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, 1998

     / / 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. / /  

THE APPROXIMATE VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF APRIL 30, 1998 WAS $39,864,000.

NUMBER OF SHARES OUTSTANDING AS OF APRIL 30, 1998: 14,556,192.

DOCUMENTS INCORPORATED BY REFERENCE:  DEFINITIVE PROXY STATEMENT TO BE FILED 
FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS (PART III).

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<PAGE>

                          MICROWARE SYSTEMS CORPORATION

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

Part II
     Item 5.   Market for the Registrant's Common Equity 
               and Related Stockholder Matters                          21
     Item 6.   Selected Consolidated Financial Data                     22
     Item 7.   Management's Discussion and Analysis of 
               Financial Condition and Results of Operations            24
     Item 7A.  Quantitative and Qualitative Disclosures about 
               Market Risk                                              34
     Item 8.   Financial Statements and Supplementary Data              35
     Item 9.   Changes in and Disagreements with Accountants 
               on Accounting and Financial Disclosures                  36

Part III
     Item 10.  Directors and Executive Officers of the Registrant       37
     Item 11.  Executive Compensation                                   37
     Item 12.  Security Ownership of Certain Beneficial 
               Owners and Management                                    37
     Item 13.  Certain Relationships and Related Transactions           37

Part IV
     Item 14.  Exhibits, Financial Statements, Schedule, and 
               Reports on Form 8-K                                      38

Signatures                                                              40
Index to Exhibits                                                       42

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Part I

CAUTIONARY NOTE:
     IN ADDITION TO HISTORICAL FINANCIAL INFORMATION, THIS DISCUSSION OF THE 
COMPANY'S BUSINESS AND OTHER ITEMS IN THIS ANNUAL REPORT ON FORM 10-K INCLUDE 
FORWARD-LOOKING STATEMENTS ABOUT MICROWARE'S BUSINESS. THESE STATEMENTS 
SHOULD BE EVALUATED IN THE CONTEXT OF THE RISKS AND UNCERTAINTIES INHERENT IN 
MICROWARE'S BUSINESS, INCLUDING THE VARIABILITY OF THE COMPANY'S QUARTERLY 
OPERATING RESULTS; THE COMPANY'S ABILITY TO SUCCESSFULLY MARKET ITS PRODUCTS 
IN THE TRADITIONAL EMBEDDED, COMMUNICATIONS, AND CONSUMER MARKETS AT WHICH 
THE COMPANY'S PRODUCTS ARE TARGETED; THE CONTINUED GROWTH OF THOSE MARKETS; 
THE COMPANY'S ABILITY TO ACHIEVE ITS FINANCIAL GOALS AND 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 ATTRACT 
AND MAINTAIN PERSONNEL GENERALLY; THE COMPANY'S ABILITY TO MANAGE ITS 
INTERNATIONAL OPERATIONS; THE RISK OF MATERIAL LITIGATION RELATED TO THE 
COMPANY'S INTELLECTUAL PROPERTY RIGHTS AND LICENSES; AND OTHER FACTORS 
MENTIONED THROUGHOUT THIS FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH 
THE SECURITIES AND EXCHANGE COMMISSION.

ITEM 1. BUSINESS
     Microware Systems Corporation is a corporation which was organized under 
the laws of the state of Iowa in 1977.  Its principal executive offices are 
located at 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's business is focused on developing and marketing OS-9 for use 
in traditional embedded systems, including industrial automation, 
transportation, medical, government/military, and networking systems; 
communications infrastructure products, including 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, and Internet appliances. In an effort to lessen the variability of 
its quarterly operating results and attain profitability, Microware 
substantially increased its emphasis on the traditional embedded and 
communications markets during the past fiscal year.  While Microware believes
all these markets present significant opportunities for growth, this change 
in market emphasis, along with the Company's continued involvement on 
emerging consumer products markets whose development is uncertain, exposes 
Microware's business to significant risks and uncertainties.

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 

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<PAGE>

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 
automatic 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 services 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 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.

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 
markets. 

     OS-9 packages 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.  
Current OEM packages include the following:

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<PAGE>

               Microware OS-9 for Embedded Systems
               Microware OS-9 for Communications
               Microware OS-9 for Digital TV (also known as DAVID)
               Microware OS-9 for Smart Phones
               Microware OS-9 for Wireless Applications

     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 OS-9 modules for internal product development in 
consideration of payment of an initial license fee; and (ii) the right to 
distribute copies of OS-9 and related software embedded in the licensee's 
product in consideration of the licensee's payment of a per copy royalty for 
every copy of OS-9 distributed. OEM licenses are generally bundled with end-
user licenses of related development tools.

     Microware's OEM products are licensed on a processor-specific basis.  
Microware OS-9 OEM licenses are available for a variety of 32-bit CPU 
families,  including the Motorola 68xxx (680x0, 683xx), Intel/AMD x86/Pentium 
(386/486/586/Pentium), Motorola/IBM PowerPC (4xx, 6xx, 7xx, 8xx), Hitachi 
SuperH (SH-3), Digital/Cirrus Logic ARM (SA-1100, PS711x), and other 
processor families.  The Company also provides engineering and training 
services to support its OEMs' development efforts.

     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 several popular single-board computers, including the Motorola MVME and 
MBX platforms, PC/AT-compatible computers, and Digital 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 system application.  Certain of these products include technologies 
licensed from third parties. These additional product components include the 
following:

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

     - mwSoftStax Communications Framework, which provides integrated 
communications and control for communications devices.

     - Microware OS-9 for Communications LAN Pak, which provides local area 
connectivity support for mwSoftStax.

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

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

                                     5
<PAGE>

     - Third party Communications Paks for Microware OS-9, including ATM 
signaling, Universal Serial Bus (USB), Serial Network Management Protocol 
(SNMP), and Infrared Data Association (IrDA) support packages. 

     - Microware Java and PersonalJava for OS-9, which enable Java- and 
PersonalJava-compatibility in OS-9 environments.

     Microware is also negotiating a license of Hewlett-Packard's embedded 
virtual machine technology, which if successfully developed will provide an 
alternative package for OEMs seeking to develop Java-compatible OS-9-based 
embedded systems.

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

     Microware's principal development tool is the FasTrak integrated 
development environment, which integrates Microware's Ultra C and C++ 
compilers, Source Level Debugger, and OS-9 Utility Set with supporting 
functions into a comprehensive automation, management and development 
environment.

     Microware has developed a new integrated development environment, 
Microware Hawk, currently scheduled for commercial release in the summer of 
calendar 1998.  Microware Hawk is designed as an all-in-one development suite 
to enable seamless editing, debugging and compilation of C 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 being established as an open development environment which will be 
interoperable with a wide variety of third party development tools. [See 
markets - traditional embedded systems business]

     Microware's development tools are generally sold under end-user licenses 
which enable customers to install and use the tools at a fixed number of 
development seats.

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, 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 

                                    6

<PAGE>

level customer support to their end-user customers and rely on the Company for 
additional 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, 
government/military, and network devices, (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 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 
Nortel 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 software in the general embedded systems market is 
large and diversified, and continues to develop, market, support and license 
its products to and for customers in the traditional embedded systems market.  
Microware believes that it has a significant share of the third party embedded 
operating system market.

     In fiscal 1998, Microware increased its emphasis on the traditional 
embedded systems business by re-emphasizing 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 its internal and third 
party sales and marketing channels in the embedded systems marketplace.  

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<PAGE>

COMMUNICATIONS INFRASTRUCTURE DEVICES MARKET
     The networked embedded systems marketplace is rapidly growing.  
According to Electronic Trends Publications, in 1996 the telecommunications 
industry accounted for $1.2 billion of revenue in the real-time operating 
system industry, with an increase to $2 billion projected by the year 2001. 
The percentage of equipment using a commercial real-time operating system is 
projected to increase from 12 percent to 24 percent in the same period.  At 
the same time, the Company believes that technological demands of these 
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 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 for Communications product line is based on 
the mwSoftStax framework.  mwSoftStax 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.   

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

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 set-top boxes manufactured under license 
by NEC Corporation of Japan 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 

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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.  

     In February, 1998, the Company announced that it had entered into a 
letter of intent with OpenTV, a joint venture of Sun Microsystems, Inc. and 
Thomson Consumer Electronics of France which has developed a competing 
digital television decoder platform, to jointly develop and market an 
interoperable version of Microware OS-9 for Digital TV and the OpenTV 
architecture.  Microware believes that the relationship with OpenTV will 
better position the Company to realize opportunities in the European digital 
decoder market.  However, OpenTV and Microware have not consummated a 
definitive agreement regarding their relationship, and there can be no 
assurance that they will do so or that, if they do, the relationship will 
have a positive impact on the Company's digital television business in Europe 
and elsewhere. 

     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 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.

WIRELESS AND INTERNET PRODUCTS BUSINESS
     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, Microware OS-9 for 
Wireless and Microware OS-9 for Smart Phones, combine OS-9 with the mwMAUI 
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 -- new types of pagers and wireless telephones which 
include small screen displays and keyboards and use the Internet to enable 
transmission and receipt of electronic mail and in some cases World Wide 

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Web browsing.  The Company believes OS-9 is well suited to operate such 
devices.

