software Development Quality Assurance 
     The reliability of Microware's technology is reflected in and supported 
by the Company's software development methodologies.  Microware believes that 
it is the first real time embedded systems software developer in the world to 
be certified under the International Standards Organization's ISO 9000 quality 
standard. Microware's ISO 9001 certification by Underwriter's Laboratories 
helps ensure that the processes by which new products are developed are well 
defined and internally monitored for quality. The ISO certification is audited 
at least annually, and the failure to maintain the certification could have an 
adverse effect on the Company's business. 


Marketing, Sales and Distribution

     Microware markets and licenses its products principally through its 
direct sales force. In North America, the Company sells its core products 
through a direct sales force of 11 personnel located throughout the United 
States. The Company's direct sales force is supported by 5 field application 
engineers located throughout the United States and 7 sales and marketing 
personnel located in Des Moines, Iowa. The Company also has a number of other 
independent authorized distributors.

     In Japan, France and the United Kingdom, the Company's products are sold 
through the Company's sales and service subsidiaries, consisting of 19, 9 and 
11 sales representatives, respectively. In October 1996, the Company 
terminated its previous independent German distributor and opened a branch 
office of Microware Systems Corporation in Munich, which is currently staffed 
by 5 employees. International sales accounted for approximately 68%, 67%, and 
50% of revenues in fiscal years 1995, 1996, and 1997, respectively.  See 
"Business - Wireless Products Business" and note 11 of the Notes to the 
Consolidated Financial Statements.

     The Company's technical support staff assists customers with problems and 
questions in the installation and use of the Company's products.  Technical 
support is provided by Microware's staff of support engineers in North 
America, Europe and Japan.   Distributors and original equipment manufacturers 
generally offer first level customer support to their end-user customers and 
rely on the Company for additional support. The Company also selectively 
engages in custom development activities related to extension of its product 
line. 

      The Company generates new business opportunities in its target markets 
through direct marketing, advertising, press releases, trade shows, user group 
meetings, telemarketing, direct mail and through its strategic alliances. 
Microware is also active in various industry standard bodies, including ANSI, 
IMA, DAVIC, and DSMCC. In addition, Microware believes that its ISO 9001 
certification gives the Company a marketing advantage, especially in 
international markets. 

Competition
     The embedded software industry is highly competitive and is characterized 
by rapidly advancing technologies. To maintain or improve its position, the 
Company must continue to enhance its current product offerings and introduce 
new product features and extensions in a timely fashion. 

     The Company's core and wireless communications products compete with 
proprietary software developed internally by embedded system product 
manufacturers, as well as with many third party vendors of development tools 
for embedded systems, including many privately held companies and several 
publicly held companies. Several microprocessor manufacturers, including Intel 
and Motorola, distribute software that at times competes with the Company's 


                                         11

<PAGE>

products. The Company expects that additional competitors, including other 
large software vendors, will emerge. Some of the Company's current 
competitors, and many of the Company's potential competitors, have 
substantially greater technical, sales, marketing and financial resources than 
the Company. Other than proprietary software developed internally by embedded 
systems manufacturers, the Company's core and wireless products compete 
primarily with products by Integrated Systems, Inc. ("ISI"), Mentor Graphics 
Corp. (through its acquisition of Microtec Research, Inc.), Microsoft 
Corporation ("Microsoft"), and Wind River Systems, Inc. ("Wind River"). 

     In the digital television market, the Company's digital television 
decoder products compete with software developed internally by set-top box 
manufacturers, including Scientific-Atlanta's PowerTV and Thomson Consumer 
Electronics' TV Open and with products from ISI and Wind River. Many of the 
Company's digital television competitors have substantially greater technical, 
sales, marketing and financial resources than the Company. 

     In the Internet appliance market, especially the Internet digital 
television market, the Company has experienced competition from ISI and Wind 
River as well as from a number newer competitors providing operating system 
microkernel software bundled with Internet access technology and, in many 
cases, Internet services and hardware.  These competitors include WebTV 
Networks, Inc., which recently entered into an agreement to be purchased by 
Microsoft.

     During 1996, Microsoft released a new product based on its Windows 
operating system, called "Windows CE", targeted at hand-held computing 
devices.  This and other efforts by Microsoft to gain market share in the 
embedded operating system business could have a significant effect on the 
market and could adversely affect the Company's business. 

     The Company expects that as the digital television, wireless personal 
communications, Internet appliance, and other emerging embedded systems 
markets evolve, additional competitors will seek to enter these markets. 

     The Company believes that its ability to effectively compete in its core, 
wireless and digital television markets depends on factors both within and 
outside its control, including timing and success of new products developed by 
the Company and its competitors, product performance and price, the Company's 
ability to provide custom development and integration services, distribution 
and customer support, product reputation, customers' willingness to replace 
internally developed software solutions and customers' assessment of the 
Company's financial resources and its technical and service expertise. The 
Company believes that it competes effectively in its markets on the basis of 
product features and reliability, price performance characteristics, 
reputation, worldwide infrastructure, support services, sales and marketing 
strength and financial stability. There can be no assurance that the Company 
will be able to compete successfully with respect to these and other factors. 
In particular, competitive pressures, including pricing pressures for the 
Company's run-time licenses and new product introductions from existing and 
new competitors could adversely affect the Company's business and results from 
operations. 

Research and Development
     The Company has made substantial investments in product development. The 
Company believes that its future success will depend in large part on its 
ability to enhance its existing products, to develop new products and to 
maintain its technological competitiveness. As of March 31, 1997, the Company 
employed 123 product development engineers. Of these, 107 engineers were based 
in Des Moines, Iowa and 16 were based in Tokyo, Japan. 


                                         12

<PAGE>

     During fiscal 1995, 1996, and 1997 research and development expenses 
amounted to $5.6 million, $5.0 million, and $7.2 million respectively, 
excluding capitalized software development costs. For the above periods, 
research and development expenses represented 29.9%,  21.2%, and 27.4% of the 
Company's total revenues, respectively. For the same periods, software 
development costs capitalized totaled $204,000, $150,000, and $81,000, 
respectively. The Company believes that its current level of research and 
development expenses is adequate to meet its competitive needs. The Company 
anticipates that it will continue to commit substantial resources to product 
development in the future. 

     The markets for the Company's products are characterized by ongoing 
technological developments, evolving industry standards and rapid changes in 
customer requirements. The Company's success depends upon its ability to offer 
its products across a spectrum of microprocessor families used in the embedded 
systems market, to continue to enhance its existing product lines, to develop 
and introduce in a timely manner new products that take advantage of 
technological advances and to respond promptly to customers' requirements. In 
the past fiscal year, the Company expended substantial research and 
development resources on extensions of its existing product offerings and the 
development of new product offerings to support its vertical market strategy.  
These investments are expected to continue in the future.  The Company's 
ability to recoup these investments are highly dependent on the success of the 
Company's vertical market strategy.  There can be no assurance that the 
Company's current level of research and development spending and scope will be 
adequate, that the Company will be successful in developing and marketing 
enhancements to its existing products or new products on a timely basis, or 
that its new products will adequately address the changing needs of the 
marketplace. Failure by the Company in any of these areas could materially and 
adversely affect the Company's business and 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. 

     The Company has in the past experienced delays in software development, 
and there can be no assurance that the Company will not experience delays in 
connection with its current or future product development activities. Prior 
delays have been the result of the reallocation of engineering resources to 
other higher priority projects, other resource limitations, problems with 
independent contractors, changes in market requirements and unanticipated 
difficulties in engineering. There can be no assurance that future delays in 
the introduction of new products will not occur. Delays and difficulties 
associated with new product introductions or product enhancements could have a 
material adverse effect on the Company's results of operations. Software 
products as complex as those offered by the Company may contain undetected 
errors or version compatibility issues, particularly when introduced or as new 
versions are released. In addition, the Company has occasionally purchased 
from third parties certain product enhancements, and may employ outside 
product developers in the future. There can be no assurance that such 
enhancements or developments will be successfully completed on a timely basis. 

Proprietary Rights
     The Company's success is dependent upon its proprietary technology and 
products. The Company regards its software as proprietary and, to date, the 
Company has relied principally upon copyrights, trademarks, trade secrets and 
contractual restrictions to protect its proprietary technology. The Company 
currently has one United States patent relating to certain functionality of 
its operating systems in digital television network environments expiring in 
February 2015, and four U.S. patent applications pending. The Company 


                                         13

<PAGE>

generally enters into confidentiality agreements with its employees and 
confidentiality and license agreements with its distributors, customers and 
potential customers, and limits access to and distribution of the source code 
to its software and other confidential proprietary information. End-user 
licenses of the Company's software are sometimes in the form of shrink-wrap 
license agreements, which typically are not signed by licensees and therefore 
may be unenforceable under the laws of many jurisdictions. 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. Accordingly, despite 
precautions taken by the Company, it may be possible for unauthorized third 
parties to copy certain portions of the Company's technology or to obtain and 
use information that the Company regards as proprietary. There can be no 
assurance that the steps taken by the Company will be adequate to prevent 
misappropriation of its technology or to provide an adequate remedy in the 
event of a breach by others. 

     Certain technology used in the Company's products, including Java 
support, browser technology, PC Card support, and IrDA support, is licensed 
from third parties. These licenses generally require the Company to pay 
royalties and to fulfill confidentiality obligations. In the future, it may be 
necessary or desirable for the Company to seek additional licenses of 
intellectual property rights held by third parties. There can be no assurance 
that such licenses will be available or, if such licenses are available, that 
the terms thereof will not have a material adverse effect on the Company's 
business, financial condition and results of operations. 

     There has been substantial industry litigation regarding intellectual 
property rights of technology companies. Although the Company is not aware of 
any infringement by its products of any patents or proprietary rights of 
others, patent and copyright protection for software is still a developing 
area of law and increased visibility of the Company and its products could 
provoke claims of infringement from third parties. The Company generally 
agrees to indemnify its customers for liability incurred in connection with 
the infringement of a third party's intellectual property rights, including 
patents. In the future, litigation may be necessary to enforce and protect 
trade secrets and other intellectual property rights owned by the Company. The 
Company may also be subject to litigation to defend the Company against 
claimed infringement of the rights of others or to determine the scope and 
validity of the proprietary rights of others. Any such litigation could be 
costly and cause diversion of management's attention, either of which could 
have a material adverse effect on the Company's results of operations and 
financial condition. Adverse determinations in such litigation could result in 
the loss of the Company's proprietary rights, subject the Company to 
significant liabilities, require the Company to seek licenses from third 
parties or prevent the Company from manufacturing or selling its products, any 
one of which could have a material adverse effect on the Company's business, 
financial condition and results of operations. Furthermore, there can be no 
assurance that any necessary licenses will be available on reasonable terms, 
or at all. 

Production
     The Company prepares master software media, user manuals and packaging 
for each product. The Company's media duplication, as well as its product 
packaging, is performed by the Company at its facilities throughout the world, 
while printing of user manuals and related materials is performed by the 
Company or by outside sources in both the United States and Japan. The Company 
grants duplication rights to certain of its original equipment manufacturers. 
To date, the Company has not experienced any material difficulties or delays 
in production of its software products or documentation. 

     The Company is currently transferring its production to a CD-ROM based 


                                         14

<PAGE>

system in which all software and related documentation is provided to the 
customer on a single disc.

Backlog
     The Company generally ships its products within a few days after 
acceptance of a customer purchase order and, therefore, has insignificant 
product backlog. The low product backlog makes it difficult to predict with 
accuracy quarterly revenues and quarterly earnings prior to the end of a 
quarterly reporting period. Contract engineering services backlog, consisting 
of orders for specific engineering services and maintenance support to be 
performed within the following 12 months, was approximately $2,206,000 as of 
March 31, 1997 and $4,274,000 as of March 31, 1996.

Employees
     As of March 31, 1997, the Company employed 259 people, including 88 in 
marketing, sales and support services, 123 in engineering and product 
development and 48 in operations, finance and administration. Of these 
employees, 190 are located in the United States, and 69 are employed by the 
Company's international operations. None of the Company's 
employees is represented by a labor union or is the subject of a collective 
bargaining agreement. The Company has never experienced a work stoppage and 
believes that its employee relations are good. 


