<PAGE>   1
                                                                EXHIBIT 13.01


                         FINANCIAL STATEMENTS US FORMAT


FINANCIAL STATEMENTS PREPARED IN ACCORDANCE
WITH U.S. GAAP (IN U.S. DOLLARS)


SELECTED CONSOLIDATED FINANCIAL DATA                                           8


MANAGEMENT'S DISCUSSION AND ANALYSIS                                           9


CONSOLIDATED STATEMENTS OF INCOME                                             15


CONSOLIDATED BALANCE SHEETS                                                   16


CONSOLIDATED STATEMENTS OF CASH FLOW                                          17


CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY                                                          18


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

 1 Significant accounting policies                                            19
 2 Acquisitions                                                               21
 3 Research and development costs                                             22
 4 Non-recurring items                                                        22
 5 Property, plant and equipment                                              22
 6 Lines of credit                                                            22
 7 Commitments                                                                23
 8 Income taxes                                                               23
 9 Business segment information                                               24
10 Employee share and retirement plans                                        24
11 Quarterly financial information (unaudited)                                26


REPORT OF THE INDEPENDENT AUDITORS                                            26


                                                                               7
<PAGE>   2
                SELECTED CONSOLIDATED FINANCIAL DATA (US FORMAT)

The following selected financial data should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements of Micro
Focus, expressed in U.S. dollars, set forth on pages 15 to 26 of this report.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
In thousands of U.S. dollars        Years ended January 31:      1997       1996   
(except per share data, percentages          Annual Report:      1996       1995   
 and employees)

OPERATING RESULTS FOR THE YEAR:
<S>                                                            <C>         <C>     
Net revenue                                                    115,409     121,956 
Non-recurring items *                                           (8,000)     (9,469)
(Loss) income before income taxes                               (8,383)    (10,536)
Net (loss) income                                              (10,508)    (10,436)
Net (loss) income per share                                     ($0.69)     ($0.69)
Weighted average number of shares outstanding (thousands)       15,234      15,101 

FINANCIAL POSITION AT END OF YEAR:
Cash and short-term investments                                 71,560      58,848 
Total assets                                                   151,311     160,354 
Long-term obligations                                               24         100 
Shareholders' equity                                            88,783      97,474 

FINANCIAL CONDITION:
Working capital                                                 42,578      41,231 
Current ratio                                                     1.81        1.76 
Return on net revenue: excluding non-recurring items *             n/a         n/a 
Return on average equity: excluding non-recurring items *          n/a         n/a 

EMPLOYEE INFORMATION:
Average number of employees                                        646         735 
Number of employees at year-end                                    626         708 
Net revenue per employee                                           179         166 
-----------------------------------------------------------------------------------            


<CAPTION>
-----------------------------------------------------------------------------------------------
In thousands of U.S. dollars        Years ended January 31:     1995         1994       1993
(except per share data, percentages          Annual Report:     1994         1993       1992
 and employees)

OPERATING RESULTS FOR THE YEAR:
<S>                                                            <C>          <C>         <C>    
Net revenue                                                    138,459      125,468     118,629
Non-recurring items *                                          (18,265)           -           -
(Loss) income before income taxes                                1,550       32,528      38,532
Net (loss) income                                               (4,860)      22,044      26,160
Net (loss) income per share                                     ($0.33)       $1.52       $1.80
Weighted average number of shares outstanding (thousands)       14,706       14,535      14,512

FINANCIAL POSITION AT END OF YEAR:
Cash and short-term investments                                 88,758       86,316      79,777
Total assets                                                   197,640      164,873     144,368
Long-term obligations                                              307          605       4,041
Shareholders' equity                                           115,842      112,650      90,218

FINANCIAL CONDITION:
Working capital                                                 58,122       73,027      62,688
Current ratio                                                     1.80         2.68        2.43
Return on net revenue: excluding non-recurring items *           10.0%        17.6%       22.1%
Return on average equity: excluding non-recurring items *        12.0%        28.4%       39.4%

EMPLOYEE INFORMATION:
Average number of employees                                        751          667         599
Number of employees at year-end                                    788          698         636
Net revenue per employee                                           184          188         198
-----------------------------------------------------------------------------------------------
</TABLE>

* Details of the non-recurring items are set out in note 4 to the consolidated
  financial statements on page 22.


8
<PAGE>   3
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                      AND FINANCIAL CONDITION (US FORMAT)

The following discussion should be read in conjunction with the financial
statements of Micro Focus Group Plc and its subsidiaries ("Micro Focus") in U.S.
dollars, on pages 15 to 26. In this discussion, references to fiscal years 1996,
1995 and 1994 are to the years ended January 31 1997, 1996 and 1995
respectively.

RESULTS OF OPERATIONS

Micro Focus reported a net loss for fiscal 1996 of $10.5m and a net loss for
fiscal 1995 of $10.4m. These results include non-recurring charges of $8.0m in
1996 and $9.5m in 1995.

The table below sets forth operating results as a percentage of net revenue for
the three fiscal years ended January 31 1997. To further aid comparison,
non-recurring items are identified separately in the table, and percentages
shown against other cost categories are exclusive of non-recurring items.

<TABLE>
<CAPTION>
---------------------------------------------------------------
                                     PERCENTAGE OF NET REVENUE      
                                                                
                                      1996      1995      1994  
<S>                                    <C>       <C>       <C>  
NET REVENUE
Product revenue                         58        57        70 
Service revenue                         42        43        30  
---------------------------------------------------------------                               

TOTAL NET REVENUE                      100       100       100 
---------------------------------------------------------------                                 
COSTS AND EXPENSES
Cost of product revenue                  9        11        12 
Cost of service revenue                 16        16        12  
Research and development                30        29        23  
Sales and marketing                     40        41        35  
General and administrative               8         7         6  
Non-recurring charges                    7         8        12  
---------------------------------------------------------------                              
TOTAL COSTS AND EXPENSES               110       112       100 
---------------------------------------------------------------                               
(LOSS) FROM OPERATIONS                 (10)      (12)        -  
Interest income (net)                    3         3         2   
Acquisition charges                      -         -        (1) 
---------------------------------------------------------------                                     
(LOSS) INCOME BEFORE INCOME TAXES       (7)       (9)        1  
Income taxes                            (2)        -        (5) 
---------------------------------------------------------------                                     
NET (LOSS)                              (9)       (9)       (4) 
---------------------------------------------------------------                                   

