<PAGE>

                   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, 1999

[ ] 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                                         42-1073916
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                    Identification Number)


1500 N.W. 118TH ST.
DES MOINES, IOWA                                           50325
(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. [X]

THE APPROXIMATE VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF APRIL 30, 1999 WAS $11,164,000. THIS CALCULATION DOES NOT
REFLECT A DETERMINATION THAT PERSONS ARE AFFILIATES FOR ANY OTHER PURPOSES.

NUMBER OF SHARES OUTSTANDING AS OF APRIL 30, 1999: 14,934,032.

DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY STATEMENT TO BE FILED FOR
THE 1999 ANNUAL MEETING OF SHAREHOLDERS (PART III).

                                       1
<PAGE>



                             MICROWARE SYSTEMS CORPORATION

                                        INDEX
<TABLE>
<CAPTION>
<S>               <C>                                                         <C>
                                                                               Page
Part I
     Item 1.      Business                                                       3
     Item 2.      Properties                                                    17
     Item 3.      Legal Proceedings                                             18
     Item 4.      Submission of Matters to a Vote of Security
                  Holders                                                       19
     Item 4A.     Executive Officers of the Registrant                          20

Part II
     Item 5.      Market for the Registrant's Common Equity
                  and Related Stockholder Matters                               22
     Item 6.      Selected Consolidated Financial Data                          23
     Item 7.      Management's Discussion and Analysis of
                  Financial Condition and Results of Operations                 25
     Item 7A.     Quantitative and Qualitative Disclosures about
                  Market Risk                                                   36
     Item 8.      Financial Statements and Supplementary Data                   37
     Item 9.      Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosures                       38

Part III
     Item 10.     Directors and Executive Officers of the
                  Registrant                                                    39
     Item 11.     Executive Compensation                                        39
     Item 12.     Security Ownership of Certain Beneficial
                  Owners and Management                                         39
     Item 13.     Certain Relationships and Related Transactions                39

  Part IV
     Item 14.     Exhibits, Financial Statements, Schedule, and
                  Reports on Form 8-K                                           40

Signatures                                                                      42
</TABLE>

                                       2
<PAGE>



PART I

CAUTIONARY NOTE
         THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS. WORDS SUCH
AS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", "PLANS", "SEEKS",
"ESTIMATES" AND SIMILAR EXPRESSIONS OR VARIATIONS OF THESE WORDS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY MEANS OF
IDENTIFYING FORWARD-LOOKING STATEMENTS IN THIS REPORT. ADDITIONALLY,
STATEMENTS THAT REFER TO MICROWARE'S ESTIMATED OR ANTICIPATED FUTURE RESULTS,
SALES OR MARKETING STRATEGIES, NEW PRODUCT DEVELOPMENT OR PERFORMANCE OR
OTHER NON-HISTORICAL FACTS ARE FORWARD-LOOKING AND REFLECT MICROWARE'S
CURRENT PERSPECTIVE OF EXISTING INFORMATION. FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES THAT CANNOT BE PREDICTED OR
QUANTIFIED, AND ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM THE
RESULTS AND OUTCOMES DISCUSSED IN THE FORWARD-LOOKING STATEMENTS DEPENDING ON
A VARIETY OF FACTORS, INCLUDING THE VOLUME AND TIMING OF ORDERS RECEIVED
DURING THE QUARTER, THE COMPANY'S ABILITY TO SUCCESSFULLY MARKET ITS
PRODUCTS, THE COMPANY'S ABILITY TO KEEP PACE WITH ITS COMPETITION AND WITH
RAPID TECHNOLOGICAL CHANGE, THE COMPANY'S ABILITY TO MANAGE TURNOVER IN ITS
SALES AND MARKETING AND OTHER PERSONNEL AND TO ATTRACT AND MAINTAIN PERSONNEL
GENERALLY, AS WELL AS OTHER RISK FACTORS MENTIONED THROUGHOUT THIS ANNUAL
REPORT AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE URGED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS AND MICROWARE DISCLAIMS ANY OBLIGATION TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT TO REFLECT ANY FUTURE
EVENTS OR DEVELOPMENTS.

ITEM 1. BUSINESS
         Microware Systems Corporation was organized under the laws of the state
of Iowa in 1977. Its principal executive offices are located at 1500 N.W. 118th
Street, Des Moines, Iowa 50325 (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 the traditional embedded
systems, communications, and consumer products markets. 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 markets its products primarily through its sales
forces in North America, Europe and Japan.

         Microware's business is focused on developing and marketing OS-9 for
use in traditional embedded systems, including industrial automation,
transportation, medical, and government/military systems; communications
infrastructure products, including networking equipment, ATM, ISDN, digital
subscriber loop, Ethernet and fast Ethernet, and custom connectivity
applications; and higher volume embedded systems for consumer and business uses,
such as digital television decoders, advanced wireless telephones and pagers,
point-of-sale equipment, workforce automation devices, in-car navigation systems
and Internet appliances. During the past fiscal year, Microware continued its
emphasis on the traditional embedded systems and communications markets.

                                       3
<PAGE>

INDUSTRY BACKGROUND
         Real-time operating systems are significantly different from the
operating systems that run general-purpose desktop computers. Many applications
require a "real-time" capability that enables them to provide an immediate,
predictable response to external events. For example, an embedded system that
controls an anti-lock braking system in an automobile needs to react to external
events such as pressure on the brake pedal, speed of the automobile and road
conditions, all within a fraction of a second. Similarly, real-time systems are
important to achieve "lip-sync" by simultaneously decompressing and
synchronizing digital streams of audio and video information. Real-time systems
are used to enhance performance, reduce manufacturing costs and enable product
customization and differentiation.

         Real-time operating systems may be loaded from external media, or may
reside within a microprocessor as part of an embedded system. An embedded system
is comprised of a microprocessor and related software that are dedicated to a
specialized task or set of tasks, embedded within an application specific
industrial or consumer product. Examples of typical products that have one or
more microprocessors and embedded systems include automated teller machines,
cellular telephones, pagers, copiers, facsimile machines and automobiles. Many
of these products require real-time embedded systems that provide true
multitasking, memory management and protection, input-output systems and
networking/telecommunication capabilities. Fueled by declining costs and
improving performance of 32/64 bit microprocessors, embedded systems are
becoming increasingly sophisticated and used in or with a wider range of
applications.

         Demand for commercial real-time operating systems is driven by growth
in real-time embedded systems. The Company anticipates that organizations that
develop embedded systems will continue to migrate from internally developed
systems to cost-effective third party products. Companies that internally
develop application software for embedded systems are focused on maximizing
productivity, minimizing costs and reducing time to market while maintaining
flexibility. Thus, embedded systems applications developers seek to use a fully
integrated and open modular suite of software development tools and real-time
operating systems to allow software development to occur concurrently with
product development. With increased product complexity and time to market
pressures, organizations are relying more heavily on third party specialized
consulting services for product and system design and development.

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. These operating system products are
complemented by the Company's development tools, technical support services, and
custom software development services, which facilitate development of embedded
OS-9 applications. 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.

                                       4
<PAGE>

OPERATING SYSTEM PRODUCTS
         Microware's operating system products are based on a variety of
packages of 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 32/64
bit processors and applications markets.

         OS-9 products include those targeted at Original Equipment
Manufacturers ("OEMs"), which include limited source code and enable OEMs to
develop customized versions of OS-9 for their specific embedded system
application. OEM packages are licensed on a processor-specific basis. Current
OEM packages provide support for Motorola 68xxx (680x0, 683xx), Motorola/IBM
Power PC (4xx, 6xx, 7xx, 8xx), Intel Strong Arm (SA 11xx, SA 15xx), Hitachi
Super H (SH3, SH4), Intel/AMD x86/Pentium (386, 486, 586, Pentium) and other
processor families. Additionally, these OEM packages provide support for
embedded, communications, and consumer applications.

         DAVID combines OS-9 with graphics API and support for various digital
audio/video transmission and networking protocols to provide a full operating
environment for the developers of interactive television and set-top boxes.

         Microware's operating system products are licensed to OEMs through OEM
license agreements which generally provide licensees (i) the right to use a
specific configuration of an OS-9 module 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. OEM licenses are generally bundled with
end-user licenses of related development tools on a single password protected
CD ROM providing a complete development solution in an easy to use package.

         All of Microware's operating system products are also available as
board-level products through end-user license agreements which grant licensees
the right to embed copies of the software in a fixed number of single-board
computers. Microware OS-9 board-level products are available for many popular
single-board computers, including the Motorola MVME, Compact PCI (cPCI), and
MBX platforms, PC/AT-compatible computers, Hitachi Super H reference
platforms and Intel StrongARM reference platforms.

         Other OS-9 board-level products are also available through third party
board-level vendors.

ADDITIONAL OPERATING SYSTEM PRODUCT COMPONENTS
         Microware also offers its customers a wide array of software product
components providing additional functionality as needed for their specific
embedded or consumer application. Certain of these products include technologies
licensed from third parties. These additional product components include the
following:

         - Microware MAUI Graphical Environment, which provides a robust
graphical environment for applications in a small memory footprint. MAUI
supports numerous I/O devices including grayscale and color LCD panels, SVGA/VGA
graphics terminals, touch screens, mouse, and keyboards. MAUI has a modular
architecture designed to be easily scaled to meet specific system needs, and is
interoperable across graphics and sound processor platforms.

         - Microware SoftStax Communications Framework, which provides high
performance integrated communications and control for communications devices.
This unique technology allows developers to rapidly change underlying
communications technologies without disturbing application software.

                                       5
<PAGE>

         - Microware OS-9 LAN Pak, which provides local area network
connectivity support for Microware SoftStax.

         - Microware OS-9 X.25 Pak, which enables networked embedded systems to
communicate over X.25 packet topologies and custom networks.

         - Microware OS-9 ISDN Pak, which enables networked embedded systems to
communicate over Basic Rate ISDN network topologies.

         - Microware OS-9 Power Management software, which provides configurable
power policy software and integrated power manager software. This technology is
necessary for battery-operated mobile devices.

         - Third party middleware for Microware OS-9, including Universal Serial
Bus (USB), Serial Network Management Protocol (SNMP), PCMCIA support, True Flash
File System (FFS) support, Infrared Data Association (IrDA), web server and web
browser support packages.

         - Microware's implementation of Sun's PersonalJava for OS-9, which
         enables PersonalJava-compatibility in OS-9 environments.

ARIEL
         During fiscal 1999, Microware introduced a new operating system
product, Ariel. Ariel is not a derivative of OS-9, rather it is a streamlined
real-time operating system focused on deeply embedded applications such as
anti-lock brake and transmission control systems. Deeply embedded applications
typically require less functionality and smaller memory footprint than the high
performance capabilities that OS-9 possesses.

         Ariel is directed at the deeply embedded systems market which is
consistent with Microware's core market, the traditional embedded systems
business. To address the deeply embedded systems market, Ariel is offered under
a full source, royalty free licensing model. Ariel provides a highly reliable
real-time operating system with minimal support for networking and graphical
user interface. Additionally, Ariel is differentiated from competitive royalty
free operating systems in that it offers a complete system validation suite and
is brought to market with Microware's twenty years of operating system
expertise.

         Current Ariel packages support Motorola's M-Core processor and
Hitachi's SH2 processor. Market information and early market experience with
Ariel suggest that this type of product will be incorporated into a growing
number of designs. While the Company believes that its new product technology
and long-standing presence and reputation in this growing market will enable it
to increase its revenues from this market, its ability to do so is subject to
significant risks and uncertainties, particularly the Company's ability to
rapidly develop effective internal and third party sales, distribution and
marketing channels in the embedded systems marketplace.

DEVELOPMENT TOOLS
         Development Tools are developed and sold by Microware to OS-9 licensees
for developing OS-9 applications. Most development tools run on Microsoft
Windows configurations, 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
Microware operating system and development tools are well integrated and are
updated on a coordinated schedule. Customers therefore avoid potential
incompatibility among competing vendors.

         In July 1998, Microware released a new integrated development
environment, Microware Hawk. Microware Hawk is designed as an all-in-one
development suite to enable seamless editing, debugging and compilation of C

                                       6
<PAGE>

and C++ code; management of complex software build scenarios; management of
solo- or team-based changes to source code with version control and access to
on-line support to provide immediate assistance for every function. Microware
Hawk is an open development environment that can be interoperable with a wide
variety of third party development tools. Microware continues to develop
compiler, debugger, and utility program components for inclusion in the
Microware Hawk integrated development. Through these core components,
Microware can provide more substantial performance and operating system
functionality than is available in competitive real-time operating systems.

         Microware's development tools are generally sold under end-user
licenses that enable customers to install and use the tools at a fixed number of
development seats. The development tools are typically packaged with the
operating system product on a single CD-ROM.