Notice Regarding Trademarks
     Microware, OS-9, and DAVID are registered trademarks of Microware Systems 
Corporation.  The Microware logo, MAUI, UpLink, ITEM, FasTrak, Ultra C, and 
Ultra C++ are trademarks of Microware Systems Corporation.  Java and HotJava 
are trademarks of Sun Microsystems, Inc. All other marks are trademarks or 
registered trademarks of their respective holders. 


                                         15

<PAGE>

Item 2. Properties

     The Company owns its main operating facility located in Des Moines, Iowa, 
subject to mortgage debt. This space is used for research and development, 
sales and marketing, operations and administration and consists of 
approximately 28,000 square feet. Annual mortgage payments for the Company's 
main operating facility total approximately $144,000. Effective October 10, 
1995, the Company entered into a one-year lease agreement for additional 
office space of approximately 12,500 square feet in Des Moines, Iowa to 
support the overall growth of the Company.  Currently this space is leased on 
a month to month basis, pending completion of the Company's new headquarters 
building which is scheduled to be finished in August, 1997. Annual rent for 
this office space is approximately $183,000. The Company also leases under 
cancelable terms approximately 7,400 square feet in Tokyo, Japan for an annual 
rental payment of approximately $380,000. The Company also leases 15 domestic 
and international sales and support offices for an aggregate annual rental 
payment of approximately $356,000.  The Company believes that additional space 
will be available as needed. 

     The Company is currently constructing a new corporate headquarters 
facility to consolidate its Des Moines, Iowa operations. The Company expects 
construction to be completed by August 1997 and the move to be completed by 
September 1997.  The estimated overall cost of the project is approximately 
$10,000,000 (including associated land costs) and is being financed by a 
$10,000,000 construction loan secured by short-term investments, land and 
building. Additionally, the Company has entered into a Development Agreement 
with the City of Clive, Iowa, pursuant to which the City will refund to 
Microware over 10 years 100 percent of the property taxes attributable to 
Microware's improvement of the property. There can be no assurance that the 
Company will successfully complete the project within budget, that the Company 
will be able to sell its existing headquarters facility at a price in excess 
of its current investment or that the move will not disrupt the Company's 
operations or adversely affect the Company's operating results over the near 
term.   

     The following table shows the location and approximate square footage of 
the Company's leased facilities as of March 31, 1997. 

                     LOCATION           APPROXIMATE SQUARE FOOTAGE
                     --------           --------------------------
                West Des Moines, Iowa            12,500
                Urbandale, Iowa                   7,000
                Campbell, California              3,100
                Newton, Massachusetts             1,120
                Oak Brook, Illinois                 150
                Itasca, Illinois                    600
                Norcross, Georgia                   400
                Austin, Texas                       200
                Richardson, Texas                   200
                Plano, Texas                        400
                Tokyo, Japan                      7,400
                Osaka, Japan                      1,100
                Burnham, England                  4,000
                Meyreuil, France                  5,000
                Paris, France                     2,500
                Hoehenkirchen, Germany            2,500
                Amsterdam, The Netherlands          230


                                         16

<PAGE>

Item 3. Legal Proceedings

     The Company is not a party to, and none of its properties are the subject 
of, any material litigation, and the Company is not aware of any proceedings 
contemplated by governmental authorities that would have a material 
adverse effect on the Company or its business. 


                                         17

<PAGE>

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.


                                         18

<PAGE>

 Item 4A. Executive Officers of the Registrant

The executive officers of the Company are as follows: 


         Name             Age                Position
        ------            ---               ----------
   Kenneth B. Kaplan       44     President and Chief Executive Officer

   M. Denis Connaghan      47     Executive Vice President and Chief 
                                    Operating Officer

   Kent R. Kelderman       37     Executive Vice President, Treasurer, and
                                    Chief Financial Officer

   Michael J. Burgher      44     Executive Vice President and Chief 
                                    Technical Officer




     Mr. Kaplan has been Chairman of the Board of Directors, President and 
Chief Executive Officer of the Company since it was founded in 1977. Mr. 
Kaplan was one of the principal designers of the OS-9 real time operating 
system. Mr. Kaplan is a member of the board of directors of the Interactive 
Multimedia Association and is a Trustee of Drake University and Buena Vista 
University. Mr. Kaplan attended Drake University. 

     Mr. Connaghan joined the Company in May 1997 as Executive Vice President 
and Chief Operating Officer.  Mr, Connaghan has also been appointed to fill a 
vacant Class II Director position effective as of the July 14, 1997 meeting of 
the Board of Directors.  Prior to joining the Company, from 1994 through 1996, 
Mr. Connaghan was Chief Executive Officer of Delphi Information Systems, Inc., 
a provider of information systems to the distribution segment of property and 
casualty insurance based in Rolling Meadows, Illinois. From 1991 to 1994, Mr. 
Connaghan served as a vice president of IBAX Healthcare Systems of Longwood, 
Florida, a joint venture of IBM Corporation and Baxter International providing 
computerized solutions for healthcare providers.  Prior to that, Mr. Connaghan 
held various executive positions with Pansophic Systems, Inc. of Lisle, 
Illinois. Mr. Connaghan attended the New South Wales Institute of Technology 
and holds an MBA from the University of Chicago. 
 
     Mr. Kelderman joined the Company in 1994 as Corporate Controller and was 
appointed Executive Vice President, Treasurer, and Chief Financial Officer in 
December 1996.  From 1988 to 1994, he served as plant controller for American 
Packaging Corporation.  Mr. Kelderman is a certified management accountant and 
holds a B.A. degree in Business Administration from Dordt College.


     Mr. Burgher joined the Company in 1987, was elected Vice President in 
1992 and became an Executive Vice President in September 1995. Mr. Burgher is 
currently the Company's Chief Technology Officer. Prior to joining the 
Company, Mr. Burgher worked for Control Data Corporation, a computer services 
company. Mr. Burgher holds a B.A. degree in Political Science from Drake 
University. 

     The Company does not have any employment agreements with any of its 
executive officers, but has one-year agreements not to compete with certain of 
its executive officers and other key employees. The loss of service of one or 
more of the Company's other executive officers could adversely affect the 
Company's business.
 
     The Company depends significantly on its Chairman, President and Chief 
Executive Officer, Kenneth B. Kaplan. The Company maintains key man life 
insurance policies in the amount of approximately $2,500,000 on Mr. Kaplan. 


                                         19

<PAGE>


Part II

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

     The Company's stock is listed on the Nasdaq National Market under the 
trading symbol "MWAR."  The Company's initial public offering of common stock 
was effective April 2, 1996 and the Company began trading on the Nasdaq 
National Market on April 3, 1996.  

     The closing price of the Company's common stock, no par value (the 
"Common Stock"), as reported by the Nasdaq National Market as of June 12, 1997 
was $8.25 per share.  The price per share in the following table sets forth 
the low and high closing sales prices on the Nasdaq National Market for the 
quarter indicated.

<TABLE>
<CAPTION>
   Fiscal 1997                                     Low          High  
   ------------------------------------------------------------------   
   <S>                                            <C>         <C>
   Quarter ended June 30, 1996                    $ 9.625     $19.625
   Quarter ended September 30, 1996               $13.000     $23.250
   Quarter ended December 31, 1996                $12.875     $21.250
   Quarter ended March 31, 1997                   $ 6.000     $15.000
</TABLE>

     As of June 12, 1997, there were approximately 223 shareholders of record 
of the Company's Common Stock.  Certain recordholders are represented by 
brokers and other institutions on behalf of shareholders.  The Company has 
estimated the total number of such shareholders to be 1,400.

     The Company has never paid any cash dividends on its capital stock and 
does not expect to pay any cash dividends in the foreseeable future.  Any 
future determinations to pay cash dividends will be at the discretion of the 
Board of Directors and will depend on the Company's earnings, capital 
requirements, financial condition, credit and loan agreements in effect at 
that time and any other factors deemed relevant by the Board of Directors.


                                         20

<PAGE>


Item 6.  Selected Consolidated Financial Data

     The following table contains certain selected financial data.  There were 
no cash dividends or distributions made by the Company during the periods 
presented.

(In thousand, except per share data)
<TABLE>
<CAPTION>
                                       Year ended March 31, 
                           --------------------------------------------
                            1993     1994      1995      1996     1997
                           ------  -------   -------   -------  -------
<S>                       <C>      <C>       <C>       <C>      <C>   
Revenues                  $15,087  $14,887   $18,899   $23,655  $26,134
Cost of revenues            3,217    3,927     3,755     5,100    6,969
                           ------  -------   -------   -------  -------
Gross profit               11,870   10,960    15,144    18,555   19,165
 
Operating expenses: 
 Research & development     4,083    4,756     5,649     5,009    7,155
 Sales & marketing          3,272    3,791     5,614     8,421   10,819
 General & administrative   3,583    3,786     3,330     3,889    3,415
 Special charges              -        530       166       -        438
                           ------  -------   -------   -------  -------
                           10,938   12,863    14,759    17,329   21,827
                           ------  -------   -------   -------  -------
Operating profit (loss)       932   (1,903)      385     1,226   (2,662)
Other income (expense):
  Foreign currency gain 
    (loss), net                25       98       293        13      (30)
  Interest (expense) 
    income, net              (253)    (306)     (132)      283    1,118
                           ------  -------   -------   -------  -------
                             (228)    (208)      161       296    1,088
                           ------  -------   -------   -------  -------
Earnings (loss) before 
  income taxes                704   (2,111)      546     1,522   (1,574)
Income tax expense (benefit)  477      314      (375)      146       (3)
                           ------  -------   -------   -------  -------
Net earnings (loss)          $227  ($2,425)     $921    $1,376  ($1,571)
                           ======  =======   =======   =======  =======

Net earnings (loss) per
   share (1)                $0.02   ($0.25)    $0.08     $0.11   ($0.11) 
                           ======  =======   =======   =======  =======
Weighted average common 
   and common equivalent
   shares outstanding (1)  10,148    9,608    12,063    13,030   13,754
                           ======  =======   =======   =======  =======
</TABLE>


                                         21

<PAGE>


<TABLE>
<CAPTION>
                                               As of March 31,
                                 --------------------------------------------
                                  1993    1994      1995      1996     1997
                                 ------  -------  -------   -------   -------
<S>                              <C>      <C>      <C>      <C>       <C>
Balance Sheet Data:     
  Cash & short-term     
   investments                     $188   $2,823   $1,516   $12,337   $19,962
  Working capital (deficit)      (2,076)   1,374    1,479    13,300    23,024
  Total assets                    8,668   11,622   12,124    24,938    49,083
  Total long-term debt (2)        1,527    1,949    1,446     1,227     8,076
  Total shareholders' equity      2,330    4,889    5,559    18,543    34,726
</TABLE>

(1)   See Note 1 of Notes to Consolidated Financial Statements for information 
      concerning the computation of net earnings (loss) per share.  
(2)   Includes current installments of long-term debt and long-term portion of 
      notes payable to banks.  See Note 5 of Notes to Consolidated Financial 
      Statements.  


                                         22

<PAGE>

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

     THE FOLLOWING DISCUSSION PROVIDES AN ANALYSIS OF THE COMPANY'S FINANCIAL 
CONDITION AND RESULTS OF OPERATIONS, AND SHOULD BE READ IN CONJUNCTION WITH 
THE "SELECTED CONSOLIDATED FINANCIAL DATA" AND THE NOTES THERETO AND THE 
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF THE COMPANY.

Forward-Looking Information is Subject to Risk and 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 1998 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 mentioned elsewhere in this Form 10-K, 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 
from time-to-time in the Company's Securities and Exchange Commission reports 
and in this Form 10-K.  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.  During the last fiscal year, the Company's actual 
performance did not meet the expectations of certain analysts.  It is likely 
that, in some future quarter, the Company's operating results will again be 
below the expectations of stock market analysts and investors.

Overview
     Microware develops, markets and supports real time operating system 
software and high-level language compilers used in consumer electronics, 
communications, process control and factory automation, scientific research, 
and government/defense applications.  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.  Substantially all of the Company's revenues in the last and current 
fiscal years have been derived from licenses and related services from the 
OS-9 product family.

     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.  Commonly, license royalty fees follow the 
completion of these contracts.  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. 
 