<CAPTION>
--------------------------------------------------------
                                       PERCENTAGE CHANGE                                     
                                        1995        1994 
                                     TO 1996     TO 1995 
<S>                                       <C>        <C> 
NET REVENUE
Product revenue                           (4)        (28)
Service revenue                           (7)         26 
--------------------------------------------------------

TOTAL NET REVENUE                         (5)        (12)
--------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenue                  (27)        (16)
Cost of service revenue                   (5)         15 
Research and development                  (2)          9 
Sales and marketing                       (7)          2 
General and administrative                13           6 
Non-recurring charges                    n/a         n/a 
--------------------------------------------------------
TOTAL COSTS AND EXPENSES                  (7)         (2)
--------------------------------------------------------
(LOSS) FROM OPERATIONS                   n/a         n/a 
Interest income (net)                    (21)          1  
Acquisition charges                      n/a         n/a 
--------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES        (20)        n/a 
Income taxes                             n/a         n/a 
--------------------------------------------------------
NET (LOSS)                                 1         115 
--------------------------------------------------------
</TABLE>


NET REVENUE

Micro Focus derives its net revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90%, 89% and 86% of total net
revenue in fiscal 1996, 1995 and 1994 respectively.

Net revenue is analyzed between product revenue, which consists of licensing of
software products to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.

Total net revenue decreased by $6.6m or 5% to $115.4m in fiscal 1996, and by
$16.5m or 12% to $122.0m in fiscal 1995.

Product revenue decreased by $2.9m or 4% to $66.5m in fiscal 1996, and by $27.4m
or 28% to $69.4m in fiscal 1995.

Service revenue decreased by $3.6m or 7% to $48.9m in fiscal 1996, having
increased by $10.9m or 26% to $52.6m in 1995.

Net revenue by customer location was contributed as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------
FISCAL YEARS:       1996             1995             1994
-----------------------------------------------------------
<S>                  <C>              <C>              <C> 
United Kingdom         9%               9%               9%
United States         53%              55%              59%
Other                 38%              36%              32%
-----------------------------------------------------------
                     100%             100%             100%
-----------------------------------------------------------
</TABLE>


                                                                               9
<PAGE>   4
The decrease in net revenue in fiscal 1996 arose during the first two quarters
with flat sales comparisons in the second half of the year. Net revenue
decreased by 10% in the United States. Non-U.S. territories showed no overall
sales increase, with growth in the United Kingdom, France and Japan being offset
by decreased sales to certain distributors, notably those in Italy and Brazil.

Factors contributing to the decline in net revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the fundamental changes caused by the Internet. The improved performance in
the second half of the year reflected increased sales of products to address the
century date change or "Year 2000" problem.

In 1995 net revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in net revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.

COST OF PRODUCT REVENUE

Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licensing of certain
add-on software products.

Excluding non-recurring items, such costs decreased by $3.7m or 27% to $10.0m in
fiscal 1996 and by $2.6m or 16% to $13.7m in fiscal 1995 and represented 15%,
20% and 17% of product revenue in 1996, 1995 and 1994 respectively.

The decrease in product costs during 1996 reflected savings in product materials
arising from the documentation being supplied on CD-ROM.

The decrease in 1995 reflected the decline in revenue.

COST OF SERVICE REVENUE

Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.

Excluding non-recurring items, such costs decreased by $0.9m or 5% to $18.6m in
fiscal 1996, having increased by $2.5m or 15% to $19.5m in fiscal 1995, and
represented 38%, 37% and 41% of service revenue in 1996, 1995 and 1994
respectively. The decrease in 1996 reflected reductions taken to better align
expenses with revenue. The increase in 1995 resulted from increases in product
support for client/server and rehosting programs.

RESEARCH AND DEVELOPMENT

Research and development costs consist principally of compensation for software
developers and related costs incurred, after adjusting for the proportion of
such costs capitalized (in accordance with Statement of Financial Accounting
Standard No. 86) and the amortization of previously capitalized software costs.
Micro Focus' high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand its product
lines.

Research and development spending in 1996 was directed principally towards
further development of Revolve/2000 (TM) products which address the Year 2000
problem; NetExpress (TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of the core legacy COBOL Workbench product line for workstation
development of IBM mainframe applications.

Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; and tools for downsizing from IBM mainframes.

Expenditure on internal software research and development, before
capitalization, decreased by $6.9m or 19% to $30.1m in fiscal 1996, having
increased by $0.8m or 2% to $37.1m in fiscal 1995 and represented 26%, 30% and
26% of net revenue in fiscal 1996, 1995 and 1994 resectively. The decrease in
1996 reflected the impact of the restructuring announced in the first quarter of
1996 (see "Non-recurring items" below).

In fiscal 1996, 1995 and 1994, $8.3m, $15.6m and $15.0m, representing 27%, 42%
and 41% of such costs, respectively, were capitalized as software product
assets. Provisions for amortization in those years, excluding non-recurring
items, amounted to $12.7m, $13.9m and $10.9m, resulting in a net charge to
income in 1996 of $4.4m, compared to net credits of $1.7m and $4.0m in 1995 and
1994 respectively.

Total research and development costs also include restructuring costs of $3.5m
and $7.0m in 1996 and

10
<PAGE>   5
1995 (see "non-recurring items", below, and notes 3 and 4 to the consolidated
financial statements on page 22).

SALES AND MARKETING

Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.

Excluding non-recurring items, such costs decreased by $3.5m or 7% to $45.9m in
fiscal 1996, having increased by $1.0m or 2% to $49.4m in fiscal 1995 and
represented 40%, 41% and 35% of net revenue in fiscal 1996, 1995 and 1994. The
decrease in 1996 reflects the impact of the worldwide cost reductions
implemented in the first quarter. The increase in 1995 was mainly in respect of
increased marketing activity including advertising, seminars and user
conferences.