     Microware's wireless strategy is to provide a wide variety of products 
and services for licensing to leading wireless equipment manufacturers.  The 
core of this strategy is the development of strategic customer relationships 
with leading manufacturers of wireless devices.  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 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 
warrants to purchase up to 1,803,728 additional shares, of which the initial 
warrant to purchase 277,496 shares expires on July 31, 1998.  Pursuant to the 
Stock and Warrant Purchase Agreement, a designee of Motorola, Motorola's 
President and Chief Operating Officer, Robert L. Growney, serves on 
Microware's Board of Directors.

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

SALE OF INVESTMENT IN UNWIRED PLANET
     In March, 1998, Microware consummated the sale of its $5.0 million 
equity investment Unwired Planet, Inc. ("Unwired Planet"), a privately held 
Delaware corporation, for approximately $5,938,090, initially purchased on 
October 15, 1996 for $5,000,000. The Company believed the investment in 
Unwired Planet had not contributed as significantly as originally anticipated 
to the furtherance of the Company's efforts to establish OS-9 as a standard 
operating systems for wireless devices, and that the amount of the investment 
would be better applied to other corporate purposes.

INTERNET PHONE BUSINESS
     The Company believes there is an emerging market for smart land-line 
telephones designed for home and business use which integrate Internet access 
and other computing functionality such as electronic mail, Internet access, 
and personal information management with traditional telephony and answering 
machine services.  A study by Paul Kagan and Associates estimates that the 
market for these "smart phones" will grow from 800,000 units in 1997 to 6.3 

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million  units in 2000.  During the same time, the average selling price of 
these products is estimated to fall from $445.00 a unit to $225.00 a unit.

     Microware has licensed OS-9 to a number of these "smart phone" OEMs, 
including Uniden America Corporation ("Uniden").  Uniden's AXIS telephone, an 
OS-9-based cordless telephone combined with a small computer terminal which 
allows users to send and receive electronic mail, is currently available in 
retail outlets. While Microware has had early successes in this sector, the 
market is still at an early stage and is not well-defined, and there can be 
no assurance that Microware will continue to receive significant revenues 
from licenses to smart phone OEMs, or that there will be customer acceptance 
and demand for such products. 

SOFTWARE DEVELOPMENT QUALITY ASSURANCE
     The reliability of Microware's technology is reflected in and supported 
by the Company's software development methodologies.  Microware has elected 
to improve its quality assurance methodology through pursuing the Capability 
Maturity ModelSM for Software (SW-CMM) developed by the Software Engineering 
Institute (SEI), and has elected to suspend any outside quality certification 
program under ISO 9001.  Microware believes the SEI model will better promote 
a controlled and measured process as the foundation for continuous 
improvement in quality.

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

     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, the Company's digital television 
decoder products compete with software developed internally by set-top box 
manufacturers, including Scientific-Atlanta's PowerTV and Thomson Consumer 
Electronics' TV Open and with products from ISI, Microsoft 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 timing and success of new products developed by the 
Company and its competitors, product performance and price, the Company's 
ability to provide custom development and integration services, distribution 
and customer support, product reputation, customers' willingness to replace 

                                    11
<PAGE>

internally developed software solutions and customers' assessment of the 
Company's financial resources and its technical and service expertise.  The 
Company believes that it competes effectively in its markets on the basis of 
product features and reliability, price performance characteristics, 
reputation, worldwide infrastructure, support services, sales and marketing 
strength and financial stability.  There can be no assurance that the Company 
will be able to compete successfully with respect to these and other factors.  
In particular, competitive pressures, including pricing pressures for the 
Company's run-time licenses and new product introductions from existing and 
new competitors could adversely affect the Company's business and results 
from operations.

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 
67%, 50% and 59% of total revenues in fiscal 1996, 1997, and 1998 
respectively. 

     The Company generates new business opportunities in its target markets 
through direct marketing, advertising, 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, 1998, the Company 
employed 82 product development engineers. Of these, 67 engineers were based 
in Des Moines, Iowa and 15 were based in Tokyo, Japan.

     During fiscal 1996, 1997, and 1998 research and development expenses 
amounted to $5.0 million, $7.2 million, and $7.2 million respectively, 
excluding capitalized software development costs. For the above periods, 
research and development expenses represented 21%,  27%, and 41% of the 
Company's total revenues, respectively. For the same periods, software 
development costs capitalized totaled $150,000, $81,000, and $215,000, 
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 

                                    12
<PAGE>

quarterly reporting period. Contract engineering services backlog, consisting 
of orders for specific engineering services and maintenance support to be 
performed within the following 12 months, was approximately $2,240,000 as of 
March 31, 1998 and $2,206,000 as of March 31, 1997.

EMPLOYEES
     As of March 31, 1998, the Company employed 201 people, including 67 in 
marketing, sales and support services, 104 in engineering and product 
development and 30 in operations, finance and administration. Of these 
employees, 135 are located in the United States, and 66 are employed by the 
Company's international operations. None of the Company's employees is 
represented by a labor union or is the subject of a collective bargaining 
agreement.  The Company has never experienced a work stoppage and believes 
that its employee relations are good.

NOTICE REGARDING TRADEMARKS
     Microware, OS-9, and DAVID are registered trademarks of Microware 
Systems Corporation.  The Microware logo, MAUI, UpLink, ITEM, FasTrak, Ultra 
C, and Ultra C++ are trademarks of Microware Systems Corporation.  Java and 
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 two 
fiscal years.  While the Company has taken a number of measures to increase 
its revenues, decrease its operating expenses, and attain profitability, 
there can be no assurance that these measures will succeed or that the 
Company will become profitable.  Furthermore, the Company's revenues and 
operating results have varied substantially from quarter to quarter, remain 
difficult to foresee due to the nature of the embedded systems market and the 
Company's business, and should not be relied upon as an indication of future 
performance. 

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

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

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

                                    13
<PAGE>

     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. Sun Microsystems, 
Inc. has developed an embedded operating system product called JavaOS which 
it markets together with its Java technology, and has made a number of 
business and technology acquisitions in the past fiscal year related to the 
development of its embedded systems business.  There can be no assurance the 
Company will be able to successfully attain new market share or even maintain 
its existing market share in this increasingly competitive market.

     ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL.  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, much of which 
was initiated by the Company. The Company's ability to execute its market 
strategy will depend to a large degree upon its ability to integrate new 
personnel into the Company.  Competition for qualified personnel throughout 
the software industry is intense and there can be no assurance that the 
Company will be successful in attracting and retaining such personnel.

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

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

                                    14
<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.

                                    15
<PAGE>

ITEM 2. PROPERTIES

     The Company owns its main operating facility located in Des Moines, 
Iowa, subject to mortgage debt. This space is used for research and 
development, sales and marketing, operations and administration and consists 
of approximately 88,000 square feet. Annual mortgage payments for the 
Company's main operating facility total approximately $588,000. The Company 
also leases under cancelable terms approximately 7,400 square feet in Tokyo, 
Japan for an annual rental payment of approximately $351,000. The Company 
also leases 13 domestic and international sales and support offices for an 
aggregate annual rental payment of approximately $433,000.  The Company 
believes that additional space will be available as needed. 

                                    16
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

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

                                    17
<PAGE>

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

Not applicable.

                                    18
<PAGE>

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows: 

<TABLE>
<CAPTION>

Name                    Age                 Position
<S>                     <C>    <C>
Kenneth B. Kaplan       45     President and Chief Executive Officer

M. Denis Connaghan      48     Executive Vice President and Chief 
                               Operating Officer

Kent R. Kelderman       38     Executive Vice President, Treasurer, 
                               and Chief Financial Officer

Stephen M. Bashada      42     Executive Vice President of Marketing

Derek B. South          45     Executive Vice President of Sales

Rebecca J. Duhaime      37     Executive Vice President of Engineering

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

Martin Allen            45     Managing Director European Operations

</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 has also been appointed to fill a 
vacant Class II Director position effective as of the July 14, 1997 meeting 
of the Board of Directors.  Prior to joining the Company, from 1994 through 
1996, Mr. Connaghan was Chief Executive Officer of Delphi Information 
Systems, Inc., a provider of information systems to the distribution segment 
of property and casualty insurance, based in Rolling Meadows, Illinois.  From 
1991 to 1994, Mr. Connaghan served as a vice president of IBAX Healthcare 
Systems of Longwood, Florida, a joint venture of IBM Corporation and Baxter 
International providing computerized solutions for healthcare providers.  
Prior to that, Mr. Connaghan held various executive positions with Pansophic 
Systems, Inc. of Lisle, Illinois.  Mr. Connaghan attended the New South Wales 
Institute of Technology and holds an MBA from the University of Chicago. 

     Mr. Kelderman joined the Company in 1994 as Corporate Controller and was 
appointed Executive Vice President, Treasurer, and Chief Financial Officer in 
December 1996.  From 1988 to 1994, he served as plant controller for American 
Packaging Corporation.  Mr. Kelderman is a certified management accountant 
and holds a B.A. degree in Business Administration from Dordt College.

     Mr. Bashada has served as Microware's Executive Vice President of 
Marketing since September 1997.  Prior to joining Microware, Mr. Bashada was 
President of Tarkenton Net Ventures, an Internet start-up company, where he 
developed an interactive multi-media educator and turnkey solution to help 
businesses market themselves on the World Wide Web.  From 1994 to 1995, he 

                                    19
<PAGE>

served as President of the application development division for Sterling 
Software where he was involved in the Sterling Software acquisition of 
KnowledgeWare Inc.  From 1989 through 1994, he held numerous executive 
positions at KnowledgeWare including Senior Vice President of Operations.  
During that time, he was responsible for product development, marketing, and 
customer support.  Additionally, he held numerous management positions at 
Amdahl Corporation, a computer products company.  Mr. Bashada received his 
bachelor's degree in business administration from Georgia State University in 
1992.