     A key element of the Company's long-term strategy is to focus on markets 
the Company anticipates will significantly increase run-time license royalty 


                                         23

<PAGE>

fees.  Since 1992, the Company has made significant investments targeting 
various emerging markets including wireless personal communications, 
interactive and digital television, and Internet access devices, through the 
development of specialized software modules that utilize the OS-9 operating 
system.  DAVID development licenses and related engineering services have been 
sold to over 20 manufacturers of digital television decoders.  Run-time 
license royalty fees, maintenance support and ongoing software engineering 
contract work revenues are expected to grow with the development of the 
digital television, wireless communications and Internet access device 
industries.

      In July 1995, the Company entered into a software license and custom 
contract engineering agreement with Motorola to develop modular software 
solutions for Motorola's personal wireless communication devices. Revenues of 
approximately $371,000 and $1,805,000 resulted from contract engineering 
services for Motorola in fiscal 1996 and 1997, respectively.  In addition to 
up-front development fees and future consulting and support activities, the 
Company will receive a royalty for each pager or other wireless product using 
OS-9 sold by Motorola or its sub-licensees.  Development license fees and run 
time royalties of $500,000 and $0 resulted from this agreement in fiscal 1996 
and 1997, respectively.  These revenues related to products under development 
which Motorola has not yet begun to distribute.  Motorola also acquired an 
equity position in the Company as part of this strategic relationship.  See 
Notes 2 and 14 of the Notes to the Consolidated Financial Statements.  

     From fiscal 1996 to fiscal 1997 the Company's total product revenues 
demonstrated a significant increase in revenues from large account, vertical 
market product sales and related services, and a corresponding decrease in 
revenues from traditional run-rate embedded systems business as a percentage 
of total revenues.  This trend resulted from the Company's deliberate focus on 
the development of its vertical market business.  The focus on revenues from 
development licenses, non-refundable prepaid royalties and custom engineering 
services from a relatively small number of customers, and the increase in 
product offerings for these customers, increased the quarterly variability of 
the Company's financial results in fiscal 1997.  Management anticipates that 
this quarterly variability will continue for the foreseeable future, and, due 
to the fixed nature of most of the Company's expenses and based on current 
revenue trends, currently anticipates an operating loss for at least the first 
two quarters of fiscal 1998. 

     Future growth in the Company's product revenues will continue to be 
substantially dependent on its customers' timely and successful development 
and distribution of new products using the Company's products, making product 
revenues difficult to accurately forecast on a quarterly or annual basis.


                                         24

<PAGE>

Results of Operations
     Amounts and percentage of revenues:  The following table sets forth, for 
the periods indicated, the amount and related percentage of the Company's 
total revenues by each line item.  

<TABLE>
<CAPTION>
                                            ($ in thousands)

                                        Amounts and Percentage of Revenues
                                  ------------------------------------------
                                             Years ended March 31, 
                                  ------------------------------------------
                                      1995          1996            1997
                                  ------------   ------------   ------------
<S>                               <C>      <C>    <C>     <C>    <C>     <C>
Revenues:
  Product                         $15,667   83%  $16,104   68%  $16,586   64%
  Services                          3,232   17     7,551   32     9,548   36
                                  -------  ---    ------  ---    ------  ---
                                   18,899  100    23,655  100    26,134  100
                                  -------  ---    ------  ---    ------  ---
Cost of revenues:
  Product                           2,463   13     2,428   10     3,046   12
  Services                          1,292    7     2,672   11     3,923   15
                                  -------  ---    ------  ---    ------  ---
                                    3,755   20     5,100   21     6,969   27
                                  -------  ---    ------  ---    ------  ---
    Gross profit                   15,144   80    18,555   79    19,165   73
                                  -------  ---    ------  ---    ------  ---
Operating expenses:
  Research & development            5,649   30     5,009   21     7,155   27
  Sales and marketing               5,614   30     8,421   36    10,819   41
  General & administrative          3,330   18     3,899   17     3,415   13
  Special charges                     166    1      -      -        438    2
                                  -------  ---    ------  ---    ------  ---
                                   14,759   79    17,329   74    21,827   83
                                  -------  ---    ------  ---    ------  ---
    Operating profit (loss)           385    1     1,226    5    (2,662) (10) 
                                  -------  ---    ------  ---    ------  ---
Other income (expense):
  Foreign currency gains 
    (losses), net                     293    2        13    *       (30)   *
  Interest(expense) income, net      (132)   *       283    1     1,118    4 
                                  -------  ---    ------  ---    ------  ---
                                      161    2       296    1     1,088    4 
                                  -------  ---    ------  ---    ------  ---
   Earnings (loss) before income
       tax expense (benefit)          546    3     1,522    6    (1,574)  (6)
   Income tax expense  (benefit)     (375)  (2)      146    *        (3)   *
                                  -------  ---    ------  ---    ------  ---
   Net earnings (loss)               $921    5%   $1,376    6%  $(1,571)  (6)% 
                                  =======  ===    ======  ===    ======  ===
</TABLE>
*Insignificant


                                         25

<PAGE>

Fiscal Year Ended March 31, 1997 Compared To Fiscal Year Ended March 31, 1996

     Revenues.  Total revenues increased 10.5%, or $2.4 million, from $23.7 
million in fiscal 1996 to $26.1 million in fiscal 1997.  Product revenues 
increased 3.0%, or $482,000, from $16.1 million in fiscal 1996 to $16.6 
million in fiscal 1997.  Product revenues anticipated for fiscal 1997 from 
certain strategic customers, including Motorola, IBM and the Company's DAVID 
licensees, fell significantly below management's expectations due to customer 
delays in the development and distribution of OS-9 based products and other 
factors.  As a result, product revenue growth remained relatively flat from 
fiscal 1996 to 1997.  The increase in overall Company revenues is primarily 
attributable to the increase in services revenues.  Services revenues 
increased 26.5%, or $2.0 million, from $7.6 million in fiscal 1996 to $9.6 
million in fiscal 1997.  Services revenues increased primarily as a result of 
the Company engaging in the development of new processor ports.  In addition, 
services revenues increased as a result of the Company adapting certain third 
party software to OS-9 for key wireless, Internet and DAVID customers. The 
proportion of total revenues attributable to international sales decreased 
17%, from 67% of total revenues in fiscal 1996 to 50% of total revenues in 
fiscal year 1997. This decrease resulted from a proportionate increase in 
North American sales, the assignment of a services contract from an 
international subsidiary to the Company's North American operations, and from 
foreign currency exchange movements, primarily in the Japanese Yen.

     Cost of Revenues.  Cost of product revenues includes direct and indirect 
costs for documentation, production quality (including maintaining ISO 9001 
Certification), duplication of manuals and media for software products, as 
well as those costs related to the packaging, shipping and delivery of the 
product to the customer.  Cost of product revenues also includes amortization 
of capitalized software development costs.  Cost of services revenues includes 
direct and indirect costs for technical phone support, training and education, 
and custom engineering.  

     Total cost of revenues increased 36.7%, or $1.9 million, from $5.1 
million in fiscal 1996 to $7.0 million in fiscal 1997.  Cost of product 
revenues increased from $2.4 million in fiscal 1996 to $3.0 million in fiscal 
1997.  Cost of product revenues increased primarily due to the cost of third 
party software being bundled with OS-9 products.  Cost of services revenues 
increased from $2.7 million in fiscal 1996 to $3.9 million in fiscal 1997.  
The increase in cost of services revenues is primarily attributable to 
increased services revenues with lower margins achieved on custom contract 
work.  Amortization of capitalized software amounted to $236,000 and $201,000 
in fiscal 1996 and 1997, respectively.

     Research and Development.  Research and development expense includes 
expenses associated with the development of new products and the enhancements 
of existing products, and consists primarily of employee salaries and related 
expenses.  Research and development expense increased by 42.8%, or $2.2 
million, from $5.0 million in fiscal 1996 to $7.2 million in fiscal 1997.  The 
increase primarily resulted from an increase of approximately 17 people, along 
with associated costs, in the Company's technical staff from March 31, 1996 to 
March 31, 1997.  Additional technical staff was added primarily to support 
additional Internet, wireless and digital television product offerings.  The 
Company has made substantial investments in product development.  The Company 
believes that its future success will depend in large part on its ability to 
enhance its existing products, to develop new products and to maintain 
technological competitiveness.  The Company anticipates that it will continue 
to commit substantial resources to product development in the future.

     Sales and Marketing.  Sales and marketing expense consists primarily of 
sales and marketing personnel related costs, including sales commissions.  


                                         26

<PAGE>

Sales and marketing expense also includes costs of advertising, public 
relations and attendance at industry trade shows.  Sales and marketing expense 
increased 28.5%, or $2.4 million, from $8.4 million in fiscal 1996 to $10.8 
million in fiscal 1997.  The overall increase was primarily attributable to 
costs associated with the opening of a branch office in Munich, Germany and a 
sales office in Osaka, Japan.  Sales commissions, sales support and product 
management personnel also increased in fiscal 1997. Approximately $387,000 of 
the increase was due to an increase in the Company's allowance for doubtful 
accounts.  The increase in the allowance for doubtful accounts resulted from 
an increase in the number of highly leveraged, emerging market customers.

     General and Administrative.  General and administrative expenses are 
primarily related to finance and administrative functions. General and 
administrative expenses decreased 12.4%, or $484,000, from $3.9 million in 
fiscal 1996 to $3.4 million in fiscal 1997.  The primary reason for the 
overall decrease is attributable to organizational changes in management 
responsibilities from general management to more direct duties associated with 
revenue production.

     Special Charges.  During the fiscal year ended March 31, 1997, the 
Company recorded a non-recurring special charge of $438,000.  The special 
charges in fiscal 1997 related primarily to employee severance and related 
costs and lease termination costs for restructuring operations in Europe.


Fiscal Year Ended March 31, 1996 Compared To Fiscal Year Ended March 31, 1995

     Revenues.  Total revenues increased 25.2%, or $4.8 million from $18.9 
million in fiscal 1995 to $23.7 million in fiscal 1996.  Product and services 
revenues respectively increased 2.8%, or $437,000 from $15.7 million to $16.1 
million and 133.6%, or $4.3 million, from $3.2 million to $7.6 million in 
fiscal 1996 as compared to the prior fiscal year.  The increase in overall 
Company revenues principally accrues to custom contract engineering and 
support activity reported in services revenues.  The increase in custom 
contract engineering revenue, from fiscal 1995 to fiscal 1996, includes 
approximately $2.4 million in New Media projects -  primarily DAVID, and $1.8 
million in customer paid porting of OS-9 product family technology to advanced 
microprocessors, wireless personal communication devices, along with related 
engineering advisory services.

     Cost of Revenues.   Total cost of revenues increased 35.8%, or 
approximately $1.3 million between the fiscal years ended March 31, 1995 and 
1996.  Cost of product revenues remained relatively constant in amount, but 
decreased by 2.7% of related sales from 13.0% in fiscal 1995, to 10.3% in 
fiscal 1996.  Cost of services revenues increased by approximately $1.4 
million and from 6.8% of related revenues to 11.3% in fiscal 1995, as compared 
to fiscal 1996.  Gross profit on product revenues increased by 0.6% from 84.3% 
to 84.9%, and on services revenues by 4.6% from 60.0% to 64.6% in fiscal 1995 
as compared to fiscal 1996.  Amortization of capitalized software development 
cost included in cost of product revenues amounted to $166,000 and $236,000 in 
fiscal 1995 and 1996, respectively.

     Research and Development.   Although the Company increased its technical 
staff from 85 people at March 31, 1995 to 101 people at March 31, 1996, the 
total amount of research and development expense decreased 11.3%, or $640,000, 
from $5.6 million to $5.0 million in respective fiscal years.  The primary 
reason for the decrease is due to an increase in customer funded custom 
contract services revenue which transfers the recording of related engineering 
spending into the cost of services revenue line.  Between fiscal years 1995 
and 1996 an approximate $1.5 million increase in engineering related expense 
has been charged to cost of services revenue.  


                                         27

<PAGE>

     Sales and Marketing.   Sales and marketing expense increased by 50.0%, or 
$2.8 million from $5.6 million to $8.4 million, and as a percentage of revenue 
from 29.7% to 35.6% from fiscal 1995 to fiscal 1996.  Included in the $2.8 
million additional fiscal 1996 over fiscal 1995 costs are incremental costs of 
approximately $1.1 million in advertising and public relations/marketing 
consulting; $1.1 million in additional commissions and salaries; $415,000 in 
increased travel and trade show expense, and $175,000 in distributor/sales 
force termination costs.