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 on a rate per hour and/or per project basis.

SOFTWARE TECHNICAL SUPPORT AND UPGRADE SERVICES
         Licenses of Microware's operating system and tools products are
typically sold together with maintenance support contracts that provide updates
of the licensed software and routine technical support. The Company's technical
support staff assists licensees 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
OEMs generally offer first level customer support to their end-user customers
and rely on the Company for higher level support.

         Each Microware software product currently includes a 30-day technical
support registration card for assistance with the installation and use of
Microware software products. Microware also offers extended software support and
maintenance services on a per-product basis for a fee. Licensees who purchase
extended service are entitled to technical support services and software product
updates during the service period.

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 and maintain OS-9 as a
leading operating environment for embedded systems. To achieve this goal,
Microware focuses its marketing and product development efforts on those sectors
of the embedded systems market it believes have the greatest potential to
increase Microware's future revenue: (i) traditional embedded systems such as
industrial automation, transportation, medical, and government/military systems,
(ii) communications infrastructure devices and equipment, and (iii) consumer
products such as digital television decoders, wireless telephones, and Internet
appliances. In product development, the Company endeavors to provide
comprehensive solutions for these diverse markets by supporting market-leading
embedded processors and developing new modules providing specialized
functionality for those markets. For example, Microware provides specialized
telecommunications protocol support for communications infrastructure products,
motion picture file manager support for digital television products, power
management software for hand-held, battery-operated

                                       7
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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 and Northern Telecom Ltd., in the wireless products
market or Zenith in the digital television market, and working closely with
the providers of complementary technologies.

TRADITIONAL EMBEDDED SYSTEMS BUSINESS
         The traditional real-time embedded system software market is the core
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 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 sizeable share of the third party embedded operating system market.

         In fiscal 1999, Microware continued its emphasis on the traditional
embedded systems business by its support for board-level products, developing
its relationships with leading embedded systems distributors and resellers, and
hiring new sales personnel with substantial embedded systems experience. While
the Company believes that its proven technology and long-standing presence in
this rapidly growing market will enable it to substantially increase its
revenues from this market, its ability to do so is subject to significant risks
and uncertainties, particularly the Company's ability to rapidly develop
effective internal and third party sales, distribution and marketing channels in
the embedded systems marketplace.

COMMUNICATIONS INFRASTRUCTURE DEVICES MARKET
         The networked embedded systems marketplace is rapidly growing.
Additionally, technological demands of networked embedded systems are evolving
rapidly, as the bandwidth of digital networks expands simultaneously with the
integration of greater multimedia functionality driven by applications such as
telecommuting, Internet access, and video delivery. The Company believes this
growth and the trend toward licensing of third party operating systems creates a
substantial opportunity for targeted packages of OS-9 products.

         Microware's solution for the communications infrastructure device
market is to provide an embedded operating system platform which includes a
simplified, integrated communications environment interoperable across
telecommunications protocols and high performance with minimal memory and CPU
utilization. The Microware OS-9 product line has integrated communications
features based on the Microware SoftStax framework. Microware SoftStax is an
open architecture designed to be interoperable with the leading communications
protocols and third party communications infrastructure products.

         Microware believes the technological sophistication and openness of its
architecture will enable it to establish a revenue base in the communications
infrastructure market. It should be noted, however, that Microware's emphasis on
communications as a distinct product market is relatively new. The
communications infrastructure embedded systems software market is highly
fragmented, very competitive, and technically demanding. As such, there can be
no assurance that Microware will be able to successfully attain significant
revenues from the communications infrastructure, or to recoup its investment in
that market.

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<PAGE>

CONSUMER MARKETS
         Microware's efforts in the market for consumer and business embedded
systems devices have focused on select categories which Microware believes
represent significant market opportunities for the Company: the wireless and
internet devices market and the digital television market.

WIRELESS AND INTERNET DEVICES
         Since 1996 Microware has marketed a configuration of OS-9 targeted at
the manufacturers of wireless hand-held communications devices and
Internet-based telephones. The current product configurations combine OS-9 with
the MAUI graphics API and new software modules created for key wireless
functions such as power management, Java-compatibility and Internet access.

         Microware believes there is an emerging market for new categories of
wireless communications devices combining the small size and low cost of
traditional pagers and mobile telephones with the more advanced interactivity,
graphical user interface, and computing power of personal digital assistants
such as new types of smart 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 and in-car
navigation syatems. The Company believes OS-9 is well suited to operate such
devices and has developed strategic relationships with OEM manufacturers working
toward their development and eventual deployment.

         Microware's wireless and Internet strategy is to provide a wide variety
of products and services for licensing to leading equipment manufacturers. The
core of this strategy is the development of strategic customer relationships
with leading manufacturers of wireless and Internet devices. Microware has
developed such strategic licensing relationships with, among others, Motorola,
Northern Telecom Ltd., and Ericsson, Inc., all of whom have been developing next
generation wireless and Internet communications devices using OS-9.

         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. Motorola's PageWriter two-way pager, currently
being marketed through the SkyTel paging network, is based on a customized
version of OS-9 jointly developed by Microware and Motorola. In July 1995,
Motorola also purchased 1,526,232 shares of Microware Common Stock and was
issued warrants to acquire additional shares. As of March 31, 1999, warrants to
acquire 1,526,232 shares were outstanding, of which warrants to purchase 554,992
shares were exercisable. On July 31, 1998, warrants to acquire 277,496 shares
expired and on July 31, 1999, warrants to acquire and additional 277,496 of the
shares will expire. Pursuant to the Stock and Warrant Purchase Agreement, a
designee of Motorola serves on Microware's Board of Directors.

         During the past fiscal year, the Company's revenues from its wireless
and Internet activities primarily consisted of license fees, non-refundable
prepaid royalties and custom contract engineering fees received from wireless
and Internet customers. The Company's future operating results will depend
significantly on the development of its products and personal wireless and
Internet communication devices. To date some of the wireless and Internet 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.
As wireless and Internet communication markets develop, the Company's strategy
depends on the incorporation of the Company's software into new products, such
as two-way pagers, smart wireless telephones, and in-car navigation systems, 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.

                                       9
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Moreover, the Company's wireless and Internet strategy is highly dependent on
its ability to develop and market Java-compatible versions of its products.
There can be no assurance that Java will continue to develop as a popular
platform for wireless and Internet communications devices of OEMs, that
Microware will be able to maintain Java-compatibility on competitive terms
under its license with Sun Microsystems, or that Microware will be able to
keep pace with the rapid technological change in these markets.

DIGITAL TELEVISION MARKET
         Since 1993 Microware has offered an OS-9 operating system configuration
targeted at the emerging digital television business. Microware OS-9 for Digital
TV is designed to operate the digital decoders that turn standard televisions
into smart clients on new digital television networks under development by
telephone companies, cable companies, and direct broadcast satellite providers
with interactive processing, graphics, video and audio functionality. Microware
OS-9 for Digital TV has emerged as a leading operating system for digital
decoders, having been licensed by over 20 set-top box manufacturers and used in
trial and commercial deployments around the world. Microware OS-9 for Digital TV
is used in set-top boxes manufactured under license by NEC Corporation of Japan
and are currently deployed in Hong Kong in an interactive television network
operated by Hongkong Telecom IMS Ltd.

         A streamlined configuration of Microware OS-9 for Digital TV is
targeted at digital-video broadcast products for existing cable systems, new
multichannel multipoint distribution systems ("MMDS") and DBS networks.
Microware OS-9 for Digital TV-based digital decoders manufactured by Zenith
Electronics Corporation have been contracted for procurement by Americast, a
digital television technology consortium of Ameritech, SBC, Bell South, GTE, and
Disney, and are currently deployed by Bell South in New Orleans.

         To date, most of the Company's digital television revenues have been
from Microware OS-9 for Digital TV license agreements and custom contract
engineering with digital decoder OEMs and network operators. The Company's
current activities relating to its new media markets remain focused upon
licensing Microware OS-9 for Digital TV for digital television uses. The Company
has increasingly focused its marketing efforts in the digital television
business on the development of strategic marketing alliances which will enable
the Company to leverage the market position of Microware OS-9 for Digital TV
into additional OEM licenses.

         During fiscal 1999, Microware entered into licensing agreements with
Motorola and C-Cube to include Microware OS-9 for Digital TV (DAVID) in their
respective set-top box designs. In addition to license, non-refundable prepaid
royalties and service revenues for these agreements, Microware believes that
these relationships will further position the Company to realize market
opportunities worldwide as set-top boxes are produced.

         While the Company has received significant revenues in the past from
development licenses, non-refundable pre-paid royalties and custom contract
engineering work sold to digital television decoder OEMs, only a small
proportion of the Company's digital television licensees are actually
manufacturing digital decoders. There can be no assurance that the Company will
be able to achieve significant new digital decoder OEM design wins and
development license revenues, 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 Microware OS-9 for Digital TV is well positioned as a solution for

                                      10
<PAGE>

the digital television market, the Company believes the digital television
market remains at an 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
have eroded Microware OS-9 for Digital TV's early market advantage to the
benefit of the Company's competitors. It is therefore difficult to make reliable
estimates of the size of the digital television market or the Company's likely
market share.

COMPETITION
         The embedded software industry is highly competitive, highly fragmented
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.

         All of the Company's 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 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 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, Microware OS-9 for Digital TV, also
known as DAVID, competes with software developed internally by set-top box
manufacturers, including Scientific-Atlanta's PowerTV and Thomson Consumer
Electronics' Open TV and with products from ISI, Microsoft, Sony and Wind River.
Many of the Company's digital television competitors have substantially greater
technical, sales, marketing and financial resources than the Company.

         The Company expects that as the embedded systems market continues to
evolve, additional competitors will seek to enter these markets.

         The Company believes that its ability to effectively compete in the
embedded systems market depends on factors both within and outside its control,
including the ability to establish effective sales and distribution channels,
timing and success of new products developed and marketed 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 its
products compete effectively in markets on the basis of product features,
reliability, price and performance characteristics. However, 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, the Company's past difficulties
encountered in working to develop strong, effective sales and distribution
channels and new product introductions from existing and new competitors could
adversely affect the Company's future business and results from operations.

                                      11
<PAGE>

MARKETING, SALES AND DISTRIBUTION
         Microware markets and licenses its products principally through its
direct sales force. Microware currently uses a direct sales force in North
America, Europe and Japan. The Company has numerous sales offices in the U.S.
International offices are located in the United Kingdom, Germany, France and
Japan. Distributors and sales representatives are used in certain countries.
Direct sales representatives are supported by field application engineers who
are experienced in the embedded market and the Company's products and
technologies. International sales accounted for approximately 50%, 59% and 64%
of total revenues in fiscal 1997, 1998, and 1999 respectively.

         During fiscal 1998, the Company experienced significant turnover in its
sales personnel, particularly in North America and Japan. During fiscal 1999,
the turnover in Japan was stabilized; however the Company experienced
significant attrition in its marketing personnel and continued to experience
significant turnover in its North American sales personnel. This included the
departures of each of its Vice President of Marketing, Vice President of Sales
and Vice President of Engineering. In its continuing effort to stabilize
turnover in North America, the Company has created a new vice president
position, Vice President of Organization Development and Human Resources, who is
charged with attracting and retaining qualified personnel. The significant
turnover experienced by the Company has had, and may continue to have, an
adverse effect on the Company's operations, the extent of which cannot presently
be determined.

         The Company's future operating results will depend significantly on the
Company's ability to develop its sales and distribution channels, particularly
in North America. In order to rapidly increase revenues and as the embedded
market continues to mature, the Company continues to realign its efforts and
resources towards developing new distribution channels, particularly in North
America. During fiscal 1999, the Company initiated an agreement with Avnet
Electronics Marketing to distribute the Company's products. Phoenix-based Avnet
Electronics Marketing is one of the world's largest distributors of
semiconductors and OEM system components. While the Company believes the use of
distributors will provide an effective channel to substantially increase its
revenues, there can be no assurance that the Company will be able successfully
engage distributors.

         In fiscal 2000, the Company expects to continue investing in the
expansion and development of its sales channels and the upgrading of its
infrastructure and to increase marketing activity associated with the release of
new products. While the Company anticipates that these investments will lead to
increased revenue generation there can be no assurance that there will be that
result.

         The Company will continue to generate new business opportunities in its
target markets through direct marketing, advertising, websites, press releases,
trade shows, user group meetings, telemarketing, direct mailings and through its
strategic alliances.

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, 1999, the Company
employed 68 product development engineers. Of these, 57 engineers were based in
Des Moines, Iowa and 11 were based in Tokyo, Japan.