     Mr. South has been Executive Vice President of Sales at Microware since 
September 1997.  Prior to joining Microware, Mr. South served as President 
and Co-founder of Automated Testing Solutions, Inc., a software company.  
From 1990 to 1995, he served as Vice President of Sales for AutoTester, Inc. 
where he was responsible for worldwide sales operations.  Mr. South received 
his bachelor's degree in electrical engineering from the University of 
Virginia in 1975.

     Ms. Duhaime has been Executive Vice President of Engineering at 
Microware since October 1997.  Prior to joining Microware, Ms. Duhaime was 
Vice President at Sterling Software, Inc.'s Storage Management Division, 
where she managed the client/server and mainframe storage management software 
development labs. From 1985 to 1993, Ms. Duhaime held several management 
positions at Systems Center, Inc., a software company, in the fields of 
software development, technical services, product management and sales.  She 
received her bachelor's degree in political science from Bryn Mawr College in 
1981 and her master's degree in computer science from George Washington 
University in 1985.

     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.  There he developed Japan's first broad retail channel for 
affordable CAD software.  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 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 has served as Managing Director of European Operations since 
January 1996 where he is responsible for overall business activities for the 
United Kingdom, German, and French subsidiaries of Microware Systems 
Corporation.  From 1993 to 1995, he was Managing Director of Microware U.K.  
Mr. Allen received his degree in business studies from Brookes University.  
Mr. Allen is not an officer 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.

     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.

                                    20
<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, 1998 was $5.25 per share.  The price per share in the following 
table sets forth the low and high closing sales prices on the Nasdaq National 
Market for the quarter indicated.

<TABLE>
<CAPTION>

     Fiscal 1997                                     Low        High

     <S>                                           <C>         <C>
     *Quarter ended June 30, 1996                  $ 9.625     $19.625
      Quarter ended September 30, 1996             $13.000     $23.250
      Quarter ended December 31, 1996              $12.875     $21.250
      Quarter ended March 31, 1997                 $ 6.000     $15.000

     *from April 3,1996

</TABLE>

<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

</TABLE>

     As of April 30, 1998, 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.

                                    21
<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, 
                            -----------------------------------------------
                              1994      1995      1996      1997     1998
<S>                         <C>       <C>       <C>       <C>       <C>
Revenues                    $14,887   $18,899   $23,655   $26,134   $17,724
Cost of revenues              3,927     3,755     5,100     6,969     5,946
                            -----------------------------------------------
Gross profit                 10,960    15,144    18,555    19,165    11,778

Operating expenses:

  Research & development      4,756     5,649     5,009     7,155     7,223
  Sales & marketing           3,791     5,614     8,421    10,819    10,148
  General & administrative    3,786     3,330     3,899     3,415     4,485
  Special charges               530       166         -       438       940
                            -----------------------------------------------
                             12,863    14,759    17,329    21,827    22,796
                            -----------------------------------------------
Operating (loss) profit      (1,903)      385     1,226    (2,662)  (11,018)

Other income (expense):
  Foreign currency gain 
    (loss), net                  98       293        13       (30)      (79)
  Gain on sale of land 
    and building                  -         -         -         -       215
  Gain on sale of 
    investment                    -         -         -         -       881
  Interest (expense) 
    income, net                (306)     (132)      283     1,118       265
                            -----------------------------------------------
                               (208)      161       296     1,088     1,282
                            -----------------------------------------------
(Loss) earnings before 
  income taxes               (2,111)      546     1,522    (1,574)   (9,736)
Income tax expense 
  (benefit)                     314      (375)      146        (3)      210
                            -----------------------------------------------
Net (loss) earnings         ($2,425)     $921    $1,376   ($1,571)  ($9,946)
                            ===============================================

Basic (loss) earnings 
  per share (1)              ($0.25)    $0.09     $0.12    ($0.11)   ($0.69)
                            ===============================================
Weighted average common 
  shares outstanding (1)      9,608    10,402    11,090    13,754    14,378
                            ===============================================
Diluted (loss) earnings 
  per share (1)              ($0.25)    $0.08     $0.11    ($0.11)   ($0.69)
                            ===============================================
Weighted average common 
  and common equivalent 
  shares outstanding (1)      9,608    12,063    12,930    13,754    14,378
                            ===============================================

                                    22
<PAGE>

<CAPTION>
                                            As of March 31,
                            -----------------------------------------------
                              1994      1995      1996      1997     1998
<S>                         <C>       <C>       <C>       <C>       <C>
Balance Sheet Data:
  Cash & short-term 
    investments             $ 2,823   $ 1,516   $12,337   $19,962   $13,620
  Working capital             1,374     1,479    13,300    23,024    14,414
  Total assets               11,622    12,124    24,938    49,083    37,499
  Total long-term debt (2)    1,949     1,446     1,227     8,076     6,984
  Total shareholders' 
    equity                    4,889     5,559    18,543    34,726    25,356

(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.  
</TABLE>

                                    23
<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 1999 and 
known trends and uncertainties in the business.  Actual future results and 
trends may differ materially depending on a variety of factors, including the 
volume and timing of orders received during the quarter, the timing and 
acceptance of new products and product enhancements by the Company or its 
competitors, changes in pricing, product life cycles, seasonality of customer 
buying patterns, the existence of product errors, extraordinary events, such 
as litigation or acquisition, including related charges, and economic 
conditions generally or in various geographic areas.  All of the foregoing 
factors, and others mentioned elsewhere in this Form 10-K, make operating 
results difficult to forecast.  The Company's operating results have varied 
significantly from quarter to quarter in the past, and the future operating 
results of the Company may fluctuate as a result of the above and other risk 
factors detailed in the Company's Annual Report on Form 10-K for the fiscal 
year ended March 31, 1998 and other documents filed by the Company with the  
Securities and Exchange Commission.  Due to all of the foregoing factors, the 
Company believes that period-to-period comparisons of its results of 
operations are not necessarily meaningful and should not be relied upon as an 
indication of future performance.  In prior years, the Company's actual 
financial performance has not always met market expectations.  It is likely 
that, in some future quarter, the Company's financial performance will again 
fall below market expectations.

OVERVIEW
     Microware develops, markets and supports real-time operating system 
software and high-level language compilers used in consumer electronics, 
communications, process control and factory automation, scientific research, 
and government/defense applications.  Microware's product line is built 
around the OS-9 family of real-time operating systems for advanced 16-bit and 
32-bit microprocessors.  The Company's OS-9 product family includes options 
for programming languages, networking, graphical interfaces and productivity 
tools.  Substantially all of the Company's revenues in the last and current 
fiscal years have been derived from licenses and related services from the 
OS-9 product family.

     The Company has historically derived revenues from development licenses 
and run-time license royalty fees along with sales of related software 
productivity tools, maintenance support and custom contract engineering work.  
Custom contract engineering revenues are typically derived from discrete 
software engineering projects porting the OS-9 operating system along with 
customized software products 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. 

                                    24
<PAGE>

     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.

     In July 1995, the Company entered into a software license and custom 
contract Engineering agreement with Motorola to develop modular software 
solutions for Motorola's personal wireless communication devices. Revenues of 
approximately $1,805,000 and $614,000 resulted from contract engineering 
services for Motorola in fiscal 1997 and 1998, respectively.  In addition to 
up-front development fees and future consulting and support activities, the 
Company will receive a royalty for each pager or other wireless product using 
OS-9 sold by Motorola or its sub-licensees.  No development license fees or 
run-time royalties resulted from this agreement in fiscal 1997 or 1998.  
These revenues related to products under development which Motorola has not 
yet begun to distribute.  Motorola also acquired an equity position in the 
Company as part of this strategic relationship.  See Notes 2 and 13 of the 
Notes to the Consolidated Financial Statements.  

                                    25
<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.  