      General and Administrative. Overall, general and administrative expenses 
increased $569,000 or 17.0% from $3.3 million in fiscal 1995 to $3.9 million 
in fiscal 1996.  As a percentage of revenues, general and administrative 
expenses decreased from 17.6% in fiscal 1995 to 16.5% in fiscal 1996.  The 
overall increase in spending was primarily attributable to additional 
personnel and associated overhead costs necessary to support the overall 
growth of the Company. 

Variability of Quarterly Operating Results
     The Company's revenues and operating results have varied substantially 
from quarter to quarter 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 revenues 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.

Liquidity and Capital Resources
     The Company has historically funded its operations primarily through cash 
flow from operations, the sale of common and preferred stock and to a lesser 
extent long-term debt.  At March 31, 1997, the Company had approximately 
$23,024,000 in working capital and $19,962,000 in cash and short-term 
investments as compared to $13,300,000 in working capital and $12,337,000 in 
cash and short-term investments at March 31, 1996.  The increase in working 
capital and cash and short-term investments resulted from the Company 
completing an initial public offering, effective April 2, 1996, of its common 
stock (selling 2,000,000 new shares of common stock of the Company and 500,000 
shares offered by selling shareholders).  The net proceeds to the Company from 


                                         28

<PAGE>

the sale of the new 2,000,000 shares of common stock were approximately 
$17,600,000 after deducting underwriting discounts and commission and offering 
expenses.  

     Cash provided by (used in) operating activities amounted to $480,000, 
$1,068,000 and ($3,155,000) for fiscal years 1995, 1996 and 1997, 
respectively.  The $588,000 difference in cash provided by operating 
activities in fiscal 1995, as compared to fiscal 1996 was primarily due to a 
change in net earnings from $921,000 to $1,376,000 and net changes in other 
reconciling items of $133,000.  The $4,223,000 difference in cash provided by 
(used in) operating activities in fiscal 1996, as compared to fiscal 1997, was 
primarily due to a change in net earnings (loss) of $2,947,000, an increase in 
trade receivables of $1,040,000, and net changes in other reconciling of 
$236,000.

     Cash used in investing activities was $823,000, $1,301,000 and 
$27,297,000 for fiscal years 1995, 1996 and 1997, respectively.  The uses of 
cash in fiscal 1995 and 1996 were related primarily to the purchase of 
computer and research equipment and furniture and fixtures.  In fiscal 1997, 
the increase in net cash used in investing activities as compared to fiscal 
1996 was partially due to approximately $7,300,000 of cash being used to 
purchase land and construct the Company's new corporate headquarter's 
facility.  

     On May 9, 1996, the Company purchased approximately 17.5 acres of land 
for approximately $2.1 million, on which the Company is constructing an 88,000 
square foot office building to consolidate all Des Moines, Iowa operations.  
The estimated overall cost of the project is approximately $10,000,000 
(including associated land) and is being financed by a $10,000,000 
construction loan secured by short-term investments, land and building.  In 
addition, cash used in investing activities increased in fiscal 1997 compared 
to fiscal 1996 approximately $13,200,000 from the purchase of short-term 
investments and $5,000,000 from the equity investment in Unwired Planet Inc.

     Cash provided by (used in) financing activities was ($548,000), 
$11,211,000 and $24,972,000 for fiscal years 1995, 1996 and 1997, 
respectively.  The  cash from financing activities in fiscal 1996 was 
primarily due to the issuance of $12,100,000 of Common Stock.  See Note 14 of 
Notes to Consolidated Financial Statements.  The cash from financing 
activities in fiscal 1997 resulted primarily from the issuance of 
approximately $17,600,000 in common stock in connection with the Company's 
initial public offering and proceeds of approximately $6,900,000 on the 
Company's construction loan.

     As of March 31, 1997, the Company had approximately $8,076,000 of long 
term debt, including current portion, outstanding relating to its current 
headquarters building and new headquarters building being currently 
constructed.  The notes bear interest between 6.4375% and 10.5280%.  See Note 
5 of Notes to Consolidated Financial Statements.

     Management believes current working capital and its $1.0 million bank 
line of credit will be adequate to meet the Company's future working capital, 
new product development and capital expenditure requirements at least through 
fiscal 1998.  

     Management does not believe that inflation has historically had a 
material effect on the Company's results of operations.  

Many of the Company's international contracts are denominated in local 
currencies, and an increase in the relative value of the dollar against such 
currencies would lead to a reduction in Company revenues.  The Company 
attempts to minimize its foreign currency exposure through keeping 
intercompany balances current and minimizing assets in any one currency 


                                         29

<PAGE>

denomination.  However, intercompany balances are not specifically hedged and 
there can be no assurance that the Company's future results of operations will 
not be adversely affected by currency fluctuations.  

     The Company anticipates that international sales will continue to account 
for a significant portion of net sales in the foreseeable future. As a result, 
the Company will be subject to certain risks, including tariffs and other 
barriers, difficulty in staffing and managing foreign subsidiary operations, 
difficulty in managing distributors and resellers, adverse tax consequences 
and difficulty in accounts receivable collection. The Company is also subject 
to the risks associated with the imposition of protective legislation and 
regulations, including those relating to import or export or otherwise 
resulting from trade or foreign policy. The Company cannot predict whether 
quotas, duties, taxes or other charges or restrictions will be implemented by 
the United States or any other country upon the import or export of the 
Company's products in the future. There can be no assurance that any of these 
factors or the adoption of restrictive policies will not have a material 
adverse effect on the Company's business, financial condition and results of 
operations. 

Accounting Policies
     In February 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings 
Per Share," and No. 129 "Disclosure of Information About Capital Structure" 
("SFAS 129").  SFAS 128 specifies the computation, presentation and disclosure 
requirements for basic and diluted earnings per share.  SFAS 128 supersedes 
Accounting Principles Board Opinion No. 15, is effective for financial 
statements ending after December 15, 1997, including interim periods, and 
requires that prior periods be restated.  SFAS 129 establishes standards for 
disclosing information about an entity's capital structure.  SFAS 129 is 
effective for financial statements for periods ending after December 15, 1997.  
The impact of the adoption of SFAS 128 on the financial statements of the 
Company has not yet been determined.


                                         30

<PAGE>

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.


                                         31

<PAGE>

Item 8. Financial Statements and Supplementary Data

The information required by this Item is contained in the financial statements 
set forth in Item 14(a) under the caption "Consolidated Financial Statements."


                                         32

<PAGE>

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

None.


                                         33

<PAGE>

Part III

Items 10-13

The response to Items 10, 11, 12, and 13 are incorporated by reference to the 
information concerning the applicable subjects in the Company's Proxy 
Statement for the 1997 Annual Meeting of Shareholders, expected to be filed 
pursuant to Regulation 14A no later than 120 days following March 31, 1997.


                                         34

<PAGE>

Part IV

Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K

(a)  The following documents are filed as part of this report:

1. Consolidated Financial Statements

The following are included herein:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1996 and 1997
Consolidated Statements of Operations for the three years ended March 31, 1997
Consolidated Statements of Shareholders' Equity for the three years ended 
March 31, 1997
Consolidated Statements of Cash Flows for the three years ended March 31, 1997
Notes to Consolidated Financial Statements


2.  Exhibits.  The following are filed herewith or are incorporated by 
               reference to exhibits previously filed with the Commission:

Exhibit No.           Description
------------------------------------------------------------------------------

3.1    Restated and Amended Articles of Incorporation of the Company, filed as 
       Exhibit 3.1(a) to Pre-Effective Amendment No. 3 to the Company's 
       Registration Statement on Form S-1 Reg. No. 33-99160-3 and hereby 
       incorporated by reference.
3.2    Restated and Amended Bylaws of the Company, filed as Exhibit 3.2 to 
       Pre-Effective Amendment No. 3 to the Company's Registration Statement 
       on Form S-1 Reg. No. 33-99160-3 and hereby incorporated by reference.
4.1    Articles of Incorporation and Bylaws of the Company (included in 
       Exhibits 3.1 and 3.2).
10.1   Stock and Warrant Purchase Agreement between the Company and Motorola, 
       Inc. dated July 31, 1995, including Form of Warrant, filed as Exhibit 
       10.1 to the Company's Registration Statement on Form S-1 Reg. No. 33-
       99160 and hereby incorporated by reference.
10.2   Shareholder Agreement among the Company, Kenneth B. Kaplan, and 
       Motorola, Inc. dated July 31, 1995, filed as Exhibit 10.2 to the 
       Company's Registration Statement on Form S-1 Reg. No. 33-99160 and 
       hereby incorporated by reference.
10.3   Agreement among the Company, Kenneth B. Kaplan, Lawrence A. Crane, and 
       the 1994 Series A Preferred Stock holders dated March 11, 1996, filed 
       as exhibit 10.18 to Pre-Effective Amendment No. 3 to the Company's 
       Registration Statement on Form S-1, Reg. No. 33-99160, and hereby 
       incorporated by reference.
10.4   Software Development and License Agreement between the Company and 
       Motorola, Inc. filed as Exhibit 10.17 to Pre-Effective Amendment No. 3 
       to the Company's Registration Statement on Form S-1, Reg. No. 33-99160, 
       and hereby incorporated by reference.10.5  1989 Stock Option Plan of 
       the Company, filed as Exhibit 10.5 to the Company's Registration 
       Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by 
       reference.
10.6   1991 Stock Option Plan of the Company, filed as Exhibit 10.6 to the 
       Company's Registration Statement on Form S-1, Reg. No. 33-99160, and 
       hereby incorporated by reference.


                                         35

<PAGE>

10.7   1992 Stock Option Plan of the Company, filed as Exhibit 10.7 to the 
       Company's Registration Statement on Form S-1, Reg. No. 33-99160, and 
       hereby incorporated by reference.
10.8   1995 Stock Option Plan of the Company, filed as Exhibit 10.8 to the 
       Company's Registration Statement on Form S-1, Reg. No. 33-99160, and 
       hereby incorporated by reference.
10.9   401(k) Plan of the Company, filed as Exhibit 10.9 to the Company's 
       Registration Statement on Form S-1, Reg. No. 33-99160, and hereby 
       incorporated by reference.
10.10  Non-Contributory Profit Sharing Plan of the Company, filed as Exhibit 
       10.10 to the Company's Registration Statement on Form S-1, Reg. No. 33-
       99160, and hereby incorporated by reference.
10.11  Credit Agreement between the Company and Norwest Bank Iowa, National 
       Association dated October 20, 1995, including Commercial Note 
       Agreement, filed as Exhibit 10.11 to the Company's Registration 
       Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by 
       reference.
10.12  Lease Agreement between the Company and RW III Partnership dated 
       October 10, 1995, filed as Exhibit 10.12 to the Company's Registration 
       Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by 
       reference.
10.13  Mortgage between the Company and Brenton Bank, N.A., dated December 10, 
       1993, filed as Exhibit 10.13 to the Company's Registration Statement on 
       Form S-1, Reg. No. 33-99160, and hereby incorporated by reference.
10.14  Mortgage between the Company and the Iowa Business Growth Company,
       dated February 24, 1987, filed as Exhibit 10.14 to the Company's 
       Registration Statement on Form S-1, Reg. No. 33-99160, and hereby 
       incorporated by reference.
10.15  Real Estate Purchase Agreement between Charles I. Colby, Jr. And 
       Patricia E. Colby, Sellers, and Mid-America Investment Co., Buyer, 
       dated November 21, 1995, with amendments, and Assignment and Conveyance 
       of Interest from Mid-America Investment Co. to the Company, dated May 
       9, 1996, filed as Exhibit 10.15 to the Form 10-K Report of the Company 
       for the fiscal year ended March 31, 1996, and hereby incorporated by 
       reference.
10.16  Real Estate Purchase Agreement between Charles I. Colby, Jr. And 
       Victoria R. Colby, Sellers, and Mid-America Investment Co., Buyer, 
       dated November 21, 1995, with amendments, and Assignment and Conveyance 
       of Interest from Mid-America Investment Co. to the Company, dated May 
       9, 1996, filed as Exhibit 10.16 to the Form 10-K Report of the Company 
       for the fiscal year ended March 31, 1996, and hereby incorporated by 
       reference.
10.17  Real Estate Agreement between Mid-America Investment Co. and the 
       Company dated May 9, 1996, filed as Exhibit 10.17 to the Form 10-K 
       Report of the Company for the fiscal year ended March 31, 1996, and 
       hereby incorporated by reference.
10.18  Commercial Note, Letter Agreement, and Security Agreement between the 
       Company and Norwest Bank Iowa, N.A., dated July 23, 1996.
10.19  Contract for Construction between the Company and The Weitz Company,
       Inc., dated July 25, 1996.
11.1   Statement Regarding Computation of Net Earnings (Loss) Per Share.21.1  
       Subsidiaries of the Registrant, filed as Exhibit 21.1 to the Company's 
       Registration Statement on Form S-1, Reg. No. 33-99160, and hereby 
       incorporated by reference.
23     Consent of Independent Accountants.
27     Financial Data Schedule (EDGAR version only).