         During fiscal 1997, 1998, and 1999 research and development expenses
amounted to $7.2 million, $7.2 million, and $6.8 million, respectively,

                                      12
<PAGE>

excluding capitalized software development costs. For the above periods,
research and development expenses represented 27%, 41%, and 41% of the Company's
total revenues, respectively. For the same periods, software development costs
capitalized totaled $81,000, $215,000, and $64,000, 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.

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.

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.

EMPLOYEES
         As of March 31, 1999, the Company employed 147 people, including 62 in
marketing, sales and support services, 68 in engineering and product development
and 17 in operations, finance and administration. Of these employees, 100 are
located in the United States, and 47 are employed by the Company's international
operations. None of the Company's employees are 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, Hawk, Ariel 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,
Java OS and PersonalJava are trademarks of Sun Microsystems, Inc. All other
marks are trademarks or registered trademarks of their respective holders.

ADDITIONAL RISK FACTORS
         In addition to the other risk factors contained herein, the Company
believes the following additional risk factors should be taken into
consideration in evaluating its business:

         HISTORY OF OPERATING LOSSES; VARIABILITY OF QUARTERLY OPERATING
RESULTS. The Company has experienced significant operating losses for the past
three fiscal years. While the Company has taken a number of measures to increase
its revenues, decrease its operating expenses, and attain profitability, there
can be no assurance that these measures will succeed or that the Company will
become profitable. Furthermore, the Company's revenues and operating results
have varied substantially from quarter to quarter, remain difficult to foresee
due to the nature of the embedded systems market and the Company's business, and
should not be relied upon as an indication of future performance.

         MARKET RISKS. The Company has invested substantial resources in the
development of emerging markets, in particular the digital television and

                                      13
<PAGE>

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

         The Company has continued its focus on the traditional embedded systems
business in an effort to lessen the variability of its quarterly operating
results and attain profitability. The traditional embedded systems business is
diverse and increasingly competitive, and there can be no assurance that the
Company will be able to substantially increase its revenues from that market.

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

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

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

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


                                      14
<PAGE>

         ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL. The Company's future
performance depends to a significant degree upon the continued contributions of
its key management, product development, marketing and sales personnel, many of
whom have joined the Company recently. The Company has experienced significant
turnover in personnel during the past fiscal year including its Vice President
of Sales, Vice President of Marketing and Vice President of Engineering. The
Company's ability to execute its market strategy will depend to a large degree
upon its ability to integrate new personnel into the Company. Competition for
qualified personnel throughout the software industry is intense and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel.

         INTERNATIONAL OPERATIONS. In the past three fiscal years, the Company
derived at least 50% of its total revenue from sales outside North America, and
this trend is anticipated to continue in the future. This dependence on
international operations subjects the Company to certain risks, including
tariffs and other barriers, difficulty in staffing and managing foreign
subsidiary operations, difficulty in managing distributors and resellers,
difficulty in accounts receivable collection, foreign currency exposure and
adverse tax consequences. The Company is also subject to the risks associated
with the imposition of protective import or export legislation and regulations
by the United States or other countries. The Company cannot predict whether
quotas, duties, taxes or other charges or restrictions will be implemented on
the Company's products in the future. There can be no assurance that 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.

         YEAR 2000 ISSUES. Many currently installed computer systems and
software products include coding to accept only two-digit entries in the date
code field instead of four digit entries and therefore cannot distinguish dates
prior to January 1, 2000 from dates on or after January 1, 2000. Systems and
software that do not properly recognize such information may generate erroneous
data or fail. Such systems need to be upgraded or replaced in order to function
properly or, in other words, be Year 2000 compliant. Significant uncertainty
exists in the computer systems and software industry concerning the potential
effects associated with non-compliance.

         Microware believes its most current releases of its products, including
third party software integrated into certain products, are Year 2000 compliant
and will neither cease to perform nor generate incorrect or ambiguous data or
results when processing dates on or after January 1, 2000. Microware believes
that its products will calculate any information dependent on such dates in the
same manner and with the same functionality, data integrity and performance.
However, Microware provides no assurance that its software products contain all
the necessary software routines and programs for the accurate calculation,
display, storage and manipulation of data involving dates on or after January 1,
2000. Any non-compliance of Microware's software products could have a material
adverse effect on its business, financial condition and results of operations.

         Additionally, the majority of Microware's software products are
combined by its customers with non-Microware software programs or hardware
devices. Such non-Microware products could be non-compliant, causing Year 2000
compliance issues for Microware's customers. Any such Year 2000 issues could
affect customers' demand for Microware products, which could have a material
adverse effect on Microware's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Year 2000 Issues"

         DEPENDENCE ON PROPRIETARY TECHNOLOGY AND RISK OF TECHNOLOGY LITIGATION.
Because substantially all of the Company's revenues are derived from OS-9 and

                                      15
<PAGE>

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

                                      16
<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
88,000 square feet. Annual mortgage payments for the Company's main operating
facility total approximately $600,000. In December 1998, the Company began
subletting excess capacity in its main operating facility in order to reduce its
operating costs associated with the facility. As of June 1, 1999, the Company
had sublet approximately 21,000 square feet of its main operating facility and
will continue to sublet additional excess capacity in the future. The Company
also leases under cancelable terms approximately 5,000 square feet in Tokyo,
Japan for an annual rental payment of approximately $200,000. The Company also
leases numerous domestic and international sales and support offices for an
aggregate annual rental payment of approximately $400,000.
The Company believes that additional space will be available as needed.

                                      17
<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.

                                      18
<PAGE>

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

         Not applicable.

                                      19

<PAGE>

 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
                Name                     Age             Position
<S>                                      <C>     <C>
Kenneth B. Kaplan                         46     President, Chief Executive
                                                 Officer and Director

M. Denis Connaghan                        49     Executive Vice President,
                                                 Chief Operating Officer,
                                                 Secretary and Director

George E. Leonard                         58     Executive Vice President,
                                                 Chief Financial Officer,
                                                 Treasurer and Assistant
                                                 Secretary

James H. Boswell                          49     Vice President of Sales

Kent E. Thompson                          32     Chief Accounting Officer,
                                                 Controller and Assistant
                                                 Treasurer

Shigehiro Ishibashi                       58     President, Microware Systems
                                                 Kabushiki Kaisha (subsidiary)

Martin Allen                              46     Managing Director European
                                                 Operations and Director
</TABLE>

         Mr.  Kaplan has served as President and Chief  Executive  Officer of
the Company since he co-founded it 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 boards 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 was appointed by the Board
of Directors to fill a vacant Class II Director position in July 1997. 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. Leonard joined the Company in August 1998 as Executive Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary. Prior to
joining the Company, from July 1996 to July 1998, Mr. Leonard was the Vice
President and Chief Financial Officer and a director of Western Pacific
Airlines, based in Colorado Springs, Colorado. Western Pacific Airlines filed
for bankruptcy protection under Chapter 11 on October 4, 1997 and converted its
filing to Chapter 7 in July 1998. Mr. Leonard also served as Chairman and Chief
Executive Officer of Consumer Guaranty Corporation of Phoenix, Arizona,
President and CEO of GEL Management Corporation, Chairman and Chief Executive

                                      20
<PAGE>

Officer of AmBank Holding Company, and Executive Vice President, Chief Financial
Officer, Chief Lending Officer and Chief Banking Officer and a Director of
MeraBank from 1975 to 1996. Mr. Leonard holds as B.S. degree from the United
States Naval Academy and an M.B.A from the University of Chicago

         Mr.  Boswell  joined the Company in February  1999 as Vice
President of Sales.  From  November 1995 until joining the Company,  Mr.
Boswell  served with Paradigm  Technology,  Inc. of Milpitas,  California,
where he was sucessively  Director of Marketing and Vice  President of Sales
and  Marketing.  From April 1994 to November  1995, Mr. Boswell was a
Strategic Sales Manager with Sharp  Microelectronics of San Jose,
California.  From 1989 to 1994 Mr. Boswell held various positions with
Hitachi America,  Ltd.,  including Regional Sales Manager.  Mr. Boswell has
held other electronics  sales,  marketing,  and operations  positions with
LSI Logic,  Advanced Micro Devices,  and Hewlett  Packard.  Mr.  Boswell
holds a B.S.  degree  from the  University  of New Mexico  and an M.B.A.
from the University of Arizona.

         Mr. Thompson has served as Chief  Accounting  Officer,  Controller
and Assistant  Treasurer of the Company since August 1998.  Prior to that, he
served as Corporate  Controller  from 1996,  and served as  International/New
Media  Controller  since joining the Company in March 1995.  Prior to joining
the Company,  Mr. Thompson worked for the international  public  accounting
firm KPMG Peat Marwick LLP. Mr. Thompson holds a B.B.A.  degree in Accounting
from the  University  of Iowa and is  currently  pursuing  an M.B.A.  from
Drake  University.  Mr.  Thompson  is a Certified Public Accountant.

         Mr. Ishibashi has served as President and  Representative  Director
of the Company's  Japanese  subsidiary since January 1998. Prior to joining
Microware,  Mr. Ishibashi served as President and  Representative  Director
of Autodesk Japan.  Prior to joining Autodesk Japan,  Ishibashi held various
executive  positions at Burr-Brown Japan, including Vice President,
Pan-Pacific Business Unit and President and Representative  Director of
Burr-Brown Japan Ltd. Mr.  Ishibashi is not an officer or director of the
Company.  However,  the nature of his duties with respect to the Company's
subsidiary may mean he is deemed to be an executive officer under applicable
SEC rule.

         Mr.  Allen was  appointed  by the Board of  Directors  of the
Company  to fill a vacant  Class I Director position in May 1999.  Mr. Allen
has served as Managing  Director of European  Operations  since January 1996
where he is  responsible  for  overall  business  activities  for  the
Company's  United  Kingdom,  German,  and  French operations.  From 1993 to
1995,  he was  Managing  Director of  Microware  U.K.  Mr. Allen is not an
officer of the Company.  However,  the nature of his duties with respect to
the  Company's  subsidiaries  may mean he is deemed to be an executive
officer under applicable SEC rule.

         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.

                                      21

<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 closing price of the Company's common stock, no par
value (the "Common Stock"), as reported by the Nasdaq National Market as of
April 30, 1999 was $1.625 per share. The following table sets forth the low and
high closing sales prices per share for the Company's common stock on the Nasdaq
National Market for the quarter indicated.

<TABLE>
<CAPTION>

     Fiscal 1998                                                            Low        High
<S>                                                                      <C>        <C>
      Quarter ended June 30, 1997                                          $6.188     $10.250
      Quarter ended September 30, 1997                                     $4.875      $8.500
      Quarter ended December 31, 1997                                      $3.500      $6.125
      Quarter ended March 31, 1998                                         $4.130      $6.250

     Fiscal 1999                                                            Low         High

      Quarter ended June 30, 1998                                          $4.500      $6.000
      Quarter ended September 30, 1998                                     $3.063      $4.875
      Quarter ended December 31, 1998                                      $1.563      $3.500
      Quarter ended March 31, 1999                                         $1.875      $4.375

</TABLE>

         As of April 30, 1999, there were approximately 300 shareholders of
record of the Company's Common Stock. Certain recordholders are brokers and
other institutions holding on behalf of shareholders. The Company has estimated
the total number of such shareholders to be 5,000.

         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.