GENERAL AND ADMINISTRATIVE

General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.

Excluding non-recurring items, such costs increased by $1.1m or 13% to $9.4m in
fiscal 1996, having increased by $0.5m or 6% to $8.3m in fiscal 1995 and
represented 8%, 7% and 6% of net revenue in fiscal 1996, 1995 and 1994. In 1996
general and administrative costs have increased following the strengthening of
the Micro Focus management team.

NON-RECURRING ITEMS

In the first quarter of 1996 Micro Focus incurred a restructuring charge of
$8.0m. The charge consisted of costs associated with a reduction in the
Company's workforce of approximately 65 people, with facility closures and
consolidations, and with asset write-downs. The restructuring was essentially
completed during the year, but payments estimated at $2.3m remain to be paid in
1997.

Non-recurring items recorded in 1995 consisted of a charge of $10.5m for
restructuring costs and a credit of $1.0m in respect of an employer loan to the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust").

Restructuring costs of $5.0m incurred in the first quarter of 1995, principally
reflected employee terminations (including salary, benefit continuation and
outplacement costs for approximately 75 employees), closure of surplus office
facilities, and write-downs of related fixed assets. An additional charge of
$5.5m, booked in the fourth quarter of 1995, reflected a reduction in the
carrying values of software product assets in line with future revenue
expectations from certain products.

In 1994 Micro Focus recorded charges of $18.3m, of which $12.8m represented the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc. ("Burl"); and $5.5m related to other acquisitions made during that year
(see Acquisitions, below).

INTEREST INCOME

Interest income represents interest earned on cash and short-term investments.

Interest income decreased by $0.7m or 21% to $2.7m in fiscal 1996, having
remained constant at $3.4m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and to a lesser degree, lower interest
rates.

INCOME TAXES

A tax provision of $2.1m was recorded for 1996. The effective tax rate in both
1996 and 1995 was affected by the distribution of taxable profits and losses
among the tax jurisdictions in which Micro Focus operates. The Company has not
recognised the tax effects of operating losses in U.S. subsidiaries. In 1994 the
Company expensed a non-recurring charge of $11,765,000 representing purchased
research and development costs. These costs were non-deductible for tax purposes
and resulted in a significant distortion of the effective tax rate in that year.

An analysis of the charge for income taxes, including an analysis of differences
between the effective rate and the U.K. statutory rates, is given in note 8 to
the consolidated financial statements on page 23.

ACQUISITIONS

In 1995 Micro Focus completed the agreed acquisition of Burl (see note 2 to the
consolidated financial statements on page 21). The transaction had been
accounted for as a purchase in 1994.

In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for $5.0m and the Expert
Consulting Division of The Systems Group for $1.0m.

                                                                              11
<PAGE>   6
FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS

Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.

The factors set forth below contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in fiscal 1997 and beyond
could differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in this
section below, as well as those in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. The Company undertakes no obligation
to release publicly any updates or revisions to any such forward-looking
statements that may reflect events or circumstances occurring after the date of
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders- Special Note on Forward-Looking
Statements.

Micro Focus' future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the introduction and
acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of distribution channels through which the
Company's products are offered, purchasing patterns of distributors and
retailers, quality control of products sold, price and other competitive
conditions in the industry, changes in the Company's level of operating
expenses, changes in the Company's sales incentive plans, budgeting cycles of
its customers, the cancellation of licenses during the warranty period,
nonrenewal of maintenance agreements, economic conditions generally or in
various geographic areas, and other factors discussed in this section.

A high percentage of Micro Focus' operating expenses are fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of a fiscal year as a result of
purchase cycles related to expiration of budgetary authorizations. As a result,
the Company experiences lower revenue for the first quarter of a fiscal year
than in the fourth quarter of the prior fiscal year. The Company's revenue is
also affected by seasonal fluctuations resulting from lower sales that typically
occur during the summer months in Europe and other parts of the world. Due to
all of the foregoing factors, it is possible that in some future quarters Micro
Focus' operating results will be below the expectations of stock market analysis
and investors and that the share price would likely be materially adversely
affected.

Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market enhancements of existing products and new products depends upon its
ability to attract and retain qualified employees. In the past, Micro Focus has
experienced delays and increased expenses in developing new products. Any
failure by the Company to anticipate or respond adequately to changes in
technology and market conditions, to complete product development and introduce
new products on a timely basis or to attract and retain qualified employees,
could materially adversely affect the Company's business, results of operations
and financial condition.

Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon market acceptance of the COBOL language. Any decline in the
demand for or market acceptance of the COBOL language or mainframe computers
where COBOL is a as

12
<PAGE>   7
a result of competition, technological change or other factors would have a
material adverse effect on Micro Focus' business, financial condition and
results of operations.

The markets in which the Company competes are characterized by rapid
technological change and aggressive competition. The Company believes that the
principal competitive factors in the Company's markets are product performance
and reliability, functionality, product quality, application portability,
product enhancement, price, training, support and the quality of service
offerings. The Company expects competition to increase in the future from
existing competitors and from other companies that may enter the Company's
existing or future markets with similar or substitute solutions including
database vendors of tools and other programming languages that may be less
costly or provide better performance or functionality. Some of the Company's
current and prospective competitors in the products and services markets have
greater financial, marketing or technical resources than Micro Focus and may be
able to adapt more quickly to new or emerging technologies, or devote greater
resources to the promotion and sale of their products than can Micro Focus.
There can be no assurance that other companies will not develop competitive
products in the future. In addition, the software industry is characterized
generally by low barriers to entry, as a result of which new competitors
possessing technological, marketing or other competitive advantages may emerge
and rapidly acquire market share. Further more, there can be no assurance that
the Company will be able to compete effectively in the future in the
professional services market and, particularly, the Year 2000 professional
services market.

The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software industry
general market conditions and other factors may have a significant impact on the
market price of the Company's securities. Further, the stock market has
experienced extreme volatility that has particularly affected the market prices
of equity securities of many high technology companies. These market
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Company's securities.