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last 
    quarter of fiscal year 1996.


                                         36

<PAGE>

SIGNATURES
-----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto authorized, on the 27th day of 
June, 1997.  

                                 MICROWARE SYSTEMS CORPORATION, 
                                      an Iowa Corporation

                                 By:  /S/ KENNETH B. KAPLAN
                                     -------------------------
                                 Kenneth B. Kaplan, President and 
                                     Chief Executive Officer 

     KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and 
officers of Microware Systems Corporation, an Iowa corporation, which is 
filing an Annual Report on Form 10-K with the Securities and Exchange 
Commission, under the provisions of the Securities Exchange Act of 1934 as 
amended, hereby constitute and appoint Kenneth B. Kaplan, M. Denis Connaghan, 
Kent R. Kelderman, and Arthur Don and each of them, each of their true and 
lawful attorneys-in-fact and agents; with full power of substitution and 
resubstitution, for him or her and in his or her name, place and stead, in any 
and all capacities, to sign such report and any or all amendments to the 
report to be filed with the Securities and Exchange Commission, granting unto 
said attorneys-in-fact and agents, and each of them, full power and authority 
to do and perform each and every act and thing requisite and necessary to be 
done in and about the premises, as fully to all interests and purposes as each 
of them might or could do in person, hereby ratifying and confirming all that 
said attorneys-in-fact and agents or any of them, or their substitute or 
substitutes, may lawfully do or cause to be done by virtue hereof.  

     Pursuant to the requirements of the Securities and Exchange Act of 1934, 
this report has been signed by the following persons in the capacities and on 
the dates indicated.  

Signature                              Title                     Date
---------                             ------                     -----

  /S/ KENNETH B. KAPLAN      Chairman, President & Chief      June 27, 1997
  ----------------------      Executive Officer (Principal
  Kenneth B. Kaplan           Executive Officer)


  /S/ M. DENIS CONNAGHAN     Director-elect, Executive        June 27, 1997
  ----------------------      Vice President & Chief
  M. Denis Connaghan          Operating Officer


  /S/ KENT R. KELDERMAN      Chief Financial Officer,         June 27, 1997
  -----------------------     Executive Vice President & 
  Kent R. Kelderman           Treasurer (Principal
                              Financial & Accounting 
                              Officer)


  /S/ LAWRANCE A. CRANE      Director                         June 27, 1997
  ---------------------
  Lawrence A. Crane


  /S/ ARTHUR DON             Director                         June 27, 1997
  ---------------
  Arthur Don


                                         37

<PAGE>

  /S/ JAMES A. GORDON        Director                         June 27, 1997
  -------------------
  James A. Gordon


  /S/ ROBERT L. GROWNEY      Director                         June 27, 1997
  ---------------------
  Robert L. Growney


  /S/ DANIEL P. HOWELL       Director                         June 27, 1997
  --------------------
  Daniel P. Howell


  /S/ DENNIS E. YOUNG        Director                         June 27, 1997
  --------------------
  Dennis E. Young


                                         38

<PAGE>

EXHIBIT INDEX

Description                                                 Page
------------------------------------------------------------------------
10.18  Commercial Note, Letter Agreement, and Security 
       Agreement between the Company and Norwest Bank 
       Iowa, N.A., dated July 23, 1996                      40
10.19  Contract for Construction between the Company 
       and The Weitz Company, Inc., dated July 25, 1996     49
11.1   Statement Regarding Computation of Net Earnings      64
       (Loss) Per Share.
23     Consent of Independent Accountants.                  65
27     Financial Data Schedule (Edgar Version Only)         



                                         39

<PAGE>

                        INDEPENDENT AUDITORS' REPORT



Board of Directors
Microware Systems Corporation:

     We have audited the accompanying consolidated balance sheets of Microware 
Systems Corporation and subsidiaries as of March 31, 1996 and 1997 and the 
related consolidated statements of operations, shareholders' equity, and cash 
flows for each of the years in the three-year period ended March 31, 1997.  
These consolidated financial statements are the responsibility of the 
Company's management.  Our responsibility is to express an opinion on these 
consolidated financial statements based on our audits. 

     We conducted our audits in accordance with generally accepted auditing 
standards.  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 consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Microware 
Systems Corporation and subsidiaries at March 31, 1996 and 1997 and the 
results of their operations and their cash flows for each of the years in the 
three-year period ended March 31, 1997, in conformity with generally accepted 
accounting principles.



                                                   KPMG Peat Marwick LLP

Des Moines, Iowa
April 24, 1997, except for the last sentence of 
    Note 5(c) which is as of June 18, 1997


                                       F-1
<PAGE>



           MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
                   Consolidated Balance Sheets
             ($ in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                           March 31,
                                                    ---------------------
      Assets                                           1996        1997
                                                    ---------   ---------
<S>                                                 <C>         <C>
Current assets:
      Cash and cash equivalents                     $  12,337   $   6,758
      Short-term investments (note 5)                    -         13,204
      Trade receivables, net of allowance
       for doubtful accounts of $366
       and $635 (notes 2 and 4)                         4,946       7,014
      Income taxes receivable                             211         207
      Inventories (note 4)                                 39          96
      Prepaid royalties                                  -          1,005
      Prepaid expenses and other current assets           226         316
      Deferred tax assets (note 6)                        518         507
                                                    ---------   ---------
       Total current assets                            18,277      29,107
                                                    ---------   ---------
Investment, at cost (note 1)                             -          5,004
                                                    ---------   ---------
Property and equipment, net (notes 3 and 5)             4,002      11,917
                                                    ---------   ---------
Other assets:
      Intangible assets, net of amortization (no        1,228       1,675
      Deposits and other (note 4)                       1,431       1,380

                                                    ---------   ---------
       Total other assets                               2,659       3,055
                                                    ---------   ---------
                                                    $  24,938   $  49,083
                                                    =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       F-2
<PAGE>




                  MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
                         Consolidated Balance Sheets
                  ($ in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                          March 31,
      Liabilities and                               ---------------------
      Shareholders' Equity                             1996       1997
                                                    ---------   ---------
<S>                                                 <C>         <C>
Current liabilities:
   Notes payable to banks (note 4)                  $     873   $     323
   Current installments of 
     long-term debt (note 5)                               39          38
   Accounts payable                                     1,665       2,559
   Accrued expenses                                     1,361       2,194
   Deferred revenues                                      888         867
   Income taxes payable                                   151         102
                                                    ---------   ---------
     Total current liabilities                          4,977       6,083
Long-term debt, less current 
  installments (note 5)                                 1,188       8,038
Deferred income taxes (note 6)                            230         236
                                                    ---------   ---------
     Total liabilities                                  6,395      14,357
Shareholders' equity (notes 7, 8, 9 and 14):
   Series A preferred stock, $14.71 par value;
    340,000 shares authorized; 340,000
    shares and none issued and outstanding              5,001          -
   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; 10,439,552 and 14,190,561 shares issued;
    10,214,452 and 13,965,461 shares outstanding       13,094      36,152
   Retained earnings                                    1,660          89
   Cumulative adjustment from foreign 
     currency translation                                (435)       (738) 
                                                    ---------   ---------
                                                       19,320      35,503
   Less cost of common shares acquired for
    the treasury, 225,100 and 225,100 shares              777         777
                                                    ---------   ---------
     Total shareholders' equity                        18,543      34,726
                                                    ---------   ---------
Commitments (note15)
                                                     $ 24,938   $  49,083
                                                    =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

      



                                       F-3
<PAGE>



                  MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations

                    ($ in thousands, except per share amounts)


<TABLE>
<CAPTION>

                                                         Years ended March 31,
                                                -----------------------------------------
                                                  1995             1996            1997
                                                ---------       ---------       ---------
<S>                                             <C>             <C>             <C>
Revenues (notes 2 and 11):
   Product                                      $  15,667       $  16,104       $  16,586
   Services                                         3,232           7,551           9,548
                                                ---------       ---------       ---------
                                                   18,899          23,655          26,134
Cost of revenues:
   Product                                          2,463           2,428           3,046
   Services                                         1,292           2,672           3,923
                                                ---------       ---------       ---------
                                                    3,755           5,100           6,969
                                                ---------       ---------       ---------
      Gross profit                                 15,144          18,555          19,165
                                                ---------       ---------       ---------
Operating expenses:
   Research and development                         5,649           5,009           7,155
   Sales and marketing                              5,614           8,421          10,819
   General and administrative                       3,330           3,899           3,415
   Special charges (note 13)                          166            -                438
                                                ---------       ---------       ---------
                                                   14,759          17,329          21,827
                                                ---------       ---------       ---------
      Operating profit (loss)                         385           1,226          (2,662) 
                                                ---------       ---------       ---------

Other income (expense):
   Foreign currency gain (loss), net                  293              13             (30)
   Interest expense                                  (162)           (151)           (106)
   Interest income                                     30             434           1,224
                                                ---------       ---------       ---------
                                                      161             296           1,088
                                                ---------       ---------       ---------
      Earnings (loss) before income
          tax (benefit) expense                       546           1,522          (1,574)
Income tax (benefit) expense (note 6)                (375)            146              (3) 
                                                ---------       ---------       ---------
      Net earnings (loss) (note 11)             $     921       $   1,376       $  (1,571) 
                                                =========       =========       ==========

Net earnings (loss) per share                   $  .08          $  .11          $  (.11) 
                                                =========       =========       ==========
Weighted average common and common
    equivalent shares outstanding (in thousands)   12,063          13,030          13,754
                                                =========       =========       ==========
</TABLE>

See accompanying notes to consolidated financial statements.