                                             ($ in thousands)

                                    Amounts and Percentage of Revenues
                          --------------------------------------------------
<TABLE>
<CAPTION>
                                           Years ended March 31,
                          --------------------------------------------------
                               1996              1997              1998
                          --------------    --------------    --------------
<S>                       <C>               <C>               <C>
Revenues:
  Product                 $16,104    68%    $16,586    64%    $12,047    68%
  Services                  7,551    32       9,548    36       5,677    32
                          -------   ----    -------   ----    -------   ----
                           23,655   100      26,134   100      17,724   100
                          -------   ----    -------   ----    -------   ----
Cost of revenues:
  Product                   2,428    10       3,046    12       2,745    15
  Services                  2,672    11       3,923    15       3,201    18
                          -------   ----    -------   ----    -------   ----
                            5,100    21       6,969    27       5,946    33
                          -------   ----    -------   ----    -------   ----
    Gross profit           18,555    79      19,165    73      11,778    67
                          -------   ----    -------   ----    -------   ----

Operating expenses:
  Research & development    5,009    21       7,155    27       7,223    41
  Sales and marketing       8,421    36      10,819    41      10,148    57
  General & administrative  3,899    17       3,415    13       4,485    25
  Special charges               -     -         438     2         940     6
                          -------   ----    -------   ----    -------   ----
                           17,329    74      21,827    83      22,796   129
                          -------   ----    -------   ----    -------   ----
    Operating profit 
      (loss)                1,226     5      (2,662)  (10)    (11,018)  (62)
                          -------   ----    -------   ----    -------   ----

Other income (expense):
  Foreign currency gain 
    (loss), net                13     *         (30)    *         (79)    *
  Gain on sale of land 
    and building                -     -           -     -         215     1
  Gain on sale of 
    investment                  -     -           -     -         881     5
  Interest(expense) 
    income, net               283     1       1,118     4         265     1
                          -------   ----    -------   ----    -------   ----
                              296     1       1,088     4       1,282     7
    Earnings (loss) 
      before income tax 
      expense (benefit)     1,522     6      (1,574)   (6)     (9,736)  (55)
Income tax expense 
  (benefit)                   146     *          (3)    *         210     1
                          -------   ----    -------   ----    -------   ----
    Net earnings (loss)    $1,376     6%    $(1,571)   (6)%   $(9,946)  (56)%
                          =======   ====    =======   ====    =======   ====

*Insignificant

</TABLE>

                                    26
<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.  During fiscal 1998, 
the Company experienced significant turnover in its sales force in North 
American and Japan, which had, and may continue to have, an adverse effect on 
the Company's operations.  While the Company has made significant progress in 
filling its vacated sales positions, the future effect of the turnover cannot 
be presently determined.  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.  The Company continues to be 
negatively impacted by 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, Ericsson and the 
Company's DAVID licensees continued to fall below management expectations.  
Future growth in the Company's product revenues will continue to be 
substantially dependent on its customers' timely and successful development 
and distribution of new products using the Company's products, making product 
revenues difficult to accurately forecast on a quarterly or annual basis.  
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.  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.  In addition, in recent months the 
currencies of many countries in the Asia Pacific region have lost significant 
value against the U.S. dollar.  As a result, revenue in this region could be 
adversely affected in fiscal 1999.  This overall general instability in the 
Asian currency and stock markets adversely affects the economic health of the 
entire region, which could negatively impact customer purchasing patterns.

     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 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 

                                    27
<PAGE>

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 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 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.  The Company has made 
substantial investments in product development.  The Company believes that 
its future success will depend in large part on its ability to enhance its 
existing products, to develop new products and to maintain technological 
competitiveness.  The Company anticipates that it will continue to commit 
substantial resources to product development in the future.

     SALES AND MARKETING.  Sales and marketing expense consists primarily of 
sales and marketing personnel related costs, including sales commissions.  
Sales and marketing expense also includes costs of advertising, public 
relations and attendance at industry trade shows.  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.  In fiscal 1999, the Company expects to continue investing 
in the expansion of its sales force 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 are 
primarily related to finance and administrative functions. 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.

     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. 

                                    28
<PAGE>

FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996

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

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

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

     RESEARCH AND DEVELOPMENT.  Research and development expense includes 
expenses associated with the development of new products and the enhancements 
of existing products, and consists primarily of employee salaries and related 
expenses.  Research and development expense increased by 42.8%, or $2.2 
million, from $5.0 million in fiscal 1996 to $7.2 million in fiscal 1997.  
The increase primarily resulted from an increase of approximately 17 people, 
along with associated costs, in the Company's technical staff from March 31, 
1996 to March 31, 1997.  Additional technical staff was added primarily to 
support additional Internet, wireless and digital television product 
offerings.  The Company has made substantial investments in product 
development.  The Company believes that its future success will depend in 
large part on its ability to enhance its existing products, to develop new 
products and to maintain technological competitiveness.  The Company 
anticipates that it will continue to commit substantial resources to product 
development in the future.
                                    29
<PAGE>

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

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

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

VARIABILITY OF QUARTERLY OPERATING RESULTS
     The Company's revenues and operating results have varied substantially 
from quarter to quarter and should not be relied upon as an indication of 
future performance. The Company believes its revenues may fluctuate from 
quarter to quarter depending upon such factors as new product introductions 
by the Company or others, seasonality of customer buying patterns, the 
Company's sales commission plan, renewals of product licenses by customers, 
product development expenses, changes in Company and competitors' pricing 
policies, the timing of significant orders, the mix of products sold, the mix 
of international versus domestic revenues, currency fluctuations, the 
existence of product errors and the hiring and training of additional staff. 
Furthermore, delays in closing product licensing transactions or in 
completion of custom contract engineering work during any quarter could cause 
quarterly revenues and net earnings for that quarter to fall below 
anticipated levels. The Company derives a significant portion of its revenues 
from a relatively small number of large account customers, therefore any 
delay in the consummation of business with this small number of customers 
could significantly impact the Company's quarterly performance.  The majority 
of the Company's revenues in a quarter has been historically derived from 
orders received in the last month of that quarter, which makes the Company's 
financial performance more susceptible to an unexpected downturn in business 
and makes quarterly results difficult to forecast. In addition, the Company's 
expense levels are based on present expectations of future revenues levels, 
and a shortfall in revenues could result in a disproportionate decrease in 
the Company's net earnings. As the markets n which the Company competes 
mature and as new and existing companies compete for customers, price 
competition is likely to intensify and such competition could adversely 
affect quarterly operating results. Variations in product mix may also affect 
gross profit margin percentages. Therefore, although the Company's revenues 
and gross profit in any period may increase in absolute terms, such an 
increase may result in lower gross profit margin percentages.

                                    30
<PAGE>

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, 1998, the Company had 
approximately $14,414,000 in working capital and $13,620,000 in cash and 
short-term investments as compared to $23,024,000 in working capital and 
$19,962,000 in cash and short-term investments at March 31, 1997.  The 
decrease in working capital and cash and short-term investments resulted 
principally from the use of cash during fiscal 1998 for operating activities.

     Cash provided by (used in) operating activities amounted to $1,068,000, 
($3,155,000) and ($8,859,000) for fiscal years 1996, 1997 and 1998, 
respectively.  The $4,223,000 difference in cash provided by (used in) 
operating activities in fiscal 1996, as compared to fiscal 1997, was 
primarily due to a change in net earnings (loss) of $2,947,000, an increase 
in trade receivables of $1,040,000, and net changes in other reconciling of 
$236,000. 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 accounts receivable of 
$2,836,000 and other reconciling items of $2,238,000.

     Cash provided by (used in) investing activities was ($1,301,000), 
($27,297,000) and $4,558,000 for fiscal years 1996, 1997 and 1998, 
respectively.  The uses of cash in fiscal 1996 were related primarily to the 
purchase of computer and research equipment and furniture and fixtures.  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 
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 financing 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.

     Cash provided by (used in) financing activities was $11,211,000, 
$24,972,000 and ($508,000) for fiscal years 1996, 1997 and 1998, 
respectively.  The cash from financing activities in fiscal 1996 was 
primarily due to the issuance of $12,100,000 of Common Stock.  See Note 13 of 
Notes to Consolidated Financial Statements.  The cash from financing 
activities in fiscal 1997 resulted primarily from the issuance of 
approximately $17,600,000 in common stock in connection with the Company's 
initial public offering and proceeds of approximately $6,900,000 on the 
Company's construction loan 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. 

     As of March 31, 1998, the Company had approximately $6,984,000 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.  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 1999.  

                                    31
<PAGE>

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

RECENT ACCOUNTING PRONOUNCEMENTS
     In June 1997, the Financial Accounting Standards Board (FASB) issued 
SFAS No. 130 "Reporting Comprehensive Income".  SFAS No. 130 establishes 
standards for reporting and displaying comprehensive income and its 
components in financial statements.  Comprehensive income, as defined, 
includes all changes in equity (net assets) during a period from non-owner 
sources.  Examples of items to be included in comprehensive income, which are 
excluded from net income, include foreign currency translation adjustments 
and unrealized gains/losses on available for sale securities.  The disclosure 
prescribed by SFAS No. 130 must be made beginning with the first quarter of 
fiscal 1999.

     Additionally in June 1997, the FASB issued SFAS No. 131, "Disclosure 
About Segments of an Enterprise and Related Information".  This statement 
establishes standards for the way companies report information about 
operating segments in annual financial statements.  It also establishes 
standards for related disclosures about products and services, geographic 
areas and major customers.  The Company has not yet determined the impact, if 
any, of adopting this new standard.  The disclosures prescribed by SFAS No. 
131 will be effective for the Company's consolidated financial statements for 
the year ending March 31, 1999.

     In April 1998, the 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 

                                    32
<PAGE>

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.

     In October 1997 and March 1998, the AICPA issued SOP 97-2, "Software 
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a 
Provision of SOP 97-2, Software Revenue Recognition" which the Company is 
required to adopt for transactions entered into in the fiscal year beginning 
April 1, 1998.  SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue 
on software transactions and supercede SOP 91-1.  The Company believes that 
the adoption of SOP 97-2 and SOP 98-4 will not have a significant impact on 
its current licensing or revenue recognition practices.  However, should the 
Company adopt new or change its existing licensing practices, the Company's 
revenue recognition practices may be subject to change to comply with the 
accounting guidance provided in SOP 97-2 and 98-4.