Micro Focus is subject to the general economic climate in the various areas of
the world in which it does business. The risks inherent in conducting
international business generally include exposure to exchange rate fluctuations
(see "Exchange rate fluctuations" below), longer payment cycles, greater
difficulties in accounts receivable collection and enforcing agreements, tariffs
and other restrictions on foreign trade, U.S. export requirements, economic and
political instability, withholding and other tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.

The Company markets certain of its products and services to customers for
managing development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions.
Although the Company has not experienced any product or service liability claims
to date, the sale and support of its products and services may entail the risk
of such claims, particularly in the Year 2000 market. A successful product or
service liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Furthermore, the Company anticipates that demand in the Year 2000
market will decline, perhaps rapidly, following the year 2000 and the demand for
the Company's Year 2000 solutions, products and services may also as a result of
new technologies, competition or other factors. If this decline in demand were
to occur, the Company's license revenues and professional services fees could be
materially and adversely affected.

                                                                              13
<PAGE>   8
EXCHANGE RATE FLUCTUATIONS

Micro Focus prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of Micro Focus' net revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses are incurred approximately
equally in U.S. dollars and other currencies, predominately G.B. pounds.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the G.B. pound, may have a significant impact on Micro Focus'
operating results, notably when expressed in G.B. pounds.

In 1996 and 1995 fluctuations between the U.S. dollar and the G.B. pound have
not been significant, and net exchange rate gains or losses on operational
transactions have been immaterial.

LIQUIDITY AND CAPITAL RESOURCES

Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was $24.4m (1995: $13.7m).

In 1996 Micro Focus invested $3.9m (1995: $13.7m) in property, plant and
equipment and $8.3m (1995: $16.0m) in software product assets. Investment in
1995 included $7.0m in the redevelopment of the Company's U.K. headquarters
office in Newbury, England. In 1995 the Company also paid $6.3m in connection
with the acquisition of Burl and spent $8.0m on the purchase of shares in the
Company for the benefit of the Micro Focus Group Employee Benefit Trust 1994.

Net of these expenditures, cash and short-term investments increased by $12.7m
to $71.6m (1995: decreased by $29.9m to $58.8m).

Micro Focus may invest a further $10.0m on capital during 1997 in connection
with occupying a new U.S. facility, and on communications software and other
information systems improvements.

The Company has in place a line of credit under the terms of which unsecured
financing of up to $8.0m is available until December 1997. There have been no
borrowings under this line of credit to date.

Micro Focus believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize
risk while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable.

Micro Focus believes that existing cash balances in combination with internally
generated funds and its available bank lines of credit will be sufficient to
meet cash requirements in 1997.

14
<PAGE>   9
        
CONSOLIDATED STATEMENTS OF INCOME (US FORMAT)


<TABLE>
<CAPTION>
                                      YEAR ENDED     YEAR ENDED     YEAR ENDED
In thousands of U.S. dollars          JANUARY 31     JANUARY 31     JANUARY 31
(except share and per share data)        1997           1996           1995   
                                                                              
<S>                                     <C>            <C>            <C>     
NET REVENUE                                                                   
  Product revenue                       $66,466        $69,399        $96,807 
  Service revenue                        48,943         52,557         41,652  
----------------------------------------------------------------------------- 
TOTAL NET REVENUE                       115,409        121,956        138,459 
============================================================================= 
COSTS AND EXPENSES                                                            
                                                                              
  Cost of product revenue                10,016         13,709         16,311 
                                                                              
  Cost of service revenue                18,580         19,520         17,034 
                                                                              
  Research and development (note 3)      34,544         35,337         32,299 
                                                                              
  Sales and marketing                    45,884         49,429         48,456 
                                                                              
  General and administrative              9,442          8,343          7,835 
                                                                              
  Non recurring charges (note 4)          8,000          9,469         16,765 
----------------------------------------------------------------------------- 
TOTAL COSTS AND EXPENSES                126,466        135,807        138,700 
============================================================================= 
(LOSS) FROM OPERATIONS                  (11,057)       (13,851)          (241)
                                                                              
Interest income                           2,706          3,432          3,408 
                                                                              
Interest expense                            (32)          (117)          (117)
                                                                              
Acquisition costs                             -              -         (1,500)
----------------------------------------------------------------------------- 
(LOSS) INCOME BEFORE INCOME TAXES        (8,383)       (10,536)         1,550 
Income taxes (note 8)                    (2,125)           100         (6,410)
----------------------------------------------------------------------------- 
NET (LOSS)                             ($10,508)      ($10,436)       ($4,860)
============================================================================= 
NET (LOSS) PER SHARE (NOTE 1)            ($0.69)        ($0.69)        ($0.33)
============================================================================= 
WEIGHTED AVERAGE NUMBER OF SHARES                                             
  OUTSTANDING (THOUSANDS)                15,234         15,101         14,706 
============================================================================= 
See accompanying notes to consolidated financial statements on pages 19 to 26.

                                                                            15
</TABLE>
<PAGE>   10
CONSOLIDATED BALANCE SHEETS (US FORMAT)



<TABLE>
<CAPTION>
In thousands of U.S. dollars                       JANUARY 31      JANUARY 31 
(except share and per share data)                     1997             1996   
                                                                              