                                       F-4
<PAGE>


                      MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                     Consolidated Statements of Shareholders' Equity

                                  ($ in thousands)

<TABLE>
<CAPTION>
                                                         Cumulative
                                                         adjustment
                                                            from
                                              Retained    foreign                Total
                           Preferred Common   earnings   currency   Treasury shareholders'
                             stock    stock   (deficit) translation   stock     equity
                           --------- -------  --------- ----------- -------- -------------
<S>                        <C>       <C>      <C>          <C>       <C>        <C>
Balance at March 31, 1994  $ 5,001   $ 1,052  $   (637)    $    139  $ (666)    $  4,889
Purchase of common shares
  of stock at cost              -        -          -            -     (111)        (111)
Net earnings                    -        -         921           -       -           921
Current translation 
   adjustment                   -        -          -          (140)     -          (140) 
                           -------   -------  ---------     -------  ------     --------
Balance at March 31, 1995    5,001     1,052       284           (1)   (777)       5,559
Issuance of common shares
   of stock                     -     12,104        -            -       -        12,104
Legal and other fees 
   incurred for issuance 
   of common shares of stock    -        (62)       -            -       -           (62)
Net earnings                    -        -       1,376           -       -         1,376
Current translation 
   adjustment                   -        -          -          (434)     -          (434) 
                           -------   -------  ---------     -------  ------     --------
Balance at March 31, 1996    5,001    13,094     1,660         (435)   (777)      18,543

Issuance of common shares 
   of stock                     -     19,046        -            -       -        19,046
Legal and other fees incurred
  incurred for issuance of
  common shares of stock        -       (989)       -            -       -          (989)
Conversion of preferred 
  stock to common stock upon 
  initial public offering   (5,001)    5,001        -            -       -            -
Net loss                        -         -     (1,571)          -       -        (1,571)
Current translation 
   adjustment                   -         -         -          (303)     -          (303) 
                           -------   -------  ---------     -------  ------     --------
Balance at March 31, 1997  $    -    $36,152   $    89       $ (738)  $(777)    $ 34,726
                           =======   =======  =========     =======  ======     ========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>



                       MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                          Consolidated Statements of Cash Flows

                                       ($ in thousands)


<TABLE>
<CAPTION>
                                                                   Years ended March 31,
                                                                1995     1996      1997
                                                              -------  --------  --------
<S>                                                           <C>      <C>       <C>

Cash flows from operating activities:
  Net earnings (loss)                                         $   921  $  1,376  $ (1,571)
  Adjustments to reconcile net earnings (loss)
    to net cash provided by (used in) operating activities:
     Depreciation and amortization                                976     1,273     1,797
     Loss on sale of property and equipment                       128        23         5
     Deferred income taxes                                       (319)     (185)       17
     Increase in trade receivables, net                        (1,058)   (1,248)   (2,288)
     (Increase) decrease in income taxes receivable              (292)      111         4
     Decrease (increase) in inventories                            49         3       (58)
     Increase in prepaid royalties                                 -         -      1,005
     (Increase) decrease in prepaid expenses 
         and other current asset                                (135)        69       (95)
     Decrease (increase) in other assets                          75       (726)   (1,749)
     (Decrease) increase in accounts payable                    (664)       547       942
     Increase (decrease) in accrued expenses                     617       (333)      905
     Increase (decrease) in deferred revenues                    138        164        (9)
     Increase (decrease) in income taxes payable                  44         (6)      (50) 
                                                              -------  --------  --------
     Net cash provided by (used in) operating activities         480      1,068    (3,155) 
                                                              -------  --------  --------
Cash flows from investing activities:
  Capital expenditures                                          (841)    (1,320)   (9,089)
  Proceeds from sale of property and equipment                    18        191       -
  Purchases of short-term investments                             -          -    (39,417)
  Maturities of short-term investments                            -          -     26,213
  Purchase of investment, at cost                                 -          -     (5,004) 
                                                              -------  --------  --------
     Net cash used in investing activities                      (823)    (1,301)  (27,297)
                                                              -------  --------  --------
Cash flows from financing activities:
  Proceeds from issuance of notes payable to banks
    and long-term debt                                          2,667     3,142     7,901
  Principal payments on notes payable to 
     banks and long-term debt                                  (3,099)   (3,406)   (1,553)
  Principal payments under capital lease obligations               (5)       -         -
  Purchase of treasury shares of stock                           (111)       -         -
  Cost of issuance of common stock                                 -        (62)     (422)
  Proceeds on issuance of common shares of stock                   -     12,104    19,046
  Deferred offering costs                                          -       (567)       -
                                                              -------  --------  --------
     Net cash (used in) provided by financing activities         (548)   11,211    24,972
                                                              -------  --------  --------
                                                                 (891)   10,978    (5,480)
Effect of foreign currency exchange rate changes on cash         (416)     (157)      (99) 
                                                              -------  --------  --------
     Net (decrease) increase in cash and cash equivalents      (1,307)   10,821    (5,579)
Cash and cash equivalents at beginning of year                  2,823     1,516    12,337
                                                              -------  --------  --------
Cash and cash equivalents at end of year                      $ 1,516  $ 12,337  $  6,758
                                                              =======  ========  ========
</TABLE>



See accompanying notes to consolidated financial statements.


                                       F-6
<PAGE>


                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(1)  Summary of Significant Accounting Policies and Related Matters

     Principles of Consolidation

     The consolidated financial statements include the financial statements of 
       Microware Systems Corporation (Microware) and its subsidiaries (the 
       Company):  Microware Systems (U.K.) Limited; Microware Systems K.K.; 
       MSC Toolco, Inc.; Microware Systems France S.A.R.L.; and MicroMall, 
       Inc.  All significant intercompany balances and transactions have been 
       eliminated in consolidation.

     Nature of Business

     The Company develops and markets operating system software and high-level
        language compilers used in industrial automation, communications, 
        scientific research, and consumer electronics applications.  The 
        Company's operations are primarily conducted in North America, Japan 
        and Europe.

     Translation of Foreign Financial Statements

     All assets and liabilities in the balance sheets of foreign subsidiaries 
       whose functional currency is other than the U.S. dollar are translated 
       at year-end exchange rates.  Income and expense items are translated at 
       the average exchange rate for the year.  Translation gains and losses 
       are not included in determining net earnings but are accumulated as a 
       separate component of shareholders' equity.  Foreign currency 
       transaction gains and losses are included in determining net earnings 
       (loss).  

     Use of Estimates

     The preparation of financial statements in conformity with generally 
       accepted accounting principles requires the Company to make estimates 
       and assumptions that affect the reported amounts of assets and 
       liabilities and disclosure of contingent assets and liabilities as of 
       the date of the financial statements and the reported amounts of 
       revenues and expenses during the reporting period.  Actual results 
       could differ from those estimates.

     Cash Equivalents and Short-term Investments

     Cash equivalents consist of money market funds, a United States treasury 
       fund and United States treasury bills with stated effective maturities 
       of three months or less at time of purchase.  Short-term investments 
       consist of United States treasury bills with stated effective 
       maturities greater than three months at time of purchase.  Cash 
       equivalents and all of the Company's short-term investments are 
       classified as "held-to-maturity" under the Statement of Financial 
       Accounting Standards (SFAS) No. 115, "Accounting for Certain 
       Investments in Debt and Equity Securities" and are stated at amortized 
       cost, which approximates fair value.

     Inventories

     Inventories are composed primarily of user manuals and software media 
       production materials and are stated at the lower of cost or market on a 
       first-in, first-out basis. Additionally, inventories include costs 
       incurred to develop customized software under certain consulting 
       agreements in progress.


                                       F-7
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(1)  Summary of Significant Accounting Policies and Related Matters, Continued

     Investments

     In October of 1996, Microware purchased a preferred stock interest in 
       another company for $5,004.  The Company owns 1,967,961 shares of the 
       other company's Series C Preferred Stock.  A conversion formula in the 
       stock purchase agreement provides for conversion of the preferred stock 
       into common stock (initially at a ratio of 1 to 1) with adjustments for 
       dilution.  The preferred stock is convertible at the option of the 
       Company or automatically upon an initial public offering of common 
       stock or upon consent of at least two-thirds of the preferred holders.  
       The investment is accounted for on the cost basis.

     Property and Equipment

     Property and equipment are stated at cost and are depreciated on 
       straight-line methods with estimated useful lives of 5 to 30 years for 
       building and improvements and 3 to 5 years for furniture, fixtures, and 
       equipment and research and development equipment.

     Intangible Assets

     The balance of intangible assets as of March 31, 1996 and 1997 consisted 
       of the following:

<TABLE>
<CAPTION>

                                                         1996
                                          --------------------------------
                                                     Accumulated
                                          Cost       amortization     Net
                                          -------      -------      -------
          <S>                             <C>          <C>          <C>
          Capitalized software
             development costs            $   851      $   536      $   315
          Purchased software                  441           -           441
          Goodwill                            789          547          242
          Patents, copyrights, and other      624          394          230
                                          -------      -------      -------
                                          $ 2,705      $ 1,477      $ 1,228
                                          =======      =======      =======

</TABLE>

<TABLE>
<CAPTION>
                                                        1997
                                          --------------------------------
                                                     Accumulated
                                          Cost       amortization     Net
                                          -------      -------      -------
          <S>                             <C>          <C>         <C>
          Capitalized software
             development costs            $   932      $   737      $   195
          Purchased software                1,476          418        1,058
          Goodwill                            727          506          221
          Patents, copyrights, and other      639          438          201
                                          -------      -------      -------
                                          $ 3,774      $ 2,099      $ 1,675
                                          =======      =======      =======
</TABLE>

                                       F-8
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(1)  Summary of Significant Accounting Policies and Related Matters, Continued

     Intangible Assets, Continued

     The Company capitalizes software development costs incurred in the
       production of computer software once technological feasibility of the 
       product to be marketed has been established.  Software development 
       costs incurred prior to technological feasibility are expensed as 
       research and development costs.  Capitalization of these costs ceases 
       when the product is considered available for general release to 
       customers.

     Amortization of capitalized software development costs is calculated as 
       the greater of the ratio that current revenues bear to estimated future 
       revenues or the straight-line method over the expected product life 
       cycle of three years.  Amortization of capitalized software development 
       costs amounted to $166, $236, and $201 for  the years ended March 31, 
       1995, 1996, and 1997, respectively.

     Purchased software represents the cost of acquiring computer software 
       used in the Company's products.  Amortization of purchased software is 
       calculated as the greater of the ratio that current revenues bear to 
       estimated future revenues or the straight-line method over three years.

     Goodwill and patents, copyrights, and other are being amortized over 5 to 
       15 year periods on the straight-line method.  The Company assesses the 
       recoverability of goodwill through analysis of undiscounted cash flows.

     Advertising

     Advertising costs incurred for the years ended March 31, 1995, 1996, and 
       1997 were $539, $1,277, and $764, respectively.

     Revenue Recognition

     Product revenues primarily consist of software licenses and development 
       tool products sold and royalties earned from equipment distributors.  
       Software license fees are recognized as revenues upon contract signing 
       and shipment of the software master copy.  Sales of development tool 
       products are recognized as revenues upon shipment.  Royalties earned 
       from equipment distributors are recognized as revenues when reported by 
       the equipment distributors or upon payment of non-refundable prepaid 
       royalties.

     Service revenues are derived primarily from custom contract engineering,
       postcontract customer support (maintenance) agreements, and training 
       and consulting services.  Revenues from custom contract engineering are 
       recognized using the percentage of completion method.  Maintenance 
       revenues, including maintenance bundled with software license fees, are 
       recognized ratably over the term of the related agreements.  Revenues 
       from training and consulting services are recognized as the services 
       are rendered.


                                       F-9
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(1)  Summary of Significant Accounting Policies and Related Matters, Continued

     Income Taxes

     The provision for income taxes includes federal, state and foreign taxes 
       currently payable and deferred taxes arising from temporary differences 
       in determining income for financial statement and tax purposes using 
       the asset and liability method of SFAS No. 109, "Accounting for Income 
       Taxes".

     Computation of Net Earnings (Loss) Per Share

     Net earnings (loss) per share is based on the weighted average number of 
       common and dilutive common equivalent shares (common stock options and 
       warrants using the treasury stock method) and convertible preferred 
       stock (as if converted to common stock on the original date of 
       issuance) outstanding during the periods presented.  Effective April 2, 
       1996, the Company completed an initial public offering of its common 
       stock.  Prior to April 2, 1996, there were no established market prices 
       for the common stock of the Company.  The market prices used in the 
       computation of net earnings (loss) per share prior to April 2, 1996 
       were average values calculated from the annual appraisals of the 
       Company's common shares of stock performed by independent appraisers.  
       Pursuant to Securities and Exchange Commission Staff Accounting 
       Bulletin No. 83, all stock issued and warrants and options to purchase 
       shares of common stock granted by the Company at a price less than the 
       initial filing price during the twelve months preceding the initial 
       public offering date (using the treasury stock method) have been 
       included in the computation of common and common equivalent shares as 
       if they were outstanding for all periods presented.

     Fair Value of Financial Instruments

     SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," 
       requires the Company to disclose the estimated fair values for its 
       financial instruments.  Fair value estimates, methods, and assumptions 
       are set forth below:

       Cash and Cash Equivalents, Short-Term Investments, Trade Receivables, 
       Notes Payable to Banks,

       Accounts Payable and Accrued Expenses

       The carrying amount approximates the estimated fair value due to the 
       short-term nature of those instruments.

       Long-Term Debt

       Rates currently available to the Company for such borrowings with 
       similar terms and remaining maturities are used to discount the future 
       cash flows to estimate the fair value for long-term debt.