                                      22
<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 thousands, except per share data)
<TABLE>
<CAPTION>

                                                                  Year ended March 31,
                                        -----------------------------------------------------------------------
                                              1995          1996           1997          1998         1999
<S>                                         <S>           <S>            <S>           <S>           <S>
Revenues                                    $18,899       $23,655        $26,134       $17,724       $16,615
Cost of revenues                              3,755         5,100          6,969         5,946         4,844
                                        -------------- ------------- ------------- ------------- --------------
Gross profit                                 15,144        18,555         19,165        11,778        11,771

Operating expenses:
   Research & development                     5,649         5,009          7,155         7,223         6,772
   Sales & marketing                          5,614         8,421         10,819        10,148        11,474
   General & administrative
                                              3,330         3,899          3,415         4,485         3,578
   Special charges                              166             -            438           940             -
                                        -------------- ------------- ------------- ------------- --------------

                                             14,759        17,329         21,827        22,796        21,824
                                        -------------- ------------- ------------- ------------- --------------

Operating profit(loss)                          385         1,226         (2,662)      (11,018)      (10,053)

Other income (expense):
   Foreign currency gain
    (loss), net                                 293            13            (30)          (79)           91
   Gain on sale of land
    and building                                  -             -              -           215           140
   Gain on sale
    of investment                                 -             -              -           881             -
   Interest (expense)
    income, net                                (132)          283          1,118           265           (35)
                                        -------------- ------------- ------------- ------------- --------------
                                                161           296          1,088         1,282           196

                                        -------------- ------------- ------------- ------------- --------------
Earnings (loss) before
 income taxes                                   546         1,522         (1,574)       (9,736)       (9,857)
Income tax(benefit)
 expense                                       (375)          146             (3)          210            81

Net earnings (loss)                            $921        $1,376        ($1,571)      ($9,946)      ($9,938)
                                        -------------- ------------- ------------- ------------- --------------
                                        -------------- ------------- ------------- ------------- --------------
Basic earnings (loss)
 per share (1)                                $0.09         $0.12         ($0.11)       ($0.69)       ($0.68)
                                        -------------- ------------- ------------- ------------- --------------
                                        -------------- ------------- ------------- ------------- --------------

Shares used in per share calculation
 - basic (1)                                 10,402        11,090         13,754        14,378        14,718
                                        -------------- ------------- ------------- ------------- --------------
                                        -------------- ------------- ------------- ------------- --------------
Diluted earnings (loss)
 per share (1)                                $0.08         $0.11         ($0.11)       ($0.69)       ($0.68)
                                        -------------- ------------- ------------- ------------- --------------
                                        -------------- ------------- ------------- ------------- --------------

Shares used in
 per share calculation
 - diluted (1)                               12,063        12,930         13,754        14,378        14,718
                                        -------------- ------------- ------------- ------------- --------------
                                        -------------- ------------- ------------- ------------- --------------

</TABLE>

                                      23
<PAGE>

<TABLE>
<CAPTION>

                                                                  As of March 31,
                                        -----------------------------------------------------------------------
                                            1995           1996          1997          1998          1999
<S>                                         <C>           <C>             <S>         <S>          <S>
Balance Sheet Data:
   Cash & short-term
    investments                              $1,516       $12,337         $19,962     $13,620       $ 7,527
   Working capital                            1,479        13,300          23,024      14,414         7,908
   Total assets                              12,124        24,938          49,083      37,499        27,534
   Total long-term
    debt (2)                                  1,446         1,227           8,076       6,984         6,918
   Total shareholders'
    equity                                    5,559        18,543          34,726      25,356        15,943

</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.

                                      24

<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 2000 and known
trends and uncertainties in the business. Words such as "expects",
"anticipates", "intends", "believes", "plans", "seeks", "estimates" and similar
expressions or variations of these words are intended to identify
forward-looking statements, but are not the only means of identifying
forward-looking statements. Additionally, statements that refer to Microware's
estimated or anticipated future results, sales or marketing strategies, new
product development or performance or other non-historical facts are
forward-looking and reflect Microware's current perspective of existing
information. Forward-looking statements are inherently subject to risks and
uncertainties that cannot be predicted or quantified, and actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements depending on a variety of factors including the
volume and timing of orders received during the quarter, the Company's ability
to successfully market its products, the Company's ability to keep pace with its
competition and with rapid technological change, the Company's ability to manage
turnover in its sales and marketing and other personnel and to attract and
maintain personnel generally, as well as other risk factors mentioned throughout
this Annual Report and in the Company's other filings with the Securities and
Exchange Commission. Readers are urged not to place undue reliance on
forward-looking statements and Microware disclaims any obligation to update any
of the forward-looking statements contained in this Report to reflect any future
events or developments. The Company's operating results have varied
significantly from quarter to quarter in the past, and the future operating
results of the Company may fluctuate as a result of the above and other risk
factors detailed in this Annual Report and other documents filed by the Company
with the Securities and Exchange Commission. Due to all of the foregoing
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future performance. In prior years, the Company's actual financial
performance has not always met market expectations and the Company has
experienced significant quarterly losses. It is likely that, in some future
quarter, the Company's financial performance will again fall below market
expectations.

OVERVIEW
         Microware develops, markets and supports 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 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

                                      25
<PAGE>

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

         A key element of the Company's long-term strategy is to develop
products which can be embedded into successful, high volume customer products;
thereby significantly increasing license run-time royalty fees. Any increase in
the percentage of revenues attributable to license run-time royalties will
depend on the Company's successful negotiation of license run-time royalties and
on the successful commercialization by the Company's customer of the underlying
product. To date, the Company has been negatively impacted by target markets,
such as cellular phones, two-way paging, personal Internet devices and digital
and interactive television, emerging much slower than anticipated. In addition,
there can be no assurances that the Company will be successful when the markets,
for which the Company products are targeted, emerge.

                                      26

<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,
                                        ----------------------------------------------------------------------------------
                                                  1997                       1998                         1999
Revenues:                               -------------------------     ----------------------     -------------------------
<S>                                          <C>           <C>          <C>             <C>          <C>            <C>
  Product                                    $16,586        64%         $12,047          68%         $12,313         74%
  Services                                     9,548        36            5,677          32            4,302         26
                                             -------       ---          -------         ---          -------        ---
                                              26,134       100           17,724         100           16,615        100
                                             -------       ---          -------         ---          -------        ---
Cost of revenues:
  Product                                      3,046        12            2,745          15            2,613         16
  Services                                     3,923        15            3,201          18            2,231         13
                                             -------       ---          -------         ---          -------        ---
                                               6,969        27            5,946          33            4,844         29
                                             -------       ---          -------         ---          -------        ---
    Gross profit                              19,165        73           11,778          67           11,771         71
                                             -------       ---          -------         ---          -------        ---
Operating expenses:
  Research &  development                      7,155        27            7,223          41            6,772         41
  Sales and marketing                         10,819        41           10,148          57           11,474         69
  General & administrative                     3,415        13            4,485          25            3,578         21
  Special charges                                438         2              940           6                -          -
                                             -------       ---          -------         ---          -------        ---
                                              21,827        83           22,796         129           21,824        131
                                             -------       ---          -------         ---          -------        ---
      Operating loss                          (2,662)      (10)         (11,018)        (62)         (10,053)       (60)
                                             -------       ---          -------         ---          -------        ---
Other income (expense):
  Foreign currency (loss) gain, net              (30)        *              (79)          *               91          *
  Gain on sale of land and building                -         -              215           1              140          1
  Gain on sale of investment                       -         -              881           5                -          -
  Interest income (expense), net               1,118         4              265           1              (35)         *
                                             -------       ---          -------         ---          -------        ---
                                               1,088         4            1,282           7              196          1
                                             -------       ---          -------         ---          -------        ---
    Loss before income tax (benefit)
         expense                              (1,574)       (6)          (9,736)        (55)          (9,857)       (59)
Income tax (benefit) expense                      (3)        *              210           1               81          *
                                             -------       ---          -------         ---          -------        ---
    Net loss                                 $(1,571)       (6)%        $(9,946)        (56)%        $(9,938)       (59)%
                                             -------       ---          -------         ---          -------        ---
                                             -------       ---          -------         ---          -------        ---

</TABLE>

*Insignificant

                                      27
<PAGE>

FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998

         REVENUES. Total revenues decreased 6.3% or $1.1 million, from $17.7
million in fiscal 1998 to $16.6 million in fiscal 1999. During fiscal 1998, the
Company experienced significant turnover in its sales personnel, particularly in
North America and Japan. During fiscal 1999, the turnover in Japan was
stabilized; however the Company experienced significant attrition in its
marketing personnel and continued to experience significant turnover in its
North American sales personnel. The significant turnover experienced by the
Company has had, and may continue to have, an adverse effect on the Company's
operations, the extent of which cannot presently be determined. Product revenues
increased 2.2%, or $266,000, from $12.0 million in fiscal 1998 to $12.3 million
in fiscal 1999. The increase in product revenues from fiscal 1998 to fiscal 1999
primarily stemmed from non-refundable prepaid royalties and license fees from
Motorola for the Company's Digital TV and Java product offerings. The Company
continues to be negatively impacted by the slower than anticipated emergence of
various target markets, such as cellular phones, two-way paging, personal
Internet devices and digital and interactive television. Product revenues from
certain strategic customers including Motorola, Northern Telecom Ltd., Ericsson
and the Company's DAVID licensees, continued to fall below management
expectations. Future growth in product revenues will continue to be
substantially dependent on the Company's ability to develop cost effective sales
channels in North America and abroad and the Company's customers' timely and
successful development and distribution of new products using the Company's
products. Each of these factors makes product revenues difficult to accurately
forecast on a quarterly or annual basis. Services revenues decreased 24.2%, or
$1.4 million, from $5.7 million in fiscal 1998 to $4.3 million in fiscal 1999.
The decrease in services revenues primarily resulted from a decrease in funded
development of advanced processor ports along with, to a lessor extent, a
reduction in DAVID custom services.

         International revenues represented 50%, 59% and 64% of total revenues
in fiscal 1997, 1998 and 1999, respectively. The percentage increase in fiscal
1999 resulted primarily from a reduction in U.S. revenue compounded by an
overall increase in revenues from Europe. The Company expects international
sales to continue to represent a significant portion of its revenues although
the percentage may fluctuate from period to period. In Europe and Japan,
revenues and expenses are primarily denominated in local currencies. The
Company's operating and pricing strategies take into account changes in exchange
rates over time. However, the Company's results of operations may be
significantly affected in the short-term by fluctuations in foreign currency
exchange rates.

         COST OF REVENUES. Cost of product revenues includes direct and indirect
costs for documentation, production quality, 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 direct third party royalty expense and amortization expense of
purchased and capitalized software. Cost of services revenues includes direct
and indirect costs for technical phone support, training and education, and
custom engineering.

         Total cost of revenues decreased 18.5%, or $1.1 million, from $5.9
million in fiscal 1998 to $4.8 million in fiscal 1999. Overall cost of revenues
decreased due to the reduction in total revenues. As a percentage of product
revenues, cost of product revenues decreased from 22.8% in fiscal 1998 to 21.2%
in fiscal 1999. Cost of product revenues decreased as a percentage of product
revenues primarily as a result of marginal efficiencies achieved in the direct
costs of producing, packaging and shipping products to customers. As a
percentage of services revenues, cost of services revenues decreased from 56.4%
in fiscal 1998 to 51.9% in fiscal 1999. The percentage decrease between

                                      28
<PAGE>

periods primarily resulted from higher margin custom contract engineering work
being performed during fiscal 1999 as compared fiscal 1998.

         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 decreased 6.2%, or $451,000, from
$7.2 million in fiscal 1998 to $6.8 million in fiscal 1999. The reduction in
research and development expense is a primary result of fewer engineers employed
by the Company during fiscal 1999. 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. Consequently, 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. Sales
and marketing expense also includes costs of advertising, public relations and
attendance at industry trade shows. Sales and marketing expense increased 13.1%,
or $1.3 million, from $10.2 million in fiscal 1998 to $11.5 million in fiscal
1999. The overall increase was primarily attributable to the Company's continued
investment in its domestic and international sales and distribution channels and
support infrastructures. In fiscal 2000, the Company expects to continue
investing in the expansion and development of its sales channels and the
upgrading of its infrastructure in addition to increasing marketing activity
associated with the release of new products.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resources and
facilities management, as well as legal, auditing and certain recruiting and
relocation expenses. General and administrative expenses decreased 20.2%, or
$907,000, from $4.5 million in fiscal 1998 to $3.6 million in fiscal 1999. The
decrease in general administrative expenses primarily resulted from a reduction
in recruiting and relocation costs along with costs associated with the move to
the Company's new headquarters facility.

         SPECIAL CHARGES. No special charges were incurred during the 1999
fiscal year. During the fiscal year ended March 31, 1998, the Company determined
that due to revised estimates of the marketability of certain products under
development, a special charge of $940,000 was appropriate to more adequately
reflect the residual value of certain intangible assets. Included in this charge
was approximately $566,000 of deferred development costs in the form of prepaid
royalties, approximately $202,000 relating to goodwill associated with
MicroMall, Inc., a subsidiary of the Company, and approximately $172,000
relating to the write-off of previously capitalized purchased technology.

         OTHER INCOME (EXPENSE). Other income decreased 84.7%, or $1.1 million,
from $1.3 million in fiscal 1998 to $196,000 in fiscal 1999. The decrease
between periods resulted from gains on the sale of the Company's interest in
Unwired Planet Inc. and its former headquarters facility of $881,000 and
$215,000, respectively, in fiscal 1998. In addition, other income decreased due
to a reduction of interest income due to cash used in operations, and an
increase in interest expense related to the Company's long-term debt on its new
headquarters facility.

                                      29

<PAGE>

FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997

         REVENUES. Total revenues decreased 32.2% or $8.4 million, from $26.1
million in fiscal 1997 to $17.7 million in fiscal 1998. Product revenues
decreased 27.4%, or $4.5 million, from $16.6 million in fiscal 1997 to $12.1
million in fiscal 1998. The decrease in product revenues from fiscal 1997 to
fiscal 1998 stemmed from a reduction in large OEM licenses along with a
reduction in nonrefundable prepaid royalties recognized from customers. Services
revenues decreased 40.5%, or $3.9 million, from $9.5 million in fiscal 1997 to
$5.6 million in fiscal 1998. The decrease in services revenues primarily
resulted from a decrease in funded development of advanced processor ports along
with, to a lessor extent, a reduction in DAVID custom services.