ASSETS                                                                        
CURRENT ASSETS:                                                               
  <S>                                               <C>              <C>      
  Cash and short-term investments                   $ 71,560        $ 58,848  
  Accounts receivable, net of allowance for                                   
    doubtful accounts of $1,066 ($645 in 1995)        20,275          30,975  
  Inventories                                            774           2,573  
  Prepaid expenses and other assets                    2,490           3,379  
----------------------------------------------------------------------------  
TOTAL CURRENT ASSETS                                  95,099          95,775  
============================================================================  
  Property, plant and equipment, net (note 5)         32,868          37,615  
  Software product assets, net of accumulated                                 
    amortization of $95,402 ($79,968 in 1995)         23,344          26,964  
----------------------------------------------------------------------------  
TOTAL ASSETS                                        $151,311        $160,354  
============================================================================  
LIABILITIES AND SHAREHOLDERS' EQUITY                                          
CURRENT LIABILITIES:                                                          
  Accounts payable                                  $  4,886        $  8,038  
  Product and royalties payable                          963             977  
  Accrued employee compensation and commissions        5,811           6,733  
  Accrued payroll taxes                                  838             676  
  Capital leases (note 7)                                109             224  
  Income taxes payable                                 4,142           3,022  
  Deferred revenue                                    26,635          29,686  
  Other current liabilities                            9,137           5,188  
----------------------------------------------------------------------------  
TOTAL CURRENT LIABILITIES                             52,521          54,544  
============================================================================  
  Capital leases (note 7)                                 24             100  
  Deferred income taxes (note 8)                       9,983           8,236  
----------------------------------------------------------------------------  
TOTAL LIABILITIES                                     62,528          62,880  
============================================================================  
Commitments (note 7)                                                          
Shareholders' equity:                                                         
  Ordinary shares: 10 pence (G.B.) par value,                                 
  22,500,000 shares authorized,                                               
  15,168,000 shares issued and outstanding                                    
  (15,144,000 in 1995)                                 2,389           2,386  
  Additional paid-in capital                          27,468          27,257  
  Treasury stock                                      (8,959)         (8,959) 
  Retained earnings                                   70,276          80,784  
  Currency translation adjustment                     (2,391)         (3,994) 
----------------------------------------------------------------------------  
TOTAL SHAREHOLDERS' EQUITY                            88,783          97,474  
============================================================================  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $151,311        $160,354  
============================================================================  
See accompanying notes to consolidated financial statements on pages 19 to 26.
                                                                              
                                                                            16
</TABLE>
<PAGE>   11

                CONSOLIDATED STATEMENTS OF CASH FLOW (US FORMAT)


<TABLE>
<CAPTION>
In thousands of U.S. dollars
-------------------------------------------------------------------------------------------------
                                                            YEAR ENDED   YEAR ENDED    YEAR ENDED 
                                                            JANUARY 31   JANUARY 31    JANUARY 31 
                                                                  1997         1996          1995 

OPERATING ACTIVITIES
<S>                                                          <C>          <C>           <C>     
  Net (loss)                                                 ($10,508)    ($10,436)       ($4,860)
  Adjustments to reconcile net (loss) to cash                                        
    provided by operations                                                           
      Depreciation of fixed assets                              8,931        9,759          6,654 
      Amortization of software product assets                  12,690       19,862         10,929 
      Loss on sale of fixed assets                                528        107               16 
      Amortization of goodwill                                      -            -            500 
      Purchased in-process technology                               -            -         11,265 
      Other acquisition costs                                       -            -          1,500 
         Deferred income taxes                                  1,374         (374)           589 
                                                                                     
  Changes in operating assets and liabilities:                                       
      Decrease in accounts receivable                          10,663        3,952          2,803 
      Decrease (increase) in inventories                        1,895          185           (520)
      Decrease in prepaid expenses and other assets             1,041          202          2,007 
      (Decrease) increase in accounts payable                  (3,130)       1,005            379 
      (Decrease) increase in product royalties payable            (18)         312           (274)
      (Decrease) increase in accrued employee                                        
            compensation and commissions payable                 (890)        (908)         1,664 
      Increase (decrease) in accrued payroll taxes                158         (105)          (838)
      Increase (decrease) in income taxes payable                 690       (4,266)        (5,104)
      (Decrease) increase in deferred revenue                  (2,958)      (4,141)         5,303 
      Increase (decrease) in other current liabilities          3,890       (1,477)         3,037 
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                      24,356       13,677         35,050 
=================================================================================================
INVESTING ACTIVITIES                                                                 
  Purchases of property, plant and equipment,                                        
    net of capital lease obligations incurred                  (3,887)     (13,726)       (18,660)
  Software product assets                                      (8,261)     (15,989)       (15,477)
  Own shares                                                       -        (7,954)           - 
  Settlement of deferred purchase consideration                    -        (6,252)           - 
  Disposals of property, plant and equipment                      899          472            232 
  Short-term investments                                           -           -           51,227 
-------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES              (11,249)     (43,449)        17,322 
=================================================================================================
FINANCING ACTIVITIES                                                                 
  Issuance of ordinary shares, net of expenses                    215          446            336 
  Repayment of capital leases                                    (233)        (467)          (481)
-------------------------------------------------------------------------------------------------
NET CASH (USED) BY FINANCING ACTIVITIES                           (18)         (21)          (145)
=================================================================================================
EFFECT OF EXCHANGE RATE CHANGES ON CASH                          (377)        (117)         1,382 
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash                                    12,712      (29,910)        53,609 
Cash at beginning of year                                      58,848       88,758         35,149 
-------------------------------------------------------------------------------------------------
CASH AT END OF YEAR                                           $71,560      $58,848        $88,758 
=================================================================================================
Supplemental disclosure of cash flow information:                                    
  Income taxes paid during the year                                61        4,569         10,925 
  Interest paid during the year                                    32          117            117 
=================================================================================================
See accompanying notes to consolidated financial statements on pages 19 to 26.