"YEAR 2000" ISSUES
     The Company is aware of the numerous issues associated with the 
programming code in existing computer systems as the year 2000 approaches.  
The "Year 2000" problem is pervasive and complex, as many computer systems 
will be affected in some way by the rollover of the two digit year value to 
00.  Systems that do not properly recognize such information may generate 
erroneous data or cause a system to fail.  The "Year 2000" issue creates 
risk for the Company from unforeseen problems in its own computer systems and 
from third parties with whom the Company deals worldwide.  Failures in the 
Company's and/or third party's computer systems could have a material adverse 
impact on the Company's operations.  To address this concern, the Company has 
evaluated its products to assess their Year 2000 compliance.  The Company 
believes that the most current release of all of its products will not cease 
to perform nor generate incorrect or ambiguous data or results solely due to 
a change in date to or after January 1, 2000.  The Company believes that the 
current versions of its products are in material compliance with the Year 
2000 papers by the British Standards Institute.  While copies of old versions 
of the Company's software may be embedded in deployed products developed by 
OEM licensees, some of which may be used in mission critical functions, the 
Company has made commercially available Year 2000 fixes to all of its past 
licensees, and believes that the term of its license agreements preclude any 
liability for Year 2000 related failures in such products.  The Company is 
also currently in the process of evaluating its infrastructure along with its 
external suppliers for "Year 2000" compliance. Management believes its 
internal infrastructure and external suppliers used will be compliant by the 
year 2000.  Management does not believe the costs related to achieving "Year 
2000" compliance will be material.  There can be no assurance that the 
systems of other companies on which the Company relies have been or will be 
accurately converted to be "Year 2000" compliant and will not have an adverse 
effect on the Company's operations.

                                    33
<PAGE>

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

                                    34
<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."

                                    35
<PAGE>

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

None.

                                    36
<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 1998 Annual Meeting of Shareholders, expected to be filed 
pursuant to Regulation 14A no later than 120 days following March 31, 1998.


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K

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

1. Consolidated Financial Statements

   The following are included herein:
   Independent Auditors' Report
   Consolidated Balance Sheets as of March 31, 1997 and 1998
   Consolidated Statements of Operations for the three years ended March 31,
      1998
   Consolidated Statements of Shareholders' Equity for the three years ended 
      March 31, 1998
   Consolidated Statements of Cash Flows for the three years ended March 31, 
      1998
   Notes to Consolidated Financial Statements


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

EXHIBIT NO.                      DESCRIPTION
-----------------------------------------------------------------------------

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

                                    38
<PAGE>

10.7  1992 Stock Option Plan of the Company, filed as Exhibit 10.7 to the 
      Company's Registration Statement on Form S-1, Reg. No. 33-99160, and 
      hereby incorporated by reference.
10.8  1995 Stock Option Plan of the Company, as amended.
10.9  401(k) Plan of the Company, filed as Exhibit 10.9 to the Company's 
      Registration Statement on Form S-1, Reg. No. 33-99160, and hereby 
      incorporated by reference.
10.10 Non-Contributory Profit Sharing Plan of the Company, filed as Exhibit 
      10.10 to the Company's Registration Statement on Form S-1, Reg. No. 33-
      99160, and hereby incorporated by reference.
10.11 Credit Agreement between the Company and Norwest Bank Iowa, National 
      Association dated October 20, 1995, including Commercial Note 
      Agreement, filed as Exhibit 10.11 to the Company's Registration 
      Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by 
      reference.
10.12 Real Estate Purchase Agreement between Charles I. Colby, Jr. And 
      Patricia E. Colby, Sellers, and Mid-America Investment Co., Buyer, 
      dated November 21, 1995, with amendments, and Assignment and Conveyance 
      of Interest from Mid-America Investment Co. to the Company, dated May 
      9, 1996, filed as Exhibit 10.15 to the Form 10-K Report of the Company 
      for the fiscal year ended March 31, 1996, and hereby incorporated by 
      reference.
10.13 Real Estate Purchase Agreement between Charles I. Colby, Jr. And 
      Victoria R. Colby, Sellers, and Mid-America Investment Co., Buyer, 
      dated November 21, 1995, with amendments, and Assignment and Conveyance 
      of Interest from Mid-America Investment Co. to the Company, dated May 
      9, 1996, filed as Exhibit 10.16 to the Form 10-K Report of the Company 
      for the fiscal year ended March 31, 1996, and hereby incorporated by 
      reference.
10.14 Real Estate Agreement between Mid-America Investment Co. and the 
      Company dated May 9, 1996, filed as Exhibit 10.17 to the Form 10-K 
      Report of the Company for the fiscal year ended March 31, 1996, and 
      hereby incorporated by reference.
10.15 Commercial Note, Letter Agreement, and Security Agreement between the 
      Company and Norwest Bank Iowa, N.A., dated July 23, 1996, filed as 
      Exhibit 10.18 to the Form 10-K Report of the Company for the fiscal 
      year ended March 31, 1997.
10.16 Contract for Construction between the Company and The Weitz Company, 
      Inc., dated July 25, 1996, filed as Exhibit 10.19 to the Form 10-K 
      Report of the Company for the fiscal year ended March 31, 1997.
11    Statement Regarding Computation of Net Earnings (Loss) Per Share.
12    Subsidiaries of the Registrant.
23    Consent of Independent Accountants.
27    Financial Data Schedule (EDGAR version only).

(b) Reports on Form 8-K. On January 14, 1998 the Company filed a report on 
    Form 8-K to report a newly executed promissory note with GMAC Commercial 
    Mortgage.  On March 9, 1998, the Company filed a report on Form 8-K to 
    report the consummation of a sale of shares of Series C Preferred Stock 
    of Unwired Planet, Inc.

                                    39
<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, 1998.  

                                    MICROWARE SYSTEMS CORPORATION, 
                                       an Iowa Corporation


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

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

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

         Signature                  Title                        Date

/S/ KENNETH B. KAPLAN          Chairman, President & Chief 
------------------------
    Kenneth B. Kaplan          Executive Officer (Principal    June 29, 1998
                               Executive Officer)

/S/ M. DENIS CONNAGHAN         Director, Executive Vice 
------------------------
    M. Denis Connaghan         President & Chief Operating     June 29, 1998
                               Officer 

/S/ KENT R. KELDERMAN          Chief Financial Officer,
------------------------
    Kent R. Kelderman          Executive Vice President &      June 29, 1998
                               Treasurer (Principal Financial 
                               & Accounting Officer)

/S/ ARTHUR DON
------------------------
    Arthur Don                 Director                        June 29, 1998

                                    40

<PAGE>


/S/ JAMES A. GORDON
------------------------
    James A. Gordon            Director                        June 29, 1998

/S/ ROBERT L. GROWNEY
------------------------
    Robert L. Growney          Director                        June 29, 1998

/S/ DANIEL P. HOWELL
------------------------
Daniel P. Howell               Director                        June 29, 1998

/S/ DENNIS E. YOUNG
------------------------
Dennis E. Young                Director                        June 29, 1998

                                    41
<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, 1997 and 1998 and the 
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended March 31,
1998.  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, 1997 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1998, in conformity with generally accepted
accounting principles.




                                                        KPMG PEAT MARWICK LLP


Des Moines, Iowa
April 24, 1998

                                     F-1
<PAGE>


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

<TABLE>
<CAPTION>
                                                           March 31,
                                                      ------------------
           Assets                                       1997      1998
           ------                                     --------  --------
<S>                                                   <C>       <C>
Current assets:
  Cash and cash equivalents                           $  6,758  $  2,009
  Short-term investments                                13,204    11,611
  Trade receivables, net of allowance
    for doubtful accounts of $635
    and $502 (notes 2 and 4)                             7,014     4,064
  Income taxes receivable                                  207         6
  Inventories (note 4)                                      96        66
  Prepaid royalties                                      1,005       370
  Prepaid expenses and other current assets                316       780
  Deferred tax assets (note 6)                             507       465
                                                      --------  --------
    Total current assets                                29,107    19,371
                                                      --------  --------
Investment, at cost                                      5,004        -
                                                      --------  --------
Property and equipment, net (notes 3 and 5)             11,917    13,663
                                                      --------  --------
Other assets:
  Intangible assets, net of amortization (notes 1 and 4  1,675     3,050
  Deposits and other (note 4)                            1,380     1,415
                                                      --------  --------
    Total other assets                                   3,055     4,465
                                                      --------  --------
                                                      $ 49,083  $ 37,499
                                                      ========  ========
</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                            1997      1998
       ----------------------                         --------  --------
<S>                                                   <C>       <C>
Current liabilities:
  Notes payable to banks (note 4)                      $   323  $    300
  Current installments of long-term debt (note 5)           38        66
  Accounts payable                                       2,559     1,386
  Accrued expenses                                       2,194     2,317
  Deferred revenues                                        867       832
  Income taxes payable                                     102        56
                                                      --------  --------
    Total current liabilities                            6,083     4,957
Long-term debt, less current installments (note 5)       8,038     6,918
Deferred income taxes (note 6)                             236       268
                                                      --------  --------
    Total liabilities                                   14,357    12,143
                                                      --------  --------
Shareholders' equity (notes 7, 8 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; 14,190,561 and 14,778,092
   shares issued;13,965,461 and 14,552,992 shares
   outstanding                                          36,152    36,735
  Retained earnings (deficit)                               89    (9,857)
  Cumulative adjustment from foreign
    currency translation                                  (738)     (745) 
                                                      --------  --------
                                                        35,503    26,133
  Less cost of common shares acquired for the treasury,
   225,100 and 225,100 shares                              777       777
                                                      --------  --------
    Total shareholders' equity                          34,726    25,356
                                                      --------  --------
Commitments (note 14)
                                                       $49,083  $ 37,499
                                                      ========  ========
</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,
                                      --------------------------------
                                         1996       1997        1998
                                      ---------   ---------   ---------
<S>                                   <C>         <C>         <C>
Revenues (notes 2 and 10):
  Product                             $  16,104   $  16,586   $  12,047
  Services                                7,551       9,548       5,677
                                      ---------   ---------   ---------
                                         23,655      26,134      17,724
                                      ---------   ---------   ---------
Cost of revenues:
  Product                                 2,428       3,046       2,745
  Services                                2,672       3,923       3,201
                                      ---------   ---------   ---------
                                          5,100       6,969       5,946
                                      ---------   ---------   ---------
    Gross profit                         18,555      19,165      11,778
                                      ---------   ---------   ---------
Operating expenses:
  Research and development                5,009       7,155       7,223
  Sales and marketing                     8,421      10,819      10,148
  General and administrative              3,899       3,415       4,485
  Special charges (note 12)                 -           438         940
                                      ---------   ---------   ---------
                                         17,329      21,827      22,796
                                      ---------   ---------   ---------
    Operating profit (loss)               1,226      (2,662)    (11,018) 
                                      ---------   ---------   ---------