         International revenues represented 67%, 50% and 59% of total revenues
in fiscal 1996, 1997 and 1998, respectively. The Company expects international
sales to continue to represent a significant portion of its revenues although
the percentage may fluctuate from period to period. In Europe and Japan,
revenues and expenses are primarily denominated in local currencies. In fiscal
1997 and 1998, the U.S. dollar strengthened against many foreign currencies
which resulted in relatively lower revenues when translated into U.S. dollars.

         COST OF REVENUES. Total cost of revenues decreased 14.7%, or $1.0
million, from $7.0 million in fiscal 1997 to $6.0 million in fiscal 1998.
Overall cost of revenues decreased due to the reduction in total revenues. As a
percentage of product revenues, cost of product revenues increased from 18.4% in
fiscal 1997 to 22.8% in fiscal 1998. Cost of product revenues increased as a
percentage of product revenues primarily as a result of an increase in
amortization expense relating to purchased software and an increase in direct
third party royalty expense. Amortization of capitalized software amounted to
$201,000 and $151,000 in fiscal 1997 and 1998, respectively. As a percentage of
services revenues, cost of services revenues increased from 41.1% in fiscal 1997
to 56.4% in fiscal 1998. The percentage increase between periods primarily
resulted from small, lower margin custom contract engineering work being
performed during fiscal 1998 compared to large, higher margin custom contract
engineering work being performed in fiscal 1997.

         RESEARCH AND DEVELOPMENT. Research and development expense remained at
$7.2 million in fiscal 1997 and 1998 although such expense constituted a greater
percentage of revenues in fiscal 1998 due to lower revenues.

         SALES AND MARKETING. Sales and marketing expense decreased 6.2%, or
$671,000, from $10.8 million in fiscal 1997 to $10.2 million in fiscal 1998. The
overall decrease was primarily attributable to significant turnover in the
Company's sales force in North America and Japan.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 31.3%, or $1.1 million, from $3.4 million in fiscal 1997 to $4.5
million in fiscal 1998. The increase in general administrative expenses resulted
from costs incurred due to organizational changes in the Company's operations
during fiscal 1998. These costs included severance and related benefits
associated with the elimination and resignation of employees of approximately
$175,000, moving costs to the Company's new headquarters facility of
approximately $80,000 and recruiting and relocation costs associated with the
hiring of new executive management and sales personnel in the U.S. and Japan of
approximately $700,000.

                                      30
<PAGE>

         SPECIAL CHARGES. During the fiscal year ended March 31, 1998, the
Company determined that due to revised estimates of the marketability of certain
products under development, a special charge of $940,000 was appropriate to more
adequately reflect the residual value of certain intangible assets. Included in
this charge was approximately $566,000 of deferred development costs in the form
of prepaid royalties, approximately $202,000 relating to goodwill associated
with MicroMall, Inc., a subsidiary of the Company, and approximately $172,000
relating to the write-off of previously capitalized purchased technology.

         OTHER INCOME (EXPENSE). Other income increased 17.8%, or $194,000, from
$1.1 million in fiscal 1997 to $1.3 million in fiscal 1998. The increase between
periods resulted from gains on the sale of the Company's interest in Unwired
Planet Inc. and its former headquarters facility of $881,000 and $215,000,
respectively. These increases were offset by a reduction of interest income due
to cash used in operations, and an increase in interest expense related to the
Company's long-term debt on its new headquarters facility.

                                      31
<PAGE>

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
and marketing expenses, changes in Company and competitors' pricing policies,
the timing of significant orders, the mix of products sold, the mix of
international versus domestic revenues, currency fluctuations, the existence of
product errors and the hiring and training of additional staff. Furthermore,
delays in closing product licensing transactions or in completion of custom
contract engineering work during any quarter could cause quarterly revenues and
net earnings for that quarter to fall below anticipated levels. The Company
derives a significant portion of its revenues from a relatively small number of
large account customers, therefore any delay in the consummation of business
with this small number of customers could significantly impact the Company's
quarterly performance. The majority of the Company's revenues in a quarter has
been historically derived from orders received in the last month of that
quarter, which makes the Company's financial performance more susceptible to an
unexpected downturn in business and makes quarterly results difficult to
forecast. In addition, the Company's expense levels are based on present
expectations of future revenue levels, and a shortfall in revenues could result
in a disproportionate decrease in the Company's net earnings. As the markets in
which the Company compete 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, 1999, the Company had approximately
$7,480,000 in working capital and $7,527,000 in cash and short-term investments
as compared to $14,414,000 in working capital and $13,620,000 in cash and
short-term investments at March 31, 1998. The decrease in working capital and
cash and short-term investments resulted principally from the use of cash during
fiscal 1999 for operating activities.

         Cash used in operating activities amounted to $3,155,000, $8,859,000
and $6,310,000 for fiscal years 1997, 1998 and 1999, respectively. The cash used
in operations in fiscal 1998 primarily resulted from the net loss of $9,946,000.
Additionally significant uses of cash resulted from an increase in other assets
(including purchased software) of $2,843,000 and a decrease in accounts payable
of $1,144,000. These uses of cash in fiscal 1998 were partially offset by a
decrease in trade receivables of $2,837,000 and other reconciling items of
$2,238,000. The cash used in operations in fiscal 1999 primarily resulted from
the net loss of $9,938,000.

         Cash provided by (used in) investing activities was ($27,297,000),
$4,558,000 and $6,799,000 for fiscal years 1997, 1998 and 1999, respectively. In
fiscal 1997, uses of cash resulted from approximately $7,300,000 of cash being
used to purchase land and construct the Company's new corporate headquarters
facility. In addition, an approximate net $13,200,000 of cash

                                      32
<PAGE>

was used to purchase of short-term investments and $5,000,000 was used to
purchase the equity investment in Unwired Planet Inc. In fiscal 1998, cash
provided by investing activities resulted principally due to proceeds from
the sale of the Company's equity investment in Unwired Planet Inc., and the
Company's former headquarters facility of $5,885,000 and $1,640,000,
respectively, offset principally by capital expenditures. In fiscal 1999,
cash provided by investing activities resulted principally from net
maturities of short-term investments of $6,924,000.

         Cash provided by (used in) financing activities was $24,972,000,
($508,000) and $186,000 for fiscal years 1997, 1998 and 1999, respectively. 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 on its new head quarters facility. In fiscal
1998, cash used in financing activities primarily resulted from the payoff of
the Company's construction note, partially offset by proceeds received on the
Company's new long-term promissory note and the issuance of common stock
resulting from stock options exercised. In fiscal 1999, cash provided by
financing activities primarily resulted from proceeds received from the issuance
of common stock due to stock options exercised.

         As of March 31, 1999, the Company had approximately $6,918,000 of
long-term debt, including current portion, outstanding relating to its
headquarters building. Monthly payments are $49,000, including interest at
7.46%, with the unpaid balance due January 1, 2008. In accordance with the loan
agreement, the Company has provided the lender an irrevocable standby letter of
credit in the amount of $724,000. In order to obtain the irrevocable standby
letter of credit, the Company has pledged a $724,000 U.S. Treasury note as
collateral. 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
the end of fiscal 2000.

         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 by attempting to keep intercompany
balances current and minimizing assets in any one currency denomination.
However, due to recent losses, intercompany balances have increased and 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. This
dependence on international operations subjects the Company to certain risks,
including tariffs and other barriers, difficulty in staffing and managing
foreign subsidiary operations, difficulty in managing distributors and
resellers, difficulty in accounts receivable collection, foreign currency
exposure and adverse tax consequences. The Company is also subject to the risks
associated with the imposition of protective import or export legislation and
regulations by the United States or other countries. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented on the Company's products in the future. There can be no assurance
that these factors or the adoption of restrictive

                                      33
<PAGE>

policies will not have a material adverse effect on the Company's business,
financial condition and results of operations.


RECENT ACCOUNTING PRONOUNCEMENTS

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

YEAR 2000 ISSUES

         Many currently installed computer systems and software products include
coding to accept only two-digit entries in the date code field instead of four
digit entries and therefore cannot distinguish dates prior to January 1, 2000
from dates on or after January 1, 2000. Systems and software that do not
properly recognize such information may generate erroneous data or fail. Such
systems need to be upgraded or replaced in order to function properly or, in
other words, be Year 2000 compliant. Significant uncertainty exists in the
computer systems and software industry concerning the potential effects
associated with non-compliance.

         Microware has conducted Year 2000 compliance reviews of current
versions of its products. The reviews include assessment, implementation,
validation, testing and contingency planning. Microware believes that all of its
most current product releases are Year 2000 compliant. However, there can be no
assurance that all of Microware's customers will implement these compliant
releases in a timely manner. This could lead to failure of customer systems and
product liability claims against Microware. While copies of old versions of
Microware's software may be embedded in deployed products, some of which may be
used in mission critical functions, Microware has made Year 2000 compliant
upgrades commercially available to all of its past licensees, and believes that
the terms of its license agreements preclude any liability for Year 2000
compliance-related failures in such products. However, even if Microware
products are Year 2000 compliant, Microware may be subject to claims based on
Year 2000 compliance issues in the products of other companies or issues arising
from the integration of multiple products within a system. The costs of
defending and resolving Year 2000 compliance-related disputes, including
consequential damages, could have a material adverse effect on Microware's
business, financial condition and results of operations.

         As part of its compliance program, Microware has tested software
obtained from third parties which has been integrated with Microware products
and in addition has sought assurances from respective third parties that their
software is Year 2000 compliant. However, despite this testing by Microware and
assurances provided by third party suppliers, third party software may not be
Year 2000 compliant. Errors or defects in Microware or third party products may
result in loss of revenue, diversion of product development resources or other
damage to Microware which could have a material adverse effect on Microware's
business, financial condition and results of operations.

         Microware has initiated an assessment of its worldwide business
systems, which include, product development, sales and marketing, finance, human
resources and order fulfillment systems. Microware is working with and

                                      34
<PAGE>

monitoring critical suppliers to determine that their products and/or services
are year 2000 compliant. Microware believes the software and hardware it uses
internally is presently Year 2000 compliant and is not aware of any material
operational issues or costs that will be incurred in the future. However,
Microware provides no assurance that it will not incur materially adverse
consequences caused by undetected Year 2000 compliant errors or defects in its
business systems.

         All costs associated with Microware's Year 2000 compliance are expensed
as incurred and have not been accounted for separately. These costs to date have
not been material. Additional costs related to Year 2000 compliance are not
expected to be material. Microware is currently developing contingency plans to
be implemented as part of its Year 2000 compliance efforts. Depending on the
system in question, these plans could include accelerated replacement of
affected equipment, increased work hours for Company personnel or use of
contract personnel or possible manual workarounds, in addition to other similar
approaches. If Microware is required to implement contingency plans, it could
have a materially adverse effect on Microware's business, financial condition
and results of operations.

         Microware's ability to achieve Year 2000 compliance, in all areas of
its business, could be adversely effected by, among other things, the
availability and cost of programming and testing resources, vendors' or
suppliers' ability to modify proprietary software and other unanticipated
problems identified in Year 2000 compliance reviews and assessments. Such
difficulties could have a material adverse effect on Microware's business,
financial condition and results of operations.

"EURO" ISSUES
         On January 1, 1999, the European Union ("EU") introduced a new currency
(the "Euro"). The Euro is intended to enable the EU to blend the economies of
the EU's member states into one large market with unrestricted and unencumbered
trade and commerce across borders. Eleven European countries are participating
in the first membership wave, namely the Netherlands, Belgium, Luxembourg,
Germany, France, Ireland, Finland, Austria, Italy, Spain and Portugal. Other
member states are expected to join in the years to come. Legacy currencies will
remain legal tender in the participating countries for a transition period
between January 1999 and January 2002. During the transition period, non-cash
payments can be made in the Euro, and parties can elect to pay for goods and
services and transact business using either the Euro or a legacy currency. The
Company does not presently expect that the introduction and use of the Euro will
have a material adverse effect on the Company's financial position, results of
operations or cash flows during the transition period. The significant
requirement of companies during the transitionary period is the ability to
invoice and accept payment in Euro denominated transactions if a customer makes
this request. The Company will continue to evaluate issues involving the
introduction of the Euro.

                                      35



<PAGE>

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY
         Microware's exposure to market risk associated with changes in interest
rates relates primarily to debt obligations as all financial assets are short
term in nature. The Company is exposed to changes in fair values of its
long-term debt that carries a fixed interest rate. As discussed in Note 5 of
Notes to Consolidated Financial Statements, Microware had total long-term debt
of $6,918,000 at March 31, 1999.