                                                                                               17
</TABLE>
<PAGE>   12
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (US FORMAT)


           <TABLE>
           <CAPTION>
           In thousands of U.S. dollars
           ------------------------------------------------------------------------------------------
                                                                                                     
                                                        ORDINARY   ADDITIONAL             DEFERRED   
                                             NUMBER      SHARES     PAID-IN    TREASURY   PURCHASE   
                                            OF SHARES    AMOUNT     CAPITAL     STOCK   CONSIDERATION
           <S>                                <C>         <C>        <C>        <C>         <C>      
           BALANCE, JANUARY 31 1994           14,217     $2,238     $19,235       -           -      
           Share options exercised               147         22         314       -           -      
           Transfer between reserves             -          -           -         -           -      
           Agreed acquisition of Burl            -          -           -         -         5,311    
           Net loss                              -          -           -         -           -      
           Currency translation adjustment       -          -           -         -           -      
           ------------------------------------------------------------------------------------------
           BALANCE, JANUARY 31 1995           14,364      2,260      19,549       -         5,311    
           Share options exercised               115         19         474       -           -      
           Agreed acquisition of Burl            665        107       7,234       -        (5,311)   
           Treasury stock                        -          -           -      (8,959)        -      
           Net loss                              -          -           -         -           -      
           Currency translation adjustment       -          -           -         -           -      
           ------------------------------------------------------------------------------------------
           BALANCE, JANUARY 31 1996           15,144      2,386      27,257    (8,959)        -      
           Share options exercised                24          3         211       -           -      
           Net loss                              -          -           -         -           -      
           Currency translation adjustment       -          -           -         -           -      
           ------------------------------------------------------------------------------------------
           BALANCE, JANUARY 31 1997           15,168     $2,389     $27,468   ($8,959)        -      
           ==========================================================================================
           </TABLE>

           <TABLE>
           <CAPTION>
           In thousands of U.S. dollars
           -----------------------------------------------------------------------------
                                                                                        
                                                                  CURRENCY              
                                              OTHER    RETAINED  TRANSLATION            
                                             RESERVES  EARNINGS  ADJUSTMENT    TOTAL    
           <S>                              <C>       <C>        <C>         <C>        
           BALANCE, JANUARY 31 1994           ($29)    $96,109    ($4,903)   $112,650   
           Share options exercised             -           -          -           336   
           Transfer between reserves            29         (29)       -             -   
           Agreed acquisition of Burl          -           -          -         5,311   
           Net loss                            -        (4,860)       -        (4,860)  
           Currency translation adjustment     -           -        2,405       2,405   
           -----------------------------------------------------------------------------
           BALANCE, JANUARY 31 1995            -        91,220     (2,498)    115,842   
           Share options exercised             -           -          -           493   
           Agreed acquisition of Burl          -           -          -         2,030   
           Treasury stock                      -           -          -        (8,959)  
           Net loss                            -       (10,436)       -       (10,436)  
           Currency translation adjustment     -           -       (1,496)     (1,496)  
           -----------------------------------------------------------------------------
           BALANCE, JANUARY 31 1996            -        80,784     (3,994)     97,474   
           Share options exercised             -           -          -           214   
           Net loss                            -       (10,508)       -       (10,508)  
           Currency translation adjustment     -           -        1,603       1,603   
           -----------------------------------------------------------------------------
           BALANCE, JANUARY 31 1997            -       $70,276    ($2,391)    $88,783   
           =============================================================================
           See accompanying notes to consolidated financial statements on pages 19 to 26.
                                                                                        
           18                                                                           
           </TABLE>
<PAGE>   13



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US FORMAT)


The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.


NOTE 1   SIGNIFICANT ACCOUNTING POLICIES

To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the U.K. format financial statements on page 46 is italicized where the
text is identical.


NATURE OF OPERATIONS

Micro Focus designs and develops computer software products. Approximately 90%
of its revenue is derived from the sale of software product licenses and related
support and maintenance to end users. The remaining 10% is derived from the
licensing of distribution rights to software products to original equipment
manufacturers.

Product licenses are sold and supported in more than 60 countries. The principal
market is the United States, which accounts for approximately 55% of revenue.
Approximately 30% of revenue is derived from customers in Europe and
approximately 10% is earned in the Pacific Rim.


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements are those of Micro Focus Group Plc and all
of its subsidiaries ("Micro Focus"). They have been prepared under the
historical cost convention and in accordance with U.S. generally accepted
accounting principles ("GAAP"), which, as applied by Micro Focus, do not differ
in any significant respect from U.K. GAAP, except with regard to the treatment
of acquisitions and goodwill and the presentation of certain items in the
financial statements. All significant inter-company balances and transactions
have been eliminated on consolidation.

In accordance with industry trends, the Company has revised the presentation of
accounts receivable and deferred income for all years presented. This revision,
in essence a reclassification, has not affected the results of operations or
financial position of the Company.

REVENUE RECOGNITION

Net revenue represents the amounts derived from the provision of goods and
services which fall within Micro Focus' ordinary activities, stated net of
applicable taxes.

Revenue from sales of software packaged products to end users and resellers is
recognized when the product is delivered.

Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancelable license agreements generally provide for development fees and
initial license fees, which are recognized at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial license fee
commitment, revenue is recognized as unit shipments are reported by the OEM.

Revenue from maintenance agreements is recognized pro-rata over the life of the
agreement corresponding to notional delivery of the service.


SOFTWARE PRODUCT ASSETS (CAPITALIZED SOFTWARE DEVELOPMENT COSTS)

Costs related to the initial development and design of new software products
prior to the establishment of technological feasibility are written off as
research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalized as software product
assets, in compliance with Statement of Financial Accounting Standards No. 86
("SFAS 86") "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed".

Software purchased for inclusion in the Micro Focus product set, including
software acquired on acquisitions, which meets the provisions for
capitalizations under SFAS 86, is also included in software product assets.

During the years ended January 31 1997, 1996 and 1995 purchased software,
totaling $nil, $350,000 and $843,000 respectively, was added to software product
assets.


                                                                              19
<PAGE>   14

Software product assets are amortized using the straight line method over the
estimated economic life of the products, which in most cases is assumed to be
four years. Where market expectations dictate, amortization is accelerated.

Amortization of software product assets is included in research and development
costs.


GOODWILL

Goodwill represents the excess of the amount paid on the acquisition of a
business over the aggregate fair value of the net assets acquired. Goodwill
arising on a purchase is capitalized as an intangible fixed asset and amortized
over its estimated useful life.

The estimated lives will depend on the length of the future period expected to
benefit from the purchase. Where there is doubt over expected future benefits,
amortization is accelerated.


PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed using the
straight-line method over estimated economic lives from the time the asset is
put into use. Present estimated economic lives are as follows:



<TABLE>
<CAPTION>
<S>                                          <C>     
Office buildings                                        40 years

Leasehold improvements                       over the lease term

Computer equipment                                   3 - 5 years

Office equipment                                         7 years

Transportation equipment                             3 - 4 years
</TABLE>


LEASING

Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalized as fixed assets. The amount capitalized
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.