Other income (expense):
  Foreign currency gain (loss), net          13         (30)        (79)
  Gain on sale of land and building         -           -           215
  Gain on sale of investment                -           -           881
  Interest expense                         (151)       (106)       (465)
  Interest income                           434       1,224         730
                                      ---------   ---------   ---------
                                            296       1,088       1,282
                                      ---------   ---------   ---------
    Earnings (loss) before income
        tax expense (benefit)             1,522      (1,574)     (9,736)
Income tax expense (benefit) (note 6)       146          (3)        210
                                      ---------   ---------   ---------
    Net earnings (loss) (note 10)     $   1,376   $  (1,571)  $  (9,946)
                                      =========   =========   =========
Basic earnings (loss) per share       $   .12     $  (.11)    $  (.69) 
                                      =========   =========   =========


Shares used in per share  
    calculation - basic                   11,090     13,754      14,378
                                       =========  =========   =========
Diluted earnings (loss) per share      $  .11     $ (.11)     $ (.69)
                                       =========  =========   =========
Shares used in per share 
    calculation - diluted                 12,930     13,754      14,378
                                       =========  =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                     F-4
<PAGE>

                          MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Shareholders' Equity (Deficit)
                                        ($ in thousands)

<TABLE>
<CAPTION>
                                                       Cumulative
                                                        adjustment
                                                            from
                                               Retained   foreign             Total
                              Preferred Common earnings   currency Treasury shareholders'
                               stock    stock (deficit) translation stock     equity
                              -------  -------  -------   --------  -------  ---------
<S>                           <C>      <C>      <C>       <C>       <C>      <C>
Balance at March 31, 1995     $5,001   $ 1,052  $  284    $    (1)  $  (777) $   5,559

Issuance of common shares
  of stock                        -     12,104     -           -        -       12,104
Legal and other fees incurred
 for issuance of common 
 shares of stock                  -        (62)    -           -        -          (62)
Net earnings                      -        -      1,376        -        -        1,376
Current translation adjustment    -        -       -          (434)     -         (434)
                              -------  -------  -------   --------  -------  ---------
Balance at March 31, 1996       5,001   13,094    1,660       (435)    (777)    18,543

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

Issuance of common shares 
  of stock                        -        643      -          -        -          643
Legal and other fees incurred 
  for issuance of common shares
  of stock                        -        (60)     -          -        -          (60)
Net loss                          -        -     (9,946)       -        -       (9,946)
Current translation adjustment    -        -        -           (7)     -           (7)
                              -------  -------  -------   --------  -------  ---------
Balance at March 31, 1998     $   -    $36,735  $(9,857)  $   (745) $  (777) $  25,356
                              =======  =======  =======   ========  =======  =========
</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,
                                                         -----------------------------
                                                           1996       1997       1998
                                                        --------    --------   --------
<S>                                                      <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings (loss)                                    $ 1,376    $ (1,571)  $ (9,946)
  Adjustments to reconcile net earnings (loss)
    to net cash provided by (used in)
    operating activities:
     Depreciation and amortization                         1,296       1,802      2,366
     Gain on sale of land and building                         -           -       (215)
     Write down of intangible and other assets                 -           -        940
     Gain on sale of investment                                -           -       (881)
     Deferred income taxes                                  (185)         17         74
     (Increase) decrease in trade receivables, net        (1,248)     (2,288)     2,837
     Decrease in income taxes receivable                     111           4        201
     Decrease (increase) in inventories                        3         (58)        30
     (Increase) decrease in prepaid royalties                  -      (1,005)        69
     Decrease (increase) in prepaid expenses
       and other current assets                               69         (95)      (469)
     Increase in other assets                               (726)     (1,749)    (2,843)
     Increase (decrease) in accounts payable                 547         942     (1,144)
     (Decrease) increase in accrued expenses                (333)        905          8
     Increase (decrease) in deferred revenues                164          (9)       159
     Decrease in income taxes payable                         (6)        (50)       (45) 
                                                        --------    --------   --------
     Net cash provided by (used in)
       operating activities                                1,068      (3,155)    (8,859) 
                                                        --------    --------   --------
Cash flows from investing activities:
  Capital expenditures                                    (1,320)     (9,089)    (4,559)
  Proceeds from sale of property and equipment                19           -      1,640
  Purchases of short-term investments                          -     (39,417)   (24,353)
  Maturities of short-term investments                         -      26,213     25,945
  Purchase of investment, at cost                              -      (5,004)         -
  Proceeds from sale of investment, net                        -           -      5,885
                                                        --------    --------   --------
     Net cash (used in) provided by
       investing activities                               (1,301)    (27,297)     4,558
                                                        --------    --------   --------
Cash flows from financing activities:
  Proceeds from issuance of notes payable to banks
    and long-term debt                                     3,142       7,901     10,702
  Principal payments on notes payable to banks
    and long-term debt                                    (3,406)     (1,553)   (11,793)
  Proceeds on issuance of common shares of stock          12,104      19,046        643
  Cost of issuance of common stock                           (62)       (422)       (60)
  Deferred offering costs                                   (567)          -          -
                                                        --------    --------   --------
     Net cash provided by (used in)
       financing activities                               11,211      24,972       (508) 
                                                        --------    --------   --------
                                                          10,978      (5,480)    (4,809)
Effect of foreign currency exchange rate
  changes on cash                                           (157)        (99)        60
                                                        --------    --------   --------
     Net increase (decrease) in cash
       and cash equivalents                               10,821      (5,579)    (4,749)
Cash and cash equivalents at beginning of year             1,516      12,337      6,758
                                                        --------    --------   --------
Cash and cash equivalents at end of year                  12,337  $    6,758  $   2,009
                                                        ========    ========   ========
</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, 1997 and 1998 consisted 
       of the following:
<TABLE>
<CAPTION>
                                                        1997
                                          --------------------------------
                                                     Accumulated
                                          Cost       amortization     Net
                                          -------      -------      -------
          <S>                             <C>          <C>         <C>
          Capitalized software
             development costs            $   932      $   737      $   195
          Purchased software                1,476          418        1,058
          Goodwill                            727          506          221
          Patents, copyrights, and other      639          438          201
                                          -------      -------      -------
                                          $ 3,774      $ 2,099      $ 1,675
                                          =======      =======      =======
</TABLE>

<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
                                          =======      =======      =======
</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 $236, $201, and $151 for  the years 
       ended March 31, 1996, 1997, and 1998, 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.  The Company assesses 
       the recoverability of goodwill through analysis of undiscounted cash 
       flows.

     Advertising
     -----------
     Advertising costs incurred for the years ended March 31, 1996, 1997, and 
       1998 were $1,277, $764, and $687, respectively.

     Revenue Recognition
     -------------------
     The Company's revenue recognition policy is in compliance with the 
       provisions of the American Institute of Certified Public Accountants' 
       (AICPA) Statement of Position (SOP) 91-1, "Software Revenue 
       Recognition".  Product revenues primarily consist of software licenses 
       and development tool products sold and royalties earned from equipment 
       distributors.  Software license fees are recognized as revenues upon 
       contract signing and shipment of the software master copy.  Sales of 
       development tool products are recognized as revenues upon shipment.  
       Royalties earned from equipment distributors are recognized as 
       revenues when reported by the equipment distributors or upon written 
       agreement for non-refundable prepaid royalties.

     Service revenues are derived primarily from custom contract engineering 
       work, postcontract 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.

                                     F-9
<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 October 1997 and March 1998, the AICPA issued SOP 97-2, "Software 
       Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of
       a Provision of SOP 97-2, Software Revenue Recognition" which the 
       Company is required to adopt for transactions entered into in the 
       fiscal year beginning April 1, 1998.  SOP 97-2 and SOP 98-4 provide 
       guidance on recognizing revenue on software transactions and supercede 
       SOP 91-1.  The Company believes that the adoption of SOP 97-2 and SOP 
       98-4 will not have a significant impact on its current licensing or 
       revenue recognition practices.  However, should the Company adopt new 
       or change its existing licensing practices, the Company's revenue 
       recognition practices may be subject to change to comply with the 
       accounting guidance provided in SOP 97-2 and 98-4.