FOREIGN CURRENCY RISK
         Microware transacts business in various foreign currencies, primarily
Japanese yen and certain European currencies, as discussed in Item 1 and Note 10
of Notes to Consolidated Financial Statements, and accordingly is exposed to
fluctuations in foreign currency markets. The Company does not enter into
foreign currency hedging transactions.

                                      36

<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."

                                      37


<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

         None.

                                      38
<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 1999 Annual Meeting of Shareholders, expected to be filed
pursuant to Regulation 14A no later than 120 days following March 31, 1999.

                                      39

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, 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, 1998 and 1999
     Consolidated Statements of Operations for the three years ended March 31,
        1999
     Consolidated Statements of Shareholders' Equity for the three years
        ended March 31, 1999
     Consolidated Statements of Cash Flows for the three
        years ended March 31, 1999
     Notes to Consolidated Financial Statements


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

<TABLE>
<CAPTION>

EXHIBIT NO.                                 DESCRIPTION
----------------------------------------------------------------
<S>       <C>
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      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.
10.6      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.


                                      40
<PAGE>

10.7      1995 Stock Option Plan of the Company, as amended, filed as Exhibit
          10.8 to the Form 10-K Report of the Company for the fiscal year ended
          March 31, 1998, and hereby incorporated by reference.
10.8      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.
10.9      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.
21        Subsidiaries of the Registrant.
23        Consent of KPMG Peat Marwick LLP
27        Financial Data Schedule (EDGAR version only).
</TABLE>

(b) Reports on Form 8-K - None.

                                      41

<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 29th day of June,
1999.

                                                 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, George E. Leonard,
Kent E. Thompson, 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 and in his name, place and stead, in any and all
capacities, to sign 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 Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                    TITLE                             DATE

<S>                                        <C>                                        <C>
          /S/ KENNETH B. KAPLAN            Chairman, President & Chief Executive
-----------------------------------------  Officer (Principal Executive Officer)
            Kenneth B. Kaplan                                                          June 29, 1999

          /S/ M. DENIS CONNAGHAN           Director, Executive Vice President, Chief
-----------------------------------------  Operating Officer and Secretary             June 29, 1999
           M. Denis Connaghan

          /S/ GEORGE E. LEONARD            Executive Vice President, Chief Financial
-----------------------------------------  Officer, Treasurer and Assistant
             George E. Leonard             Secretary (Principal Financial Officer)     June 29, 1999

          /S/ KENT E. THOMPSON             Chief Accounting Officer, Controller and
-----------------------------------------  Assistant Treasurer (Principal Accounting   June 29, 1999
            Kent E. Thompson               Officer)

            /S/ MARTIN ALLEN
-----------------------------------------  Director                                     June 29, 1999
              Martin Allen

                                      42
<PAGE>


          /S/ ROBERT W. BIGONY
-----------------------------------------  Director                                    June 29, 1999
            Robert W. Bigony


             /S/ ARTHUR DON
-----------------------------------------  Director                                    June 29, 1999
               Arthur Don


           /S/ JAMES A. GORDON
-----------------------------------------   Director                                   June 29, 1999
             James A. Gordon


          /S/ DANIEL P. HOWELL
-----------------------------------------   Director                                   June 29, 1999
            Daniel P. Howell


           /S/ DENNIS E. YOUNG
-----------------------------------------   Director                                   June 29, 1999
             Dennis E. Young
</TABLE>

                                      43

<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, 1998 and 1999 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, 1999. 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, 1998 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.


                                            KPMG PEAT MARWICK LLP

Des Moines, Iowa
April 23, 1999


                                      F-1

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                     March 31,
                                                                                             --------------------------
                                             Assets                                             1998           1999
                                             ------                                             ----           ----
<S>                                                                                        <S>             <S>
Current assets:
      Cash and cash equivalents                                                            $      2,009    $     2,840
      Short-term investments (note 5)                                                            11,611          4,687
      Trade receivables, net of allowance
          for doubtful accounts of $502
          and $485 (notes 2 and 4)                                                                4,064          3,593
      Income taxes receivable                                                                         6            122
      Inventories (note 4)                                                                           66             71
      Prepaid royalties                                                                             370              -
      Prepaid expenses and other current assets                                                     780            438
      Deferred tax assets (note 6)                                                                  465            473
                                                                                             -----------     ----------
          Total current assets                                                                   19,371         12,224
                                                                                             -----------     ----------
Property and equipment, net (notes 3 and 5)                                                      13,663         12,516
                                                                                             -----------     ----------
Other assets:
      Intangible assets, net of amortization (notes 1 and 4)                                      3,050          2,007
      Deposits and other (note 4)                                                                 1,415            787
                                                                                             -----------     ----------
          Total other assets                                                                      4,465          2,794
                                                                                             -----------     ----------
                                                                                           $     37,499    $    27,534
                                                                                             -----------     ----------
                                                                                             -----------     ----------
</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                                    1998             1999
                                     --------------------                                    ----             ----
<S>                                                                                     <S>              <S>
Current liabilities:
      Notes payable to banks (note 4)                                                   $        300     $         253
      Current installments of long-term debt (note 5)                                             66                71
      Accounts payable                                                                         1,386               927
      Accrued expenses                                                                         2,317             2,140
      Deferred revenues                                                                          832               812
      Income taxes payable                                                                        56               113
                                                                                          -----------      ------------
           Total current liabilities                                                           4,957             4,316
Long-term debt, less current installments (note 5)                                             6,918             6,847
Deferred income taxes (note 6)                                                                   268               428
                                                                                          -----------      ------------
           Total liabilities                                                                  12,143            11,591
                                                                                          -----------      ------------
Shareholders' equity (notes 7, 9 and 13):
      Series I preferred stock, no par value; 500,000
        shares authorized; none issued or outstanding                                              -                 -
      Common stock, voting, no par value; 50,000,000
        shares authorized; 14,778,092 and 15,154,992 shares issued;
        14,552,992 and 14,929,892 shares outstanding                                          36,735            37,065
      Retained earnings (deficit)                                                             (9,857)          (19,795)
      Cumulative adjustment from foreign currency translation                                   (745)             (550)
                                                                                          -----------      ------------
                                                                                              26,133            16,720
      Less cost of common shares acquired for the treasury,
        225,100 and 225,100 shares                                                               777               777
                                                                                          -----------      ------------
           Total shareholders' equity                                                         25,356            15,943
                                                                                          -----------      ------------
Commitments (note 14)
                                                                                        $     37,499     $      27,534
                                                                                          -----------      ------------
                                                                                          -----------      ------------
</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,
                                                                  -----------------------------------------------------------------
                                                                              1997                1998                  1999
                                                                              ----                ----                  ----
<S>                                                                    <C>                 <C>                <C>
Revenues (notes 2 and 10):
      Product                                                          $         16,586    $          12,047    $           12,313
      Services                                                                    9,548                5,677                 4,302
                                                                         ---------------     ----------------     -----------------
                                                                                 26,134               17,724                16,615
                                                                         ---------------     ----------------     -----------------
Cost of revenues:
      Product                                                                     3,046                2,745                 2,613
      Services                                                                    3,923                3,201                 2,231
                                                                         ---------------     ----------------     -----------------
                                                                                  6,969                5,946                 4,844
                                                                         ---------------     ----------------     -----------------
            Gross profit                                                         19,165               11,778                11,771
                                                                         ---------------     ----------------     -----------------
Operating expenses:
      Research and development                                                    7,155                7,223                 6,772
      Sales and marketing                                                        10,819               10,148                11,474
      General and administrative                                                  3,415                4,485                 3,578
      Special charges (note 12)                                                     438                  940                     -
                                                                         ---------------     ----------------     -----------------
                                                                                 21,827               22,796                21,824
                                                                         ---------------     ----------------     -----------------
            Operating loss                                                       (2,662)             (11,018)              (10,053)
                                                                         ---------------     ----------------     -----------------

Other income (expense):
      Foreign currency (loss) gain, net                                             (30)                 (79)                   91
      Gain on sale of land and building                                               -                  215                   140
      Gain on sale of investment                                                      -                  881                     -
      Interest expense                                                             (106)                (465)                 (525)
      Interest income                                                             1,224                  730                   490
                                                                         ---------------     ----------------     -----------------
                                                                                  1,088                1,282                   196
                                                                         ---------------     ----------------     -----------------
            Loss before income tax (benefit) expense                             (1,574)              (9,736)               (9,857)
Income tax (benefit) expense (note 6)                                                (3)                 210                    81
                                                                         ---------------     ----------------     -----------------
            Net loss (note 10)                                         $         (1,571)   $          (9,946)   $           (9,938)
                                                                         ---------------     ----------------     -----------------
                                                                         ---------------     ----------------     -----------------


Basic loss per share                                                   $           (.11)   $            (.69)   $             (.68)
                                                                         ---------------     ----------------     -----------------
                                                                         ---------------     ----------------     -----------------
Shares used in per share calculation - basic                                     13,754               14,378                14,718
                                                                         ---------------     ----------------     -----------------
                                                                         ---------------     ----------------     -----------------
Diluted loss per share                                                 $           (.11)   $            (.69)   $             (.68)
                                                                         ---------------     ----------------     -----------------
                                                                         ---------------     ----------------     -----------------
Shares used in per share calculation - diluted                                   13,754               14,378                14,718
                                                                         ---------------     ----------------     -----------------
                                                                         ---------------     ----------------     -----------------
</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>
                                                                                        Accumulated
                                                                             Retained      other                   Total
                                                   Preferred     Common      earnings  comprehensive   Treasury shareholders'
                                                     stock        stock     (deficit)      loss         stock      equity
                                                   ---------     ------     ---------  -------------   -------- -------------
<S>                                                <C>          <C>         <C>        <C>             <C>      <C>
Balance at March 31, 1996                           $ 5,001     $ 13,094     $ 1,660     $ (435)       $ (777)     $ 18,543

Comprehensive loss
     Net loss                                             -            -      (1,571)         -             -        (1,571)
     Currency translation adjustments                     -            -           -       (303)            -          (303)
                                                                                                                   --------
        Total comprehensive loss                                                                                     (1,874)
Issuance of common shares of stock                        -       19,046           -          -             -        19,046
Legal and other fees 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           -          -             -             -
                                                    -------    ---------   ---------    -------        ------      --------
Balance at March 31, 1997                                 -       36,152          89       (738)         (777)       34,726

Comprehensive loss
     Net loss                                             -            -      (9,946)         -             -        (9,946)
     Currency translation adjustments                     -            -           -         (7)            -            (7)
                                                                                                                   --------
        Total comprehensive loss                                                                                     (9,953)
Issuance of common shares of stock                        -          643           -          -             -           643
Legal and other fees incurred for
     issuance of common shares of stock                   -          (60)          -          -             -           (60)
                                                    -------     --------     -------     ------        ------      --------
Balance at March 31, 1998                                 -       36,735      (9,857)      (745)         (777)       25,356