Depreciation on such leased assets is provided at rates calculated to write off
the capitalized cost over the shorter of the lease term and the asset's economic
life. Lease payments are apportioned between finance charges (computed on the
basis of implicit interest rates) and a reduction in the original liability.

Rentals paid under operating leases are expensed on a straight line basis
over the term of the lease.


INCOME TAXES

The provision for income taxes includes U.S., U.K. and other income taxes
currently payable and those deferred because of timing differences between
financial and tax reporting.


INVENTORIES

Inventories, consisting principally of diskettes and technical manuals, are
stated at the lower of cost or market, using the first-in, first-out method.
Contracts in progress, representing engineering costs associated with
non-cancelable license agreements prior to delivery, are included in
inventories and expensed when the related revenue is recognized.


CASH AND SHORT-TERM INVESTMENTS

Cash includes cash equivalents which represent cash placed on short-term deposit
where the maturity date is less than three months from the initial date of
deposit.

Short-term investments represents cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit.


TRANSLATION OF FOREIGN CURRENCIES

Micro Focus' policy on foreign currency translation complies with SFAS 52
"Foreign Currency Translation".

Assets and liabilities denominated in currencies other than U.S. dollars are
translated at exchange rates in effect at the balance sheet date. Closing U.S.
dollar to G.B. pound rates at January 31 1997, 1996 and 1995 were $1 = GBP
0.625, $1 = GBP 0.662 and $1 = GBP 0.629 respectively. Revenue, costs and
expenses are translated using average rates. Monthly average U.S. dollar to G.B.
pound rates used during 1996 range between $1 = GBP 0.585 and $1 = GBP 0.667,
and average $1 = GBP 0.633 (1995: $1 = GBP 0.634; 1994: $1 = GBP 0.648).
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than U.S. dollars are dealt with
separately in stockholders' equity.



20

<PAGE>   15



NET (LOSS) PER SHARE

Net (loss) per share is based on net (loss) and on the weighted average
number of ordinary shares outstanding during the period, including common share
equivalents, represented by shares issuable upon exercise of share options. The
computation assumes the proceeds from the exercise of share options are used to
repurchase the Company's ordinary shares at their average market price during
each period. In 1994 and 1995 common stock equivalents were antidilutive and
therefore excluded from the computation.

Pro-forma net (loss) per share calculated on the fair-value-based method is
disclosed in accordance with SFAS 123 (see "Stock based compensation", below).


USE OF ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.


CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject Micro Focus to concentrations of
credit risk consist principally of short-term investments and trade receivables.
Micro Focus places its short-term investments only in financial high quality
instruments and, by policy, limits the amounts invested with any one issuer.
Concentrations of credit risk with respect to trade receivables are limited due
to the large, widespread customer base which encompasses many different
industries and countries. No single customer represented more than 10% of Micro
Focus' revenue in 1996, 1995 and 1994.


OTHER RISKS AND UNCERTAINTIES

Micro Focus' policy is to amortize capitalized software using the straight-line
method over the remaining estimated economic life of the product. In the event
that the remaining estimated economic life of a product is judged to be reduced
significantly, the carrying amount of such capitalized software costs would be
reduced.


STOCK BASED COMPENSATION

The Company grants share options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for share option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no
compensation expense for the share option grants.

Financial Accounting Board Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October 1995 and is effective for
fiscal 1996. As set out in note 10 the Company has elected to apply the
disclosure provisions of the standard and has therefore added pro forma
disclosures of net income and earnings per share as if the fair-value-based
method had been applied.


NOTE 2  ACQUISITIONS

There were no acquisitions in 1996.

In May 1995 Micro Focus completed the agreed acquisition of Burl Software
Laboratories, Inc. for a total of $13,500,000, which was satisfied by the issue
of 664,979 ordinary shares and the payment of $6,251,000 in cash. The
acquisition was accounted for as a purchase.

In 1994 Micro Focus acquired the Expert Consulting Division of The Systems
Group, a consultancy business based in Massachusetts. In addition, the
intellectual property rights to certain development tools were purchased from
mbp Softwareentwickslungs GmbH, a German subsidiary of EDS, a U.S. corporation,
at a cost of $5,000,000.



                                                                              21
<PAGE>   16
NOTE 3  RESEARCH AND DEVELOPMENT COSTS


<TABLE>
<CAPTION>
----------------------------------------------------------------------
(in thousands)                            1996      1995        1994
<S>                                     <C>        <C>         <C>
Research and development costs,
  before capitalization                 $30,126    $37,059     $36,243
Costs capitalized as software
  product assets                         (8,272)   (15,639)    (14,977)
Amortization of capitalized costs        12,690     13,917      10,929
Previously deferred costs expensed
  on contract completion                                           104
----------------------------------------------------------------------
                                        $34,544    $35,337     $32,299
======================================================================
</TABLE>



NOTE 4  NON-RECURRING ITEMS

Non-recurring items recorded in 1996 represent a charge of $8,000,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at $2,300,000
remain to be paid in 1997.

Non-recurring items recorded in 1995 consist of a charge of $10,502,000 for
restructuring costs and a credit of $1,033,000 in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.

Restructuring costs of $5,031,000 incurred in the first quarter of 1995 related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of $5,471,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.

In 1994 Micro Focus recorded a charge of $18,265,000 related to acquisitions
made during that year. This charge included $12,765,000 representing the
write-off of purchased research and development costs, goodwill and other
charges incurred in connection with the purchase of Burl Software Laboratories,
Inc.; and $5,000,000 of intellectual property rights acquired
from mbp.