                                       F-10
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(1)  Summary of Significant Accounting Policies and Related Matters, Continued

     Stock Based Compensation

     The Company accounts for stock-based compensation using the intrinsic 
       value method prescribed in Accounting Principles Board Opinion No. 25, 
       "Accounting for Stock Issued to Employees," (ABP No. 25) and related 
       interpretations.  Under APB No. 25, compensation cost is measured as 
       the excess, if any, of the quoted market price of the Company's stock 
       at the date of grant over the exercise price of the option ratably over 
       the vesting period.  The Company's policy is to grant options with an 
       exercise price equal to the quoted market price of the Company's stock 
       on the grant date.  Accordingly, no compensation cost has been 
       recognized for the Company's stock option plan.  The Company provides 
       additional pro forma disclosures as required under SFAS No. 123, 
       "Accounting for Stock-Based Compensation" (see note 9).

     Recent Accounting Pronouncements

     In February 1997, the Financial Accounting Standards Board issued SFAS 
       No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of 
       Information About Capital Structure".  SFAS No. 128 establishes 
       financial accounting and reporting standards for calculation of basic 
       earnings per share and diluted earnings per share.  SFAS No. 128 
       supersedes Accounting Principles Board Opinion No. 15, "Earnings Per 
       Share" and is effective for financial statements issued for periods 
       ending after December 15, 1997, including interim periods.  SFAS No. 
       129 establishes financial reporting standards for disclosing 
       information about an entity's capital structure and is effective for 
       financial statements issued for periods ending after December 15, 1997.  
       The Company will adopt the new standards in the year ending March 31, 
       1998.

 (2) Trade Receivables

     At March 31, 1996 and 1997, the Company had one customer whose trade 
       receivable balance exceeded 10 percent of consolidated trade 
       receivables.  Trade receivables at March 31, 1996 and 1997 for this 
       customer were $768 and $704, respectively, and revenues for the years 
       ended March 31, 1996 and 1997 for this customer totaled approximately 
       $1,516 and $2,279, respectively.  This customer is also a shareholder 
       of the Company (see note 14).


                                       F-11
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

 (2) Trade Receivables, Continued

     The activity in the Company's allowance for doubtful accounts for the 
       years ended March 31, 1995, 1996, and 1997 consisted of the following:

<TABLE>

<CAPTION>
                                Balance at    Additions     Deductions, 
                                beginning     charged to      net of         Balance 
                                 of year       expenses     recoveries     end of year
                                ----------    ----------    ----------     ----------- 
      <C>                         <S>          <S>             <S>            <S>
      Year ended March 31, 1995   $  94        $  57           $  73          $  78
                                  =====        =====           =====          =====
      Year ended March 31, 1996   $  78        $ 367           $  79          $ 366
                                  =====        =====           =====          =====
      Year ended March 31, 1997   $ 366        $ 754           $ 485          $ 635
                                  =====        =====           =====          =====
</TABLE>


(3)  Property and Equipment

     Property and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                    March 31, 
                                                1996      1997
                                             -------    -------
         <S>                                 <C>        <C>
         Land and improvements               $   144    $   144
         Building                              2,017      2,017
         Furniture, fixtures, and equipment    3,316      4,115
         Research and development equipment    2,900      3,612
         Leasehold improvements                  102        123
         Construction in progress                 25      7,369
                                             -------    -------
                                               8,504     17,380
         Accumulated depreciation
              and amortization                 4,502      5,463
                                             -------    -------
                                             $ 4,002    $11,917
                                             =======    =======
</TABLE>

     Included in construction in progress is $190 of capitalized interest at 
       March 31, 1997.

 (4) Notes Payable to Banks

     Microware has a $1,000 line of credit with a bank bearing interest at the 
       bank's base rate.  The line of credit matures on October 31, 1997 and 
       is renewable annually.  Funds advanced are secured by Microware's trade 
       receivables, inventories, and intangible assets.  There was $500 in 
       borrowings outstanding at March 31, 1996.  There were no borrowings 
       outstanding at March 31, 1997.

     Microware Systems K.K. has credit agreements with various maturities with 
       two Japanese banks.  Outstanding balances at March 31, 1996 and 1997 
       totaled $373 and $323, respectively.  The weighted average interest 
       rate was 2.125 percent at March 31, 1997. The credit agreements are 
       secured by Microware Systems K.K.'s deposit for office space in the 
       amount of $489 at March 31, 1997.

                                       F-12
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(5)  Long-Term Debt

     Long-term debt at March 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>

                                                      March 31,
                                                 --------------------
                                                   1996        1997
                                                 -------      -------
         <S>                                     <C>          <C> 
         Mortgage note                       (A) $   203      $   193
         Mortgage note with bank             (B)   1,024          997
         Construction note                   (C)     -          6,886
                                                 -------      -------
                                                   1,227        8,076
         Less current installments                    39           38
                                                 -------      -------
             Long-term debt, excluding 
             current installments                $ 1,188      $ 8,038
                                                 =======      =======
</TABLE>

     (A) The note is secured by the Company's headquarters building, subject 
         to mortgage note (B), and is guaranteed by the Small Business 
         Administration and the Company's major shareholder.  Monthly payments 
         are $3, including interest at 10.528 percent, with the unpaid balance 
         due June 1, 2007.
     (B) The note is secured by the Company's headquarters building and is 
         guaranteed by the Company's major shareholder.  Monthly payments are 
         $9, including a variable interest rate, adjusted every 3 years (9.125 
         percent at March 31, 1997), with the unpaid balance due December 13, 
         2013.
     (C) The Company has a $10,000,000 commercial real estate construction 
         note with a bank.  The construction note is secured by liens on the 
         Company's new headquarters and pledged United States treasury bills.  
         Interest payments are due monthly, at a variable interest rate equal 
         to 1 percent over the bank's fed funds rate (6.4375% at March 31, 
         1997), with the principal balance due December 31, 1997.  On June 18, 
         1997, the Company obtained a renewal of the construction note through 
         April 30, 1998 and the aggregate maturities of long-term debt have 
         been presented under the renewal terms.

     The aggregate maturities of long-term debt for each of the five years 
         ending March 31, 2002 and thereafter are as follows:
                                                   1998        $    38
                                                   1999          6,920
                                                   2000             37
                                                   2001             41
                                                   2002             45
                                                   Thereafter      995
                                                               -------
                                                               $ 8,076
                                                               =======

     The carrying amount of the Company's long-term debt approximates the fair 
         value as of March 31, 1997.


                                       F-13
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

 (6) Income Taxes

     The provision for income taxes is based on earnings (loss) before 
        income tax expense (benefit) as follows:
<TABLE>
<CAPTION>
                                            1995     1996       1997
                                         --------  --------  ---------
                 <S>                     <C>       <C>       <C>
                 United States           $  (228)  $  (234)  $ (1,404)
                 Foreign                     774     1,756       (170) 
                                         --------  --------  ---------
                                         $   546   $ 1,522   $ (1,574) 
                                         =======   =======   =========
</TABLE>
     Components of income tax expense (benefit) for the years ended March 31, 
       1995, 1996, and 1997 consist of the following: 

<TABLE>
<CAPTION>
                                                 1995  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current      $   12       $   3      $   15
                      Deferred       (390)         -         (390) 
                                   ------       -----      ------
                                   $ (378)      $   3      $ (375) 
                                   ======       =====      ======
</TABLE>
<TABLE>
<CAPTION>
                                                 1996  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current      $  269       $  62      $  331
                      Deferred       (185)         -         (185) 
                                   ------       -----      ------
                                   $   84       $  62      $  146
                                   ======       =====      ======
</TABLE>
<TABLE>
<CAPTION>
                                                 1997  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current       $  34       $ (54)     $  (20)
                      Deferred         17           -          17
                                   ------       -----      ------
                                   $   51       $ (54)     $   (3) 
                                   ======       =====      ======
</TABLE>

                                       F-14
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(6) Income Taxes, Continued

     Income tax expense (benefit) for the years ended March 31, 1995, 1996, 
       and 1997 differs from the "expected" income tax expense (benefit) 
       computed by applying the United States federal income tax rate of 34 
       percent to pretax income (loss) due to the following:


<TABLE>
<CAPTION>
                                                     1995      1996      1997
                                                    -------   ------    ------
   <S>                                              <C>       <C>       <C>
   Computed "expected" tax expense (benefit)        $  186    $  517    $ (535)
   Increase (decrease) in taxes resulting from:   
   U.S. losses without current benefit                  -         -        660
   Foreign losses without current benefit               -         -        209
   Utilization of foreign net    
      operating loss carryforwards                    (262)     (208)     (457)
   Foreign taxes                                        -         -         99
   Change in the beginning of the   
      year balance of the valuation   
      allowance for deferred tax assets   
      allocated to income tax expense                 (284)     (173)       -  
   Other                                               (15)       10        21
                                                    ------    ------     -----
                                                    $ (375)   $  146     $  (3) 
                                                    ======    ======     =====

</TABLE>

     The tax effects of temporary differences that give rise to deferred tax 
        assets and liabilities at March 31, 1996 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                             March 31,
                                                        ------------------
                                                          1996       1997
                                                        -------    -------
     <S>                                                <C>        <C>
     Deferred tax assets:  
        U.S. net operating loss carryforwards           $    -     $ 1,400
        Foreign net operating loss carryforwards            913        445
        Post contract customer support unearned revenue     177        161
        Compensation/benefits                                28         43
        Inventories                                          54         54
        Allowance for doubtful accounts                     115        214
        Other                                                64         95
                                                        -------    -------
           Total gross deferred tax assets                1,351      2,412
        Less valuation allowance                            760      1,845
                                                        -------    -------
           Total deferred tax assets                        591        567
                                                        -------    -------
     Deferred tax liabilities:  
        Capitalized software costs                          114         70
        Property and equipment                              189        226
                                                        -------    -------
           Total deferred tax liabilities                   303        296
                                                        -------    -------

           Net deferred tax assets                      $   288   $    271
                                                        =======   ========
</TABLE>

     The net deferred tax assets at March 31, 1996 and 1997, are composed of 
       current deferred tax assets of $518 and $507, respectively, and 
       noncurrent deferred tax liabilities of $230 and $236, respectively.

                                       F-15
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(6) Income Taxes, Continued

    The net change in the total valuation allowance for the years ended March 
       31, 1996 and 1997 was a decrease of $820 and an increase of $1,085, 
       respectively.  A valuation allowance has been set up to offset the 
       gross deferred tax assets created by U.S. and foreign net operating 
       loss carryforwards.  Utilization of the U.S. and foreign net operating 
       losses is dependent upon future taxable income generated in the 
       respective U.S. and foreign subsidiaries.  The Company recorded the 
       valuation allowance due to its lack of history of consistent earnings 
       in the U.S. and in a foreign subsidiary generating the net operating
       loss carryforwards.  At March 31, 1997, the Company has U.S. net 
       operating loss carryforwards for federal income tax purposes of 
       approximately $4,000 (including approximately $2,000 from tax benefits 
       related to employee stock options) which are available to offset future
       federal taxable income, if any, through 2012.  The foreign net 
       operating loss carryforwards expire as follows: $395 in 1998, $233 in 
       1999 and $485 in 2000.

 (7) Series A Preferred Stock

     On March 31, 1994, the Company issued and sold 340,000 shares of Series A 
       preferred stock, par value $14.71 per share to a group of four 
       investors.  A conversion formula in the stock purchase agreement 
       provided for conversion of preferred stock into common stock with 
       adjustments for dilution.  Effective April 2, 1996, upon completion of 
       the initial public offering of the Company's common stock, the 340,000 
       shares of Series A preferred stock were each converted into 4 shares of 
       common stock.

 (8)  Shareholders' Equity

     On March 12, 1996, the Company effected a 4-for-1 split as a share 
       dividend of common stock of the Company.  All common share and per 
       share amounts have been adjusted Company's shareholders and board of 
       directors approved an increase in the number of authorized common 
       shares of stock of the Company to 50,000,000.  The authorized number of 
       common shares of stock of the Company have been adjusted to give effect 
       to this increase.

     Effective April 2, 1996, the Company completed an initial public offering 
       of its common stock (selling 2,000,000 new shares of common stock of 
       the Company and 500,000 shares offered by selling shareholders).  The 
       net proceeds to the Company from the sale of the new 2,000,000 shares 
       of common stock were approximately $17,600 after deducting underwriting 
       discounts and commissions and offering expenses.  