Comprehensive loss
     Net loss                                             -            -      (9,938)         -             -        (9,938)
     Currency translation adjustments                     -            -           -        195             -           195
                                                                                                                   --------
        Total comprehensive loss                                                                                     (9,743)
Issuance of common shares of stock                        -          351           -          -             -           351
Legal and other fees incurred for
     issuance of common shares of stock                   -          (21)          -          -             -           (21)
                                                    -------      -------      ------     ------         ------     --------
Balance at March 31, 1999                           $     -     $ 37,065   $ (19,795)    $ (550)        $(777)     $ 15,943
                                                    -------      -------      ------     ------         ------     --------
                                                    -------      -------      ------     ------         ------     --------
</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,
                                                                                      ---------------------------------------------
                                                                                         1997            1998           1999
                                                                                         ----            ----           ----
<S>                                                                                 <C>             <C>            <C>
Cash flows from operating activities:
      Net loss                                                                      $      (1,571)  $     (9,946)  $     (9,938)
      Adjustments to reconcile net loss
          to net cash used in operating activities:
            Depreciation and amortization                                                   1,802          2,366          2,905
            Gain on sale of land and building                                                   -           (215)          (140)
            Write down of intangible and other assets                                           -            940              -
            Gain on sale of investment                                                          -           (881)             -
            Deferred income taxes                                                              17             74            150
            (Increase) decrease in trade receivables, net                                  (2,288)         2,837            526
            Decrease (increase) in income taxes receivable                                      4            201           (116)
            (Increase) decrease  in inventories                                               (58)            30             (5)
            (Increase) decrease in prepaid royalties                                       (1,005)            69            370
            (Increase) decrease in prepaid expenses and other current assets                  (95)          (469)           347
            (Increase) decrease in other assets                                            (1,749)        (2,843)           273
            Increase (decrease) in accounts payable                                           942         (1,144)          (499)
            Increase (decrease) in accrued expenses                                           905              8            (18)
            (Decrease) increase in deferred revenues                                           (9)           159           (221)
            (Decrease) increase in income taxes payable                                       (50)           (45)            56
                                                                                      ------------    -----------    -----------
            Net cash used in operating activities                                          (3,155)        (8,859)        (6,310)
                                                                                      ------------    -----------    -----------
Cash flows from investing activities:
      Capital expenditures                                                                 (9,089)        (4,559)          (790)
      Proceeds from sale of property and equipment                                              -          1,640            665
      Purchases of short-term investments                                                 (39,417)       (24,353)        (9,679)
      Maturities of short-term investments                                                 26,213         25,945         16,603
      Purchase of investment, at cost                                                      (5,004)             -              -
      Proceeds from sale of investment, net                                                     -          5,885              -
                                                                                      ------------    -----------    -----------
            Net cash (used in) provided by investing activities                           (27,297)         4,558          6,799
                                                                                      ------------    -----------    -----------
Cash flows from financing activities:
      Proceeds from issuance of notes payable to banks
          and long-term debt                                                                7,901         10,702              -
      Principal payments on notes payable to banks and long-term debt                      (1,553)       (11,793)          (144)
      Proceeds on issuance of common shares of stock                                       19,046            643            351
      Cost of issuance of common shares of stock                                             (422)           (60)           (21)
                                                                                      ------------    -----------    -----------
            Net cash provided by (used in) financing activities                            24,972           (508)           186
                                                                                      ------------    -----------    -----------
                                                                                           (5,480)        (4,809)           675
Effect of foreign currency exchange rate changes on cash                                      (99)            60            156
                                                                                      ------------    -----------    -----------
            Net (decrease) increase in cash and cash equivalents                           (5,579)        (4,749)           831
Cash and cash equivalents at beginning of year                                             12,337          6,758          2,009
                                                                                      ------------    -----------    -----------
Cash and cash equivalents at end of year                                            $       6,758   $      2,009   $      2,840
                                                                                      ------------    -----------    -----------
                                                                                      ------------    -----------    -----------
</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.; Microware
           Systems Corporate Park, Inc.; 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.


                                      F-7

<PAGE>

                    MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                 Notes to Consolidated Financial Statements, Continued

                      ($ in thousands, except per share amounts)

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

       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.

       INVESTMENTS

       In  October of 1996, Microware purchased a preferred stock interest in
           another company for $5,004. On February 20, 1998, the Company
           received net proceeds of $5,885 from the sale of the preferred stock.

       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, 1998 and 1999 consisted
           of the following:

<TABLE>
<CAPTION>
                                                                        1998
                                                   -----------------------------------------------
                                                                    Accumulated
                                                        Cost        amortization        Net
                                                        ----        -------------      -----
<S>                                                <C>            <C>              <C>
             Capitalized software
                  development costs                $      1,147   $        888     $      259
             Purchased software                           3,983          1,344          2,639
             Goodwill                                       323            323              -
             Patents, copyrights, and other                 518            366            152
                                                       --------       --------         ------
                                                   $      5,971   $      2,921     $    3,050
                                                       --------       --------         ------
                                                       --------       --------         ------

                                                                        1999
                                                   -----------------------------------------------
                                                                    Accumulated
                                                        Cost        amortization        Net
                                                        ----        -------------      -----
             Capitalized software
                  development costs                $      1,211   $      1,038     $      173
             Purchased software                           4,363          2,621          1,742
             Patents, copyrights, and other                 542            450             92
                                                       --------       --------         ------
                                                   $      6,116   $      4,109     $    2,007
                                                       --------       --------         ------
                                                       --------       --------         ------
</TABLE>

                                      F-8

<PAGE>

                      MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements, Continued

                       ($ 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 $201, $151, and $150 for the years
           ended March 31, 1997, 1998, and 1999, 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 not to exceed
           three years.

       Goodwill and patents, copyrights, and other are being amortized over 5 to
           15 year periods on the straight-line method.

       ADVERTISING

       Advertising costs incurred for the years ended March 31, 1997, 1998, and
           1999 were $764, $687, and $810, respectively.

       REVENUE RECOGNITION

       The Company adopted the provisions of the American Institute of Certified
           Public Accountants' (AICPA) Statement of Position (SOP) 97-2,
           "Software Revenue Recognition," as amended by SOP 98-4, "Deferral of
           the Effective Date of a Provision of SOP 97-2, "Software Revenue
           Recognition," effective April 1, 1998. SOP 97-2 and SOP 98-4 provide
           guidance on recognizing revenue on software transactions and
           supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not
           have a material impact on the Company's current licensing or revenue
           recognition practices. 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 written agreement for non-refundable prepaid royalties.

       Service revenues are derived primarily from custom contract engineering
           work, customer support (maintenance) agreements, and training and
           consulting services. Revenues from custom contract engineering work
           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.


<PAGE>

                     MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                 Notes to Consolidated Financial Statements, Continued

                       ($ in thousands, except per share amounts)

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

       REVENUE RECOGNITION, CONTINUED

       In  December 1998, the AICPA released SOP 98-9, " Modification of SOP
           97-2, `Software Revenue Recognition with Respect to Certain
           Transactions." SOP 98-9 amends SOP 97-2 to require that an entity
           recognize revenue for multiple element arrangements by means of the
           "residual method" when (1) there is vendor-specific objective
           evidence of the fair values of all the undelivered elements that are
           not accounted for by means of long-term contract accounting (2)
           vendor-specific objective evidence of fair value does not exist for
           one or more of the delivered elements, and (3) all revenue
           recognition criteria of SOP 97-2 (other than the requirement for
           vendor-specific objective evidence of the fair value of each
           delivered element) are satisfied. The provisions of SOP 98-9 extend
           the deferral of certain paragraphs of SOP 97-2 and became effective
           December 15, 1998. These deferred paragraphs of SOP 97-2 and SOP 98-9
           will be effective for transactions that are entered into in fiscal
           years beginning after March 15, 1999. Retroactive application is
           prohibited. The adoption of this statement is not expected to have a
           material impact on the Company's operating results, financial
           position or cash flows.

       COMPUTATION OF NET EARNINGS (LOSS) PER SHARE

       Basic earnings (loss) per share (EPS) has been computed by dividing net
           earnings (loss) by the weighted average number of common shares
           outstanding during the periods presented. Diluted EPS has been
           computed by dividing net earnings (loss) by the weighted average and,
           when dilutive, common equivalent shares outstanding during the
           periods presented. Dilutive common equivalent shares are calculated
           using the treasury stock method and consist of common stock issuable
           upon the exercise of options and warrants.

       COMPREHENSIVE INCOME (LOSS)

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

       The Company's comprehensive income has been presented in the Consolidated
           Statements of Shareholders' Equity. As of March 31, 1999, accumulated
           other comprehensive loss consisted of foreign currency translation
           adjustments of $550.

                                     F-10

<PAGE>

                   MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

               Notes to Consolidated Financial Statements, Continued

                     ($ in thousands, except per share amounts)

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

       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.

       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 granted. Compensation cost for stock options, if any, is
           recognized 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).

                                     F-11

<PAGE>

                   MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                Notes to Consolidated Financial Statements, Continued

                     ($ in thousands, except per share amounts)

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

       RECENT ACCOUNTING PRONOUNCEMENTS

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

(2)    TRADE RECEIVABLES

       At  March 31, 1998, the Company had one customer whose trade receivable
           balance exceeded 10 percent of consolidated trade receivables. Trade
           receivables at March 31, 1998 for this customer were $663 and
           revenues for the year ended March 31, 1998 totaled approximately
           $667.

       At  March 31, 1999 the Company had no customer whose trade receivable
           balance exceeded 10 percent of consolidated trade receivables.

       The activity in the Company's allowance for doubtful accounts for the
           years ended March 31, 1997, 1998, and 1999 consisted of the
           following:

<TABLE>
<CAPTION>
                                        Balance at      Additions      Deductions,
                                        beginning      charged to        net of           Balance at
                                         of year        expenses       recoveries        end of year
                                        ----------     ----------      -----------
<S>                                     <C>            <C>             <C>             <C>
       Year ended March 31, 1997         $     366      $    754        $    485          $     635
                                        ----------     ----------      -----------        ----------
                                        ----------     ----------      -----------        ----------

       Year ended March 31, 1998         $     635      $    587        $    720          $     502
                                        ----------     ----------      -----------        ----------
                                        ----------     ----------      -----------        ----------
       Year ended March 31, 1999         $     502      $    103        $    120          $     485
                                        ----------     ----------      -----------        ----------
                                        ----------     ----------      -----------        ----------
</TABLE>

(3)    PROPERTY AND EQUIPMENT

       Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                               March 31,
                                                        ------------------------
                                                          1998            1999
                                                        --------        --------
<S>                                                     <C>             <C>
           Land and improvements                        $  2,529        $  2,004
           Building                                        8,426           8,426
           Furniture, fixtures, and equipment              3,264           3,647
           Research and development equipment              2,571           2,806
           Leasehold improvements                             49              49
                                                        --------        --------
                                                          16,839          16,932
           Accumulated depreciation and amortization       3,176           4,416
                                                        --------        --------
                                                        $ 13,663        $ 12,516
                                                        --------        --------
                                                        --------        --------
</TABLE>

                                     F-12

<PAGE>

                   MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                Notes to Consolidated Financial Statements, Continued

                     ($ in thousands, except per share amounts)

(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, 1999 and
           is renewable annually. Funds advanced are secured by Microware's
           trade receivables, inventories, and intangible assets. There were no
           borrowings outstanding at March 31, 1998 or 1999.

       Microware Systems K.K. has credit agreements with various maturities.
           Outstanding balances at March 31, 1998 and 1999 totaled $300 and
           $253, respectively. The weighted average interest rate was 2.125
           percent at March 31, 1999. The credit agreements are fully secured by
           Microware Systems K.K.'s deposit placed on its Tokyo office space.

(5)    LONG-TERM DEBT

       Long-term debt at March 31, 1998 and 1999 consisted of the following:

<TABLE>
<CAPTION>
                                                                      1998          1999
                                                                  -----------   -----------
<S>                                                               <C>           <C>
          Promissory note                                          $   6,984     $   6,918
          Less current installments                                       66            71
                                                                  -----------   -----------
               Long-term debt, excluding current installments      $   6,918     $   6,847
                                                                  -----------   -----------
                                                                  -----------   -----------
</TABLE>

       On December 30, 1997, the Company, through its wholly owned subsidiary
           Microware Systems Corporate Park, Inc. executed a promissory note
           with GMAC Commercial Mortgage Corporation in the amount of $7,000.
           The note is secured by the Company's headquarters facility and
           associated real estate.  In accordance with the agreement, the
           Company has provided GMAC an irrevocable standby letter of credit
           in the amount of $724.  In order to obtain the irrevocable standby
           letter of credit, the Company has pledged a $724 U.S. Treasury note
           as collateral.  Monthly payments are $49, including interest at 7.46
           percent, with the unpaid balance due January 1, 2008.

       The aggregate maturities of long-term debt for each of the five years
           ending March 31, 2004 and thereafter are as follows:

<TABLE>
<S>                                                    <C>
                    2000                               $     71
                    2001                                     76
                    2002                                     82
                    2003                                     89
                    2004                                     96
                    Thereafter                            6,504
                                                       --------
                                                       $  6,918
                                                       --------
                                                       --------
</TABLE>

       The carrying amount of the Company's long-term debt approximates the fair
           value as of March 31, 1999.