     Computation of Net Earnings (Loss) Per Share
     --------------------------------------------
     Net earnings (loss) per share is calculated in accordance with the 
       provisions of SFAS No. 128,  "Earnings per Share" which was required 
       to be adopted in the quarter ended December 31, 1997.  SFAS No. 128 
       establishes new standards for computing and presenting earnings per 
       share (EPS) on a basis that is more comparable to international 
       standards and provides for the presentation of basic and diluted EPS.  
       Basic EPS has been computed by dividing net earnings (loss) by the 
       weighted average number of common shares common and convertible 
       preferred stock (as if converted to common stock on the original date 
       of issuance) outstanding during the periods presented.  Diluted EPS 
       has been computed by dividing net earnings (loss) by the weighted 
       average common and convertible preferred stock (as if  converted to 
       common stock on the original date of issuance) 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.  All prior period EPS calculations have been 
       restated.

     Effective April 2, 1996, the Company completed an initial public 
       offering of its common stock.  Prior to April 2, 1996, there were no 
       established market prices for the common stock of the Company.  The 
       market prices used in the computation of net earnings (loss) per share 
       prior to April 2, 1996 were average values calculated from the annual 
       appraisals of the Company's common shares of stock performed by 
       independent appraisers.  Pursuant to Securities and Exchange 
       Commission Staff Accounting Bulletin No. 98 (SAB No. 98), all stock 
       issued and warrants and options to purchase shares of common stock 
       granted by the Company for normal consideration preceding the initial 
       public offering date are included in the EPS calculations in a manner 
       similar to a stock split or stock dividend.  SAB No. 98 revised the 
       calculation of the pre-initial public offering common and common stock 
       equivalent shares previously governed by SAB No. 83.  The Company has 
       retroactively applied SAB No. 98.  In fiscal year 1996, basic EPS was 
       calculated based upon 11,090,000 weighted-average common shares and 
       the effect of the dilutive EPS was 1,840,000 shares.

     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:

                                     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, Continued
     ----------------------------------------------
    
       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 proforma disclosures as required under SFAS No. 
       123, "Accounting for Stock-Based Compensation" (see note 8).

     Recent Accounting Pronouncements
     --------------------------------
     In June 1997, the Financial Accounting Standards Board (FASB) issued 
       SFAS No. 130, "Reporting Comprehensive Income".  SFAS No. 130 
       establishes standards for reporting and displaying comprehensive 
       income and its components in financial statements.  Comprehensive 
       income, as defined, includes all changes in equity (net assets) during 
       a period from non-owner sources.  Examples of items to be included in 
       comprehensive income, which are excluded from net income, include 
       foreign currency translation adjustments and unrealized gains/losses 
       on available for sale securities.  The disclosure prescribed by SFAS No. 
       130 must be made beginning with the first quarter of fiscal 1999.

     Additionally in June 1997, the FASB issued SFAS No. 131, "Disclosure 
       About Segments of an Enterprise and Related Information".  This 
       statement establishes standards for reporting information about 
       operating segments in annual financial statements.  It also 
       establishes standards for related disclosures about products and 
       services, geographic areas and major customers.  The Company has not 
       yet determined the impact, if any, of adopting this new standard.  The 
       disclosures prescribed by SFAS No. 131 will be effective for the 
       Company's consolidated financial statements for the year ending March 
       31, 1999.


                                     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, Continued
     -------------------------------------------
     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, 1997, the Company had one customer whose trade receivable 
       balance exceeded 10 percent of consolidated trade receivables.  Trade 
       receivables at March 31, 1997 for this customer were $704 and revenues 
       for the year ended March 31, 1997 totaled approximately $2,279.  This 
       customer is also a shareholder of the Company (see note 13).

     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.

     The activity in the Company's allowance for doubtful accounts for the 
       years ended March 31, 1996, 1997, and 1998 consisted of the following:



<TABLE>
<CAPTION>
                                Balance at    Additions     Deductions, 
                                beginning     charged to      net of       Balance at
                                 of year       expenses     recoveries     end of year
                                ----------    ----------    ----------     ----------- 
      <C>                         <S>          <S>             <S>            <S>
      Year ended March 31, 1996   $  78        $ 367           $  79          $ 366
                                  =====        =====           =====          =====
      Year ended March 31, 1997   $ 366        $ 754           $ 485          $ 635
                                  =====        =====           =====          =====
      Year ended March 31, 1998   $ 635        $ 587           $ 720          $ 502
                                  =====        =====           =====          =====

</TABLE>


(3)  Property and Equipment
     -----------------------
     Property and equipment consisted of the following:
<TABLE>
<CAPTION>
                                                  March 31, 
                                             ------------------
                                                1997      1998
                                             -------    -------
         <S>                                 <C>        <C>
         Land and improvements               $   144    $ 2,529
         Building                              2,017      8,426
         Furniture, fixtures, and equipment    4,115      3,264
         Research and development equipment    3,612      2,571
         Leasehold improvements                  123         49
         Construction in progress              7,369        -
                                             -------    -------
                                              17,380     16,839
         Accumulated depreciation
              and amortization                 5,463      3,176
                                             -------    -------
                                             $11,917    $13,663
                                             =======    =======
</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, 1998 
       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, 1997 or 1998.

     Microware Systems K.K. has credit agreements with various maturities 
       with two Japanese banks.  Outstanding balances at March 31, 1997 and 
       1998 totaled $323 and $300, respectively. The weighted average 
       interest rate was 2.125 percent at March 31, 1998.  The credit 
       agreements are secured by Microware Systems K.K.'s deposit for office 
       space in the amount of $450 at March 31, 1998.

(5)  Long-term Debt
     ---------------
     Long-term debt at March 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
                                                      March 31,
                                                 --------------------
                                                   1997        1998
                                                 -------      -------
         <S>                                     <C>          <C> 
         Mortgage note                       (A) $   193      $   -
         Mortgage note with bank             (B)     997          -
         Construction note                   (C)   6,886          -
         Promissory note                     (D)     -          6,984
                                                 -------      -------
                                                   8,076        6,984
         Less current installments                    38           66
                                                 -------      -------
             Long-term debt, excluding 
             current installments                $ 8,038      $ 6,918
                                                 =======      =======
</TABLE>

     
     (A) In conjunction with the sale of the Company's former headquarters 
         building, this note was paid off in November 1997.

     (B) In conjunction with the sale of the Company's former headquarters 
         building, this note was paid off in December 1997.

     (C) The construction note was paid off in December 1997.

     (D) On December 30, 1997, the Company, through its newly organized 
         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.  Monthly payments 
         are $49, including interest at 7.46 percent, with the unpaid balance
         due January 1, 2008.


                                     F-13
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)


(5)  Long-term Debt (continued)
     --------------------------
     The aggregate maturities of long-term debt for each of the five years 
       ending March 31, 2003 and thereafter are as follows:
                                              
                                              1999             66
                                              2000             71
                                              2001             76
                                              2002             82
                                              2003             89
                                              Thereafter    6,600
                                                          -------
                                                          $ 6,984
                                                          =======

     The carrying amount of the Company's long-term debt approximates the fair 
       value as of March 31, 1998.

(6)  Income Taxes
     ------------
     The provision for income taxes is based on earnings (loss) before income
       tax expense (benefit) as follows:
<TABLE>
<CAPTION>
                                           1996      1997       1998
                                         --------  --------   --------
                 <S>                     <C>       <C>        <C>
                 United States           $  (234)  $ (1,404)  $ (7,940)
                 Foreign                   1,756       (170)    (1,796)
                                         --------  --------   --------
                                         $ 1,522   $ (1,574)    (9,736)
                                         =======   ========   ========
</TABLE>


     Components of income tax expense (benefit) for the years ended March 31, 
       1996, 1997, and 1998 consist of the following: 
<TABLE>
<CAPTION>
                                                 1996  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current      $  269       $  62      $  331
                      Deferred       (185)         -         (185) 
                                   ------       -----      ------
                                   $   84       $  62      $  146
                                   ======       =====      ======
</TABLE>
<TABLE>
<CAPTION>
                                                 1997  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current       $  34       $ (54)     $  (20)
                      Deferred         17           -          17
                                   ------       -----      ------
                                   $   51       $ (54)     $   (3) 
                                   ======       =====      ======
</TABLE>
<TABLE>
<CAPTION>
                                                 1998  
                                  -------------------------------
                                  Domestic     Foreign 
                                   income       income      Total
                                  ---------   -----------   -----
                      <S>          <C>          <C>        <C>
                      Current       $ 121       $  15      $  136
                      Deferred         74           -          74
                                   ------       -----      ------
                                   $  195       $  15      $  210 
                                   ======       =====      ======
</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, 1996, 1997, 
       and 1998 differs from the "expected" income tax expense (benefit) 
       computed by applying the United States federal income tax rate of  
       34 percent to pretax income (loss) due to the following:

<TABLE>
<CAPTION>
                                                     1996      1997      1998
                                                    -------   ------    -------
   <S>                                              <C>       <C>       <C>
   Computed "expected" tax expense (benefit)        $  517    $ (535)   $(3,310)
   Increase (decrease) in taxes resulting from:   
   U.S. losses without current benefit                  -        660      2,682
   Foreign losses without current benefit               -        209        743
   Utilization of foreign net    
      operating loss carryforwards                    (208)     (457)        -
   Foreign taxes                                        -         99         77
   Change in the beginning of the   
      year balance of the valuation   
      allowance for deferred tax assets   
      allocated to income tax expense                 (173)       -          -
   Other                                                10        21         18
                                                    ------    ------    -------
                                                    $  146     $  (3)   $   210
                                                    ======    ======    =======