(9)  Stock Options

     The Company has established 1989, 1991, 1992 and 1995 Stock Option Plans 
       (the Plans) and granted options to certain officers, directors, and 
       employees to purchase shares of common stock.  The options granted 
       under the Plans expire 10 years from the date such option is granted.  
       Options vest over a two to four year period and are exercisable under 
       conditions specified in the Plans' agreements.

     The 1989, 1991, 1992 and 1995 Plans had available 1,200,000, 512,000, 
       496,000 and 1,120,000 total shares of common stock subject to option, 
       respectively. 

                                       F-16
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(9)  Stock Options, Continued

     Activity for the Company's Plans is as follows: 


<TABLE>
<CAPTION>
                      1995                   1996                         1997
           -------------------------  -------------------------  -------------------------
             Number    Option Price     Number    Option Price     Number     Option Price
            of Shares    Per Share     of Shares     Per Share    of Shares     Per Share
           ----------- ------------   ----------  ------------    ----------  ------------
<S>         <C>         <C>           <C>         <C>             <C>         <C>
Beginning        
  balance   1,671,928   $.50-1.3125   1,520,000   $0.50-1.3125     2,250,200  $0.50-3.125
Issued          -             -         784,400      $3.125          373,100  $10.00-15.50
Exercised       -             -           4,000      $.9375          391,009  $0.50-3.125
Canceled      151,928  $.50-1.3125       50,200   $.9375-3.125       171,600      $3.125
            ---------                 ---------                    ---------  
Ending        
  balance   1,520,000  $.50-1.3125    2,250,200    $0.50-3.125     2,060,691   $0.50-15.50
            =========  ===========    =========    ===========     =========   ===========

</TABLE>

     SFAS No. 123 requires proforma information regarding net earnings (loss) 
       and earnings (loss) per share be determined as if the Company has 
       accounted for its stock options granted subsequent to December 15, 1994 
       under the "fair value" method.  Under SFAS No. 123, the fair value of 
       each option grant is estimated on the date of grant using the Black-
       Scholes option valuation model with the following assumptions used for 
       grants during fiscal 1996 and 1997: risk free interest rates of 6.0% 
       and 6.25%, respectively; expected volatility of 0.00% and 80.89%, 
       respectively; an expected option life of 5.75 years and 6.0 years, 
       respectively, and no expected dividends for both years.  As the Company 
       was a nonpublic entity until prior to April 2, 1996, it is permitted 
       under SFAS No. 123 to use the "minimum value" method to value stock 
       options granted April 2, 1996.  Under the "minimum value" method 
       expected volatility is effectively zero.  The weighted average fair 
       value of stock options granted under the Plans for the years ended 
       March 31, 1996 and 1997, were $0.82 and $10.80, respectively.

     The Black-Scholes option valuation model was developed for use in 
       estimating the fair-value of traded options which have no vesting 
       restrictions and are fully transferable.  In addition, option valuation 
       models require the input of highly subjective assumptions including the 
       expected stock price volatility.  Because the Company's stock options 
       have characteristics significantly different from those of traded 
       options, and because changes in the subjective input assumptions can 
       materially affect the fair value estimate, in management's opinion, the 
       existing option valuation models do not necessarily provide a reliable 
       single measure of the fair value of its stock options.

                                       F-17
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(9)  Stock Options, Continued

     The Company applies the provisions of APB No. 25 and related 
       interpretations in accounting for compensation expense under the Plans.  
       Had compensation expense under the Plans been determined pursuant to 
       SFAS No. 123, the Company's proforma net earnings (loss) and net 
       earnings (loss) per share for the years ended March 31, 1996 and 1997 
       would have been as follows:

                                            1996     1997
                                          -------  --------
           Net earnings (loss):   
              As reported                 $ 1,376  $ (1,571)
              Proforma                    $ 1,215  $ (2,763)
   
          Net earnings (loss) per share:   
              As reported                 $  0.11  $  (0.11)
              Proforma                    $  0.09  $  (0.20)
   

     The above proforma disclosures are not necessarily representative of the 
       effects on reported net earnings (loss) for future years.

     The following table summarizes information about fixed stock options 
       outstanding under the Plans at March 31, 1997:

<TABLE>
<CAPTION>

               Options Outstanding                        Options Exercisable
----------------------------------------------------   ------------------------
                              Weighted-    
                               Average     Weighted-                  Weighted-
   Range of                   Remaining     Average                    Average
   Exercise        Number    Contractual   Exercise      Number        Exercise 
    Prices      Outstanding     Life         Price     Exercisable      Price
   --------     -----------  -----------   ---------   -----------    ---------
<S>             <C>              <C>       <C>          <C>            <C>
 $0.50-0.9375     840,191        3.0       $ 0.6742       840,191      $ 0.6742
$1.3125-3.125     847,400        7.2       $ 2.4779       438,350      $ 1.8742
 $10.00-15.50     373,100        9.5       $15.2051          -         $   -   
                ---------                               ---------     
                2,060,691        5.9       $ 4.0469     1,278,541      $ 1.0856
                =========        ===       ========     =========      ========


 

 (10) Profit Sharing Plans

     Microware had a noncontributory profit sharing plan for employees meeting 
       certain service requirements.  Subject to certain limitations, annual 
       contributions to the noncontributory plan were determined by the board 
       of directors and were made in the form of Microware's common stock. 
       There were no annual contributions to the noncontributory plan for the 
       years ended March 31, 1995, 1996, and 1997.  Effective January 1, 1997 
       the noncontributory plan was merged into the contributory profit 
       sharing plan.

                                       F-18
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(10) Profit Sharing Plans, Continued

     Microware has a contributory profit sharing plan for substantially all 
       full-time employees.  Under the contributory plan, Microware provides 
       matching cash contributions based on qualified employee contributions, 
       as well as certain other contributions. Microware's contributions to 
       the contributory plan for the years ended March 31, 1995, 1996 and 1997 
       amounted to $49, $88 and $131, respectively.

(11) Foreign Operations

     A summary of the Company's domestic and foreign operations as of and for 
       the years ended March 31, 1995, 1996 and 1997 is presented below:



</TABLE>
<TABLE>
<CAPTION>
                                                       1995
                             ---------------------------------------------------------
                                U.S     U.K.    Japan   France    Eliminations  Total
                             -------- -------- -------  -------   ------------ -------
     <S>                     <C>      <C>      <C>      <C>        <C>         <C>
     Revenues                $10,658  $ 2,567  $ 6,513  $ 1,592    $ (2,431)   $18,899
                             =======  =======  =======  =======    =========   =======
     Operating (loss) profit $  (558) $   288  $   636  $    69    $    (50)   $   385
                             =======  =======  =======  =======    =========   =======
     Net earnings            $   200  $   264  $   449  $    58    $    (50)   $   921
                             =======  =======  =======  =======    =========   =======
     Total assets            $14,974  $   412  $ 3,519  $   659    $ (7,440)   $12,124
                             =======  =======  =======  =======    =========   =======
     Total liabilities       $ 4,447  $ 1,643  $ 6,064  $ 1,618    $ (7,207)   $ 6,565
                             =======  =======  =======  =======    =========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                         1996
                             ---------------------------------------------------------
                                U.S     U.K.    Japan   France    Eliminations  Total
                             -------- -------- -------  -------   ------------ -------
     <S>                     <C>      <C>      <C>      <C>        <C>         <C>
     Revenues                $13,377  $ 4,464  $ 7,309  $ 1,670    $  (3,165)  $23,655
                             =======  =======  =======  =======    =========   =======
     Operating (loss) profit $  (558) $ 1,126  $   661  $    (3)   $    -      $ 1,226
                             =======  =======  =======  =======    =========   =======
     Net (loss) earnings     $  (318) $ 1,000  $   677  $    17    $    -      $ 1,376
                             =======  =======  =======  =======    =========   =======
     Total assets            $26,353  $ 1,189  $ 2,352  $   641    $  (5,597)  $24,938
                             =======  =======  =======  =======    =========   =======
     Total liabilities       $ 4,435  $ 1,379  $ 1,390  $ 1,662    $  (2,471)  $ 6,395
                             =======  =======  =======  =======    =========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                         1997
                             ------------------------------------------------------------
                                                                          Elimin-
                                U.S     U.K.    Japan   France   Germany   ations  Total
                             -------- -------- -------  -------  -------  ------- -------
     <S>                     <C>      <C>      <C>      <C>      <C>     <C>      <C>
     Revenues                $16,909  $ 2,658  $ 6,820  $ 1,413  $  838  $(2,504) $26,134
                             =======  =======  =======  =======  ======  =======  =======
     Operating (loss) profit $(2,501) $  (191) $ 1,041  $  (697) $ (314) $   -    $(2,662)
                             =======  =======  =======  =======  ======  =======  =======
     Net (loss) earnings     $(1,456) $  (137) $ 1,026  $  (682) $ (322) $   -    $(1,571)
                             =======  =======  =======  =======  ======  =======  =======
     Total assets            $50,708  $ 1,315  $ 3,025  $   594  $  733  $(7,292) $49,083
                             =======  =======  =======  =======  ======  =======  =======
     Total liabilities       $12,251  $ 1,657  $ 1,261  $ 2,314  $1,038  $(4,164) $14,357
                             =======  =======  =======  =======  ======  =======  =======

</TABLE>

     Included in U.S. revenues are foreign export sales, primarily to Germany, 
       of approximately $2,265, $2,324, and $1,226 during the years ended 
       March 31, 1995, 1996, and 1997, respectively.  Revenue eliminations 
       represent primarily intercompany sales between the U.S. and foreign 
       operations and royalties paid to the U.S. by foreign subsidiaries.

                                       F-19
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

 (12) Supplemental Disclosure of Cash Flow Information

     During the years ended March 31, 1995, 1996, and 1997, the Company paid 
       interest of approximately $179, $124, and $262, respectively.

     Income taxes paid during the years ended March 31, 1995, 1996, and 1997 
       amounted to approximately $-0-, $168, and $242, respectively.

(13) Special Charges

     During the year ended March 31, 1995, the Company recorded special 
       charges in Japan of $166.  No adjustments were necessary to the 
       liabilities recorded in 1995, and all amounts were paid as of March 31, 
       1995.  The 1995 charges relate primarily to employee severance and 
       related costs and lease termination costs for restructuring operations 
       in Japan.

     During the year ended March 31, 1997, the Company recorded special 
       charges of $438 relating to the restructuring of its European 
       operations.  The 1997 charges relate primarily to employee severance 
       and related benefits for resizing operations in Europe.

(14) Motorola Stock and Warrant Purchase Agreement

     On July 31, 1995, the Company entered into a Stock and Warrant Purchase 
       Agreement (the Agreement) with Motorola, Inc. (Motorola) pursuant to 
       which Motorola purchased 1,526,232 common shares of stock of the 
       Company for $12,100 ($7.93 per share).  In addition, pursuant to the 
       Agreement, the Company issued Motorola five separate warrants to 
       purchase a total maximum of an additional 1,803,728 common shares of 
       stock of the Company at an exercise price of $10.81 per share.  The 
       warrants are exercisable at various periods through July 31, 2001.  The 
       Agreement contains certain anti-dilution protection in the event of 
       certain dividends, stock splits, reclassifications, or issuances of 
       common shares of stock of the Company or rights thereto.  In connection 
       with the Agreement, the Company delivered 1,373,608 common shares of 
       stock of the Company on July 31, 1995 for $10,890.  The 152,624 
       deferred delivery common shares of stock of the Company were delivered 
       to Motorola on August 18, 1995 for $1,210.  Motorola is also a customer 
       of the Company (see note 2).

(15) Commitments

     The Company leases certain domestic and foreign facilities under 
       noncancelable operating leases.  Minimum annual rental commitments at 
       March 31, 1997 under all noncancelable operating leases are as follows:
                           1998              $  775
                           1999              $  259
                           2000              $  185
                           2001              $  172
                           2002              $  151
                           Thereafter        $  934

     Rental expense under cancelable and noncancelable operating leases was 
       $786, $950, and $922 during the years ended March 31, 1995, 1996 and 
       1997, respectively.

                                       F-20
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                   ($ in thousands, except per share amounts)

(15) Commitments, Continued

     The Company is constructing an office building and as of March 31, 1997 
       the estimated remaining costs to complete construction approximated 
       $3,000.


                                       F-21
<PAGE>