                                     F-13

<PAGE>

                  MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                    ($ in thousands, except per share amounts)

(6)    INCOME TAXES

       The provision for income taxes is based on losses before income tax
           expense (benefit) as follows:

<TABLE>
<CAPTION>
                                                 1997         1998          1999
                                            -----------    ----------    ----------
<S>                                         <C>            <C>           <C>
             United States                  $   (1,404)    $  (7,940)    $  (8,908)
             Foreign                              (170)       (1,796)         (949)
                                            -----------    ----------    ----------
                                            $   (1,574)    $  (9,736)    $  (9,857)
                                            -----------    ----------    ----------
                                            -----------    ----------    ----------
</TABLE>

       Components of income tax expense (benefit) for the years ended March 31,
           1997, 1998, and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                        1997
                                         ------------------------------------
                                         Domestic      Foreign
                                          income        income        Total
                                         --------      -------      ---------
<S>                                      <C>           <C>          <C>
             Current                     $     34      $  (54)      $    (20)
             Deferred                          17           -             17
                                         --------      -------      ---------
                                         $     51      $  (54)      $     (3)
                                         --------      -------      ---------
                                         --------      -------      ---------
</TABLE>

<TABLE>
<CAPTION>
                                                        1998
                                         ------------------------------------
                                         Domestic      Foreign
                                          income        income        Total
                                         --------      -------      ---------
<S>                                      <C>           <C>          <C>
             Current                     $    121      $   15       $    136
             Deferred                          74             -           74
                                         --------      -------      ---------
                                         $    195      $   15       $    210
                                         --------      -------      ---------
                                         --------      -------      ---------
</TABLE>

<TABLE>
<CAPTION>
                                                        1999
                                         ------------------------------------
                                         Domestic      Foreign
                                          income        income        Total
                                         --------      -------      ---------
<S>                                      <C>           <C>          <C>
             Current                     $   (155)     $   86       $    (69)
             Deferred                         150           -            150
                                         --------      -------      ---------
                                         $     (5)     $   86       $     81
                                         --------      -------      ---------
                                         --------      -------      ---------
</TABLE>

                                     F-14

<PAGE>

                   MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

               Notes to Consolidated Financial Statements, Continued

                    ($ in thousands, except per share amounts)

(6)    INCOME TAXES, CONTINUED

       Income tax expense (benefit) for the years ended March 31, 1997, 1998,
           and 1999 differs from the "expected" income tax expense (benefit)
           computed by applying the United States expected federal income tax
           rate of 34 percent to pretax income (loss) due to the following:

<TABLE>
<CAPTION>
                                                                           1997         1998         1999
                                                                           ----         ----         ----
<S>                                                                    <C>          <C>          <C>
             Computed "expected" tax benefit                           $   (535)    $  (3,310)   $  (3,351)
             Increase (decrease) in taxes resulting from:
                  U.S. losses without current benefit                       660         2,682        2,912
                  Foreign losses without current benefit                    209           743          459
                  Utilization of foreign net
                      operating loss carryforwards                         (457)            -            -
                  Foreign taxes                                              99            77           86
                  Other                                                      21            18          (25)
                                                                           ------       ------       -------
                                                                       $     (3)    $     210    $      81
                                                                           ------       ------       -------
                                                                           ------       ------       -------
</TABLE>

       The tax effects of temporary differences that give rise to deferred tax
           assets and liabilities at March 31, 1998 and 1999 are presented
           below:

<TABLE>
<CAPTION>
                                                                                           March 31,
                                                                                 ------------------------------
                                                                                      1998           1999
                                                                                      ----           ----
<S>                                                                              <C>            <C>
         Deferred tax assets:
              U.S. net operating loss carryforwards                              $     7,048    $    10,294
              Foreign net operating loss carryforwards                                 1,042          1,211
              Post contract customer support unearned revenue                            189            201
              Compensation/benefits                                                       33             37
              Inventories                                                                 54              -
              Allowance for doubtful accounts                                            178            153
               Warranty reserve                                                           54             86
              Other                                                                       43              3
                                                                                     -------        -------
                  Total gross deferred tax assets                                       8,641        11,985
               Less valuation allowance                                                 8,090        11,512
                                                                                      -------       -------
                      Total deferred tax assets                                  $        551   $       473
                                                                                      -------       -------
                                                                                      -------       -------

         Deferred tax liabilities:
              Capitalized software costs                                                   93            62
              Property and equipment                                                      261           366
                                                                                      -------       -------
                  Total deferred tax liabilities                                          354           428
                                                                                      -------       -------

                  Net deferred tax assets                                        $        197   $        45
                                                                                       -------      -------
                                                                                       -------      -------
</TABLE>

                                     F-15

<PAGE>

                  MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)

(6)    INCOME TAXES, CONTINUED

       The net deferred tax assets at March 31, 1998 and 1999, are composed of
           current deferred tax assets of $465 and $473, respectively, and
           noncurrent deferred tax liabilities of $268 and $428, respectively.

       The net change in the total valuation allowance for the years ended March
           31, 1998 and 1999 was an increase of $6,245 and $3,422, respectively,
           and relates primarily to increases in 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, 1999, the Company has U.S. net
           operating loss carryforwards for federal income tax purposes of
           approximately $28,600 (including approximately $9,300 from tax
           benefits related to employee stock options) which are available to
           offset future federal taxable income, if any, expiring as follows:
           $8,500 in 2012, $10,700 in 2013 and $9,400 in 2019. The foreign net
           operating loss carryforwards expire as follows: $1,860 in 2003 and
           $1,500 in 2004.

(7)    SHAREHOLDERS' EQUITY

       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.

(8)    PROFIT SHARING PLAN

       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,
           1997, 1998, and 1999 amounted to $131, $175, and $114, respectively.



                                     F-16

<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)

(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 five 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 2,070,000 total shares of common stock subject to option,
           respectively.

       Activity for the Company's Plans is as follows:

<TABLE>
<CAPTION>
                                     1997                               1998                               1999
                       ---------------------------------  ---------------------------------  ---------------------------------
                          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       2,250,200     $0.50-3.125          2,060,691      $0.50-15.50         2,008,310      $0.50-15.50
        Issued             373,100    $10.00-15.50            978,250     $4.375-10.00         1,126,150       $1.94-5.88
        Exercised          391,009     $0.50-3.125            587,531      $0.50-3.125           376,900      $0.50-3.125
        Canceled           171,600          $3.125            443,100     $3.125-15.50           888,235      $1.94-15.50
                       ------------                       ------------                       ------------
        Ending
           balance       2,060,691     $0.50-15.50          2,008,310      $0.50-15.50         1,869,325      $0.50-15.50
                       ------------  -------------        ------------     ------------      ------------      -----------
                       ------------  -------------        ------------     ------------      ------------      -----------
</TABLE>

       SFAS No. 123 requires proforma information regarding net earnings (loss)
           and net 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 1997, 1998 and 1999: risk
           free interest rates of 6.25%, 6.0% and 5.0%, respectively; expected
           volatility of 80.89%, 88.40% and 90.0%, respectively; an expected
           option life of 6.0 years, 6.0 years, and 6.0 years, respectively; and
           no expected dividends for any year. As the Company was a nonpublic
           entity until April 2, 1996, it is permitted under SFAS No. 123 to use
           the "minimum value" method to value stock options granted prior to
           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, 1997, 1998, and
           1999 were $10.80, $4.90 and $2.03, respectively.

       The Black-Scholes option valuation model was developed for use in
           estimating the fair-value of traded options that 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, Continued

                   ($ 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 loss and net
           loss per share for the years ended March 31, 1997, 1998 and 1999
           would have been as follows:

<TABLE>
<CAPTION>
                                                          1997                  1998                  1999
                                                    -----------------     -----------------     ------------------
<S>                                                 <C>                   <C>                   <C>
               Net loss:
                      As reported                   $     (1,571)         $     (9,946)         $     (9,938)
                      Proforma                      $     (2,763)         $    (10,954)         $    (10,976)

               Net loss per share:
                      As reported
                           Basic                    $      (0.11)         $     (0.69)          $      (0.68)
                           Diluted                  $      (0.11)         $     (0.69)          $      (0.68)
                      Proforma
                           Basic                    $      (0.20)         $     (0.76)          $      (0.75)
                           Diluted                  $      (0.20)         $     (0.76)          $      (0.75)
</TABLE>

       The above proforma disclosures are not necessarily representative of the
           effects on reported net earnings (loss) for future years. Diluted
           loss per share does not include stock options exercisable (see below)
           as the exercise would have an antidilutive effect on the computation.

       The following table summarizes information about fixed stock options
           outstanding under the Plans at March 31, 1999:

<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 - 1.55          296,150          2.5          $ 1.1403              296,150        $  1.1403
           $1.56 - 3.10          812,650          9.8          $ 2.2387                    -        $       -
           $3.11 - 4.65          378,100          6.2          $ 3.2225              202,400        $  3.1327
           $4.66 - 6.20          111,250          9.0          $ 5.2723                1,250        $   5.375
           $6.21 - 7.75          261,175          7.6          $ 6.6323               52,415        $   6.664
          $13.95 - 15.50          10,000           .1          $  15.50               10,000        $   15.50
                             ------------                                        ------------
                               1,869,325          7.5          $ 3.1290              562,215        $  2.6374
                             ------------         ---          --------          ------------       ---------
                             ------------         ---          --------          ------------       ---------

</TABLE>

                                     F-18

<PAGE>

                   MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

                Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)

(10)   FOREIGN OPERATIONS

       A summary of the Company's domestic and foreign operations as of and
           for the years ended March 31, 1997, 1998, and 1999 is presented
           below:

<TABLE>
<CAPTION>
                                                                           1997
                                     U.S.        U.K.      Japan      France      Germany     Eliminations      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>

<TABLE>
<CAPTION>
                                                                           1998
                                     U.S.       U.K.      Japan      France      Germany     Eliminations      Total
                                     ----       ----      -----      ------      -------     ------------      -----
<S>                              <C>          <C>        <C>        <C>          <C>         <C>              <C>
       Revenues                  $  10,882   $  2,692   $   4,197   $   1,053    $   1,827    $   (3,068)     $   17,724
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
       Operating (loss) profit   $  (9,268)  $    (74)  $  (1,558)  $    (211)   $      93    $        -      $  (11,018)
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
       Net (loss) earnings       $  (8,135)  $    (81)  $  (1,544)  $    (262)   $      76    $        -      $   (9,946)
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
       Total assets              $  41,105   $  1,047   $   1,632   $     550    $     744    $   (7,579)     $   37,499
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
       Total liabilities         $  10,258   $  1,479   $   1,421   $   1,105    $     948    $   (3,068)     $   12,143
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
                                 ---------   --------   ---------   ---------    ---------    ----------      ----------
</TABLE>

<TABLE>
<CAPTION>
                                                                           1999
                                     U.S.       U.K.      Japan      France      Germany     Eliminations      Total
                                     ----       ----      -----      ------      -------     ------------      -----
<S>                              <C>          <C>        <C>        <C>          <C>         <C>              <C>
       Revenues                  $   9,805    $  3,086   $   3,171  $   1,131    $   2,643    $   (3,221)     $   16,615
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
       Operating (loss) profit   $  (8,427)   $   (145)  $  (1,200) $    (358)   $      77    $        -      $  (10,053)
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
       Net (loss) earnings       $  (8,981)   $   (162)  $  (1,210) $     355    $      60    $        -      $   (9,938)
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
       Total assets              $  31,605    $  1,053   $   1,501  $     850    $   1,000    $   (8,903)     $   27,106
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
       Total liabilities         $   9,349    $  1,628   $   2,569  $     857    $   1,150    $   (4,390)     $   11,163
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
                                 ---------    --------   ---------  ---------    ---------    ----------      ----------
</TABLE>

       Included in U.S. revenues are foreign export sales, of approximately
            $1,226, $690, and $553 during the years ended March 31, 1997, 1998,
            and 1999, 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, Continued

                   ($ in thousands, except per share amounts)

(11)   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

       During the years ended March 31, 1997, 1998, and 1999, the Company paid
           interest of approximately $262, $701, and $519, respectively.

       Income taxes paid during the years ended March 31, 1997, 1998, and 1999
           amounted to approximately $242, $95, and $13, respectively.

(12)   SPECIAL CHARGES

       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 costs and lease termination costs for restructuring
           operations in Europe.

       During the year ended March 31, 1998, the Company determined that due to
           revised estimates of the marketability of certain products under
           development, a special charge of $940 was appropriate to more
           adequately reflect the residual value of certain intangible assets.
           Included in this charge was approximately $566 of deferred
           development costs in the form of prepaid royalties, approximately
           $202 relating to goodwill associated with MicroMall, Inc., a
           subsidiary of the Company, and $172 relating to the write-off of
           previously capitalized purchased technology.

(13)   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, Motorola currently holds four separate warrants to
           purchase an additional 1,526,232 common shares of stock of the
           Company at an exercise price of $10.81 per share. These warrants are
           exercisable and expire at certain 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. Revenues
           from Motorola for the years ended March 31, 1997, 1998, and 1999 were
           $2,279, $1,428, and $2,227, respectively.

(14)   COMMITMENTS

       The Company leases certain domestic and foreign facilities under
           noncancelable operating leases. Minimum annual rental commitments at
           March 31, 1999 under all noncancelable operating leases are as
           follows:

<TABLE>
<S>                                                  <C>
                          2000                       $   284
                          2001                       $   199
                          2002                       $   165
                          2003                       $   149
                          2004                       $   149
                          Thereafter                 $   634
</TABLE>

       Rental expense under cancelable and noncancelable operating leases was
           $922, $785, and $832 during the years ended March 31, 1997, 1998,
           and 1999, respectively.


                                     F-20