</TABLE>


     The tax effects of temporary differences that give rise to deferred tax 
       assets and liabilities at March 31, 1997 and 1998 are presented below:

<TABLE>
<CAPTION>
                                                             March 31,
                                                        ------------------
                                                          1997       1998
                                                        -------    -------
     <S>                                                <C>        <C>
     Deferred tax assets:  
        U.S. net operating loss carryforwards           $ 1,400    $ 7,048
        Foreign net operating loss carryforwards            445      1,042
        Post contract customer support unearned revenue     161        189
        Compensation/benefits                                43         33
        Inventories                                          54         54
        Allowance for doubtful accounts                     214        178
        Warranty reserve                                     -          54
        Other                                                95         43
                                                        -------    -------
           Total gross deferred tax assets                2,412      8,641
        Less valuation allowance                          1,845      8,090
                                                        -------    -------
           Total deferred tax assets                        567        551
                                                        -------    -------
     Deferred tax liabilities:  
        Capitalized software costs                           70         93
        Property and equipment                              226        261
                                                        -------    -------
           Total deferred tax liabilities                   296        354
                                                        -------    -------

           Net deferred tax assets                      $   271    $   197
                                                        =======    =======
</TABLE>


     The net deferred tax assets at March 31, 1997 and 1998, are composed of 
       current deferred tax assets of $507 and $465, respectively, and 
       noncurrent deferred tax liabilities of $236 and $268, respectively.

                                     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 change in the total valuation allowance for the years ended 
       March 31, 1997 and 1998 was an increase of $1,085 and $6,245, 
       respectively.  A valuation allowance has been set up to offset the 
       gross deferred tax assets created by U.S. and foreign net operating 
       loss carryforwards.  Utilization of the U.S. and foreign net operating
       losses is dependent upon future taxable income generated in the 
       respective U.S. and foreign subsidiaries.  The Company recorded the 
       valuation allowance due to its lack of history of consistent earnings
       in the U.S. and in a foreign subsidiary generating the net operating 
       loss carryforwards.  At March 31, 1998, the Company has U.S. net 
       operating loss carryforwards for federal income tax purposes of 
       approximately $19,500 (including approximately $8,500 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 and $11,000 in 2013.  The foreign net operating loss 
       carryforwards expire as follows: $599 in 1999, $150 in 2000, $1,597 in
       2003, and $550 in 2004.

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

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

(8)  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 1,720,000 total shares of common stock subject to option,
       respectively. 


                                     F-16
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)

(8)  Stock Options, Continued
     ------------------------
     In May 1997, the Company offered all recipients of stock options grants 
       made in October 1996 the right to cancel those outstanding and non-
       vested options at the original exercise price of $15.50 per share and 
       receive new options dated May 1997 with a new price and revised 
       vesting.  The new exercise prices are $10.00 per share for employees 
       who were serving as executive officers at the time of the original 
       grant and $6.25 (the closing price of the common stock on the date of 
       grant) for all other employees.  While the original grants had a 
       vesting schedule of 25% on each anniversary of October 14, 1996, the 
       new grants have a vesting of 10%, 20%, 30% and 40% on each anniversary 
       of May 2, 1997.  Vesting of all grants accelerates in the event of a 
       change in control of the Company.  The new grants all have an 
       expiration date of May 2, 2007.

     Activity for the Company's Plans is as follows: 
<TABLE>
<CAPTION>
                      1996                   1997                         1998
           -------------------------  -------------------------  ------------------------
             Number    Option Price     Number    Option Price     Number    Option Price
            of Shares    Per Share     of Shares     Per Share   of Shares     Per Share
           ----------- ------------   ----------  ------------   ----------  ------------
<S>         <C>         <C>           <C>         <C>            <C>         <C>
Beginning        
  balance   1,520,000  $0.50-1.3125   2,250,200    $0.50-3.125    2,060,691   $0.50-15.50
Issued        784,400      $3.125       373,100   $10.00-15.50      978,250  $4.375-10.00
Exercised       4,000      $.9375       391,009    $0.50-3.125      587,531   $0.50-3.125
Canceled       50,200  $.9375-3.125     171,600      $3.125         443,100  $3.125-15.50
            ---------                 ---------                   ---------  
Ending        
  balance   2,250,200  $0.50-3.125    2,060,691    $0.50-15.50    2,008,310   $0.50-15.50
            =========  ===========    =========    ===========    =========   ===========

</TABLE>


     SFAS No. 123 requires proforma information regarding net earnings (loss) 
       and earnings (loss) per share be determined as if the Company has 
       accounted for its stock options granted subsequent to December 15, 
       1994 under the "fair value" method.  Under SFAS No. 123, the fair 
       value of each option grant is estimated on the date of grant using the
       Black-Scholes option valuation model with the following assumptions 
       used for grants during fiscal 1996, 1997 and 1998: risk free interest 
       rates of 6.0%, 6.25% and 6.0%, respectively; expected volatility of 
       0.00%, 80.89% and 88.40%, respectively; an expected option life of 
       5.75 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, 1996, 1997, and 1998 were 
       $0.82,  $10.80 and $4.90, respectively.

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

                                     F-17
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)

(8)  Stock Options, Continued
    -------------------------
     The Company applies the provisions of APB No. 25 and related 
       interpretations in accounting for compensation expense under the 
       Plans.  Had compensation expense under the Plans been determined 
       pursuant to SFAS No. 123, the Company's proforma net earnings (loss) 
       and net earnings (loss) per share for the years ended March 31, 1996, 
       1997, and 1998 would have been as follows:
<TABLE>
<CAPTION>
                                     1996          1997          1998
                                  ----------    ----------    ----------
<S>                               <C>           <C>           <C>

           Net earnings (loss): 
              As reported         $  1,376      $  (1,571)    $  (9,946)
              Proforma            $  1,215      $  (2,763)    $ (10,954)

           Net earnings (loss)  
            per share:
              As reported
                 Basic            $  0.12       $  (0.11)     $  (0.69)
                 Diluted          $  0.11       $  (0.11)     $  (0.69)
              Proforma 
                 Basic            $  0.11       $  (0.20)     $  (0.76)
                 Diluted          $  0.09       $  (0.20)     $  (0.76)
</TABLE>


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

     The following table summarizes information about fixed stock options 
       outstanding under the Plans at March 31, 1998:

<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     635,010        2.7       $ 0.8973       635,010      $ 0.8973
   $3.10 - 4.65     410,600        7.0       $ 3.1996       195,600      $ 3.1250
   $4.66 - 6.20     238,500        9.5       $ 5.7372           -        $   -
   $6.21 - 7.75     674,300        9.2       $ 6.6743           -        $   -
   $9.30 - 10.85     25,000        7.3       $  10.00         5,000      $  10.00
  $13.95 - 15.50     24,900        8.5       $  15.50         6,225      $  15.50
                  ---------                               ---------     
                  2,008,310        6.7       $ 4.1768       841,835      $ 1.5769
                  =========        ===       ========     =========      ========
</TABLE>


(9)  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, 1996, 1997, and 
       1998 amounted to $88, $131, and $175, respectively.

                                     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, 1996, 1997, and 1998 is presented below:

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

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

<TABLE>
<CAPTION>
                                                       1998
                           ------------------------------------------------------------
                                                                       Elimin-
                              U.S     U.K.    Japan   France   Germany  ations   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) $(1,554) $  (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>


     Included in U.S. revenues are foreign export sales, of approximately 
       $2,324, $1,226, and $690 during the years ended March 31, 1996, 1997, 
       and 1998, 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, 1996, 1997, and 1998, the Company paid 
       interest of approximately $124, $262, and $701, respectively.

     Income taxes paid during the years ended March 31, 1996, 1997, and 1998 
       amounted to approximately $168, $242, and $95, 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, the Company issued Motorola five separate warrants to 
       purchase a total maximum of an additional 1,803,728 common shares of 
       stock of the Company at an exercise price of $10.81 per share.  The 
       warrants are exercisable 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. 
       In connection with the Agreement, the Company delivered 1,373,608 
       common shares of stock of the Company on July 31, 1995 for $10,890.  
       The 152,624 deferred delivery common shares of stock of the Company 
       were delivered to Motorola on August 18, 1995 for $1,210.  Motorola is 
       also a customer of the Company (see note 2).

(14) Commitments
     -----------

     The Company leases certain domestic and foreign facilities under 
       noncancelable operating leases.  Minimum annual rental commitments at 
       March 31, 1998 under all noncancelable operating leases are as 
       follows:
                           1999              $  337
                           2000              $  238
                           2001              $  152
                           2002              $  147
                           2003              $  147
                           Thereafter        $  754


                                     F-20
<PAGE>

                 MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

                   ($ in thousands, except per share amounts)


(14) Commitments, continued
     -----------------------
     Rental expense under cancelable and noncancelable operating leases was 
       $950, $922, and $785 during the years ended March 31, 1996, 1997, and 
       1998, respectively.

                                     F-21
<PAGE>

                                EXHIBIT INDEX

Description                                                         Page

10.8  1995 Stock Option Plan of the Company, as amended              43
11    Statement Regarding Computation of Net Earnings
      (Loss) Per Share                                               50
21    Subsidiaries of the Registrant                                 51
23    Consent of Independent Accountants                             52
27    Financial Data Schedule (Edgar Version Only)

                                     42
<PAGE>