NOTE 5  PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
--------------------------------------------------------------------
(in thousands)                                  1996          1995

<S>                                          <C>            <C>     
Land and buildings                           $ 21,690       $ 19,845
Leasehold improvements                          1,343          2,994
Computer and communications
  equipment & software                         38,328         37,772
Office equipment                                7,503          7,326
Transportation equipment                          467            897
--------------------------------------------------------------------
Property, plant and equipment - at cost        69,331         68,834
Less: accumulated depreciation
  and amortization                            (36,463)       (31,219)
--------------------------------------------------------------------
Property, plant and equipment - net          $ 32,868       $ 37,615
====================================================================
</TABLE>


The above figures include assets under capital leases as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------
<S>                                      <C>       <C> 
Cost                                     $200      $564
Less: accumulated depreciation
  and amortization                       (105)     (249)
-------------------------------------------------------
                                          $95      $315
=======================================================
</TABLE>


During the years ended January 31 1997, 1996 and 1995 depreciation expense,
including depreciation on leased assets, totalled $8,931,000, $9,759,000 and
$6,654,000 respectively.


NOTE 6  LINES OF CREDIT

Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5,000,000 ($8,000,000
at January 31 1997). Any borrowings under this line of credit will bear interest
at 1% above the London Interbank Offered Rate (LIBOR) and would be unsecured.
There have been no borrowings under this line of credit to date.



22
<PAGE>   17




NOTE 7  COMMITMENTS

Micro Focus has entered into both capital and operating leases. The capital
leases are principally for transportation equipment. The operating leases are
for buildings, furniture and equipment and generally contain renewal options at
rates which approximate the anticipated market rate at expiration. In most
cases, it is expected that the operating leases will be renewed or replaced by
other leases in the normal course of business.

Minimum rental payments due under the leases described above are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------
(in thousands)                        Capital    Operating
Years ended January 31                 Leases      Leases
<S>                                    <C>         <C>   
1998                                   $113        $2,741
1999                                     24         1,983
2000                                      -         1,663
2001                                      -         1,483
2002                                      -         1,447
Thereafter                                -         7,509
----------------------------------------------------------
Total minimum lease payments            137        16,826
Less: amount representing interest       (4)
----------------------------------------------------------
Present value of net minimum 
lease payments                         $133
----------------------------------------------------------
</TABLE>

During the years ended January 31 1997, 1996 and 1995 rent expense totalled
$4,006,000, $4,809,000 and $4,726,000 respectively.

NOTE 8  INCOME TAXES

Income taxes consist of:

<TABLE>
<CAPTION>
----------------------------------------------------------
(in thousands)               1996        1995        1994
<S>                         <C>         <C>         <C>   
Current:  U.K               $  375       $ 210      $3,045
          U.S. federal           6         297         181
          U.S. state             1          (3)        116
          Other                369        (230)      2,402
----------------------------------------------------------
                               751         274       5,744
==========================================================
Deferred: U.K                1,489        (235)      1,617
          U.S. federal        (115)       (113)       (956)
          U.S. state            --         (26)          5
----------------------------------------------------------
                             1,374        (374)        666
==========================================================
Total:                      $2,125       $(100)     $6,410
==========================================================
</TABLE>


Deferred taxes result from timing differences in the recognition of revenues
and expenses for tax and financial statement purposes. The sources of these
differences and the tax effect of each were as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------
in thousands                              1996      1995      1994
<S>                                     <C>       <C>       <C> 
Software development costs and other     $1,571    ($620)     $907
Depreciation and amortization              (197)     246      (241)
------------------------------------------------------------------
                                         $1,374    ($374)     $666
==================================================================
</TABLE>

Micro Focus has not recognized the tax effects of operating losses in U.S.
subsidiaries. The following table analyses the differences between the U.K. tax
rate and the effective tax rate:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                                  1996     1995      1994

<S>                                             <C>       <C>       <C>  
U.K. statutory tax rate                           33.0%    33.0%     33.0%
Tax effect of earnings of foreign subsidiaries   (37.3)     7.2       2.8
Permanent differences and other items            (21.0)   (39.2)     (3.5)
Non-recurring charges                                -        -     381.2
-------------------------------------------------------------------------
Effective tax rate                               (25.3%)    1.0%    413.5%
=========================================================================
</TABLE>


In 1994 the Company expensed non-recurring charges of $16,765,000. These charges
reduced income before income taxes by 92% from $18,315,000 to GBP 1,550,000 and,
since a significant proportion of these charges were non deductable for tax
purposes, increased the effective tax rate from 32.3% to 413.5%

Deferred income taxes, all of which are non-current, are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------
(in thousands)                             1996       1995

<S>                                       <C>        <C>   
Software development costs and other      $9,712     $7,768
Depreciation and amortization                271        468
-----------------------------------------------------------
                                          $9,983     $8,236
===========================================================
</TABLE>


Deferred tax relative to the different tax jurisdictions is as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------
(in thousands)                           1996       1995

<S>                                    <C>         <C>   
U.K.                                   $9,983      $8,121
U.S.                                        -         115
---------------------------------------------------------
                                       $9,983      $8,236
=========================================================
</TABLE>


                                                                              23
<PAGE>   18



NOTE 9  BUSINESS SEGMENT INFORMATION

Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyzes worldwide operations by
geographical segment, based on the location of Micro Focus facilities.

<TABLE>
<CAPTION>
----------------------------------------------------------------
                               1996          1995          1994

<S>                        <C>           <C>           <C>  
Revenue:
  United States            $  67,388     $  78,118     $  90,065
  United Kingdom              53,859        53,578        55,310
  Europe (excluding U.K.      32,866        32,125        38,856
  Other                        3,048         2,051         2,119
----------------------------------------------------------------
                             157,161       165,872       186,350

Inter-segment revenue:
  United States               (5,470)       (7,498)       (4,261)
  United Kingdom             (25,217)      (26,369)      (23,993)
  Europe (excluding U.K.)    (10,331)       (8,708)      (18,154)
  Other                         (734)       (1,341)       (1,483)
----------------------------------------------------------------
Total net revenue            115,409       121,956       138,459
================================================================
Income from operations:
  United States               (7,522)       (7,278)      (14,431)
  United Kingdom              (3,789)        1,913         8,980
  Europe (excluding U.K.)       (441)       (7,760)        6,523
  Other                          695          (726)       (1,313)
----------------------------------------------------------------
                             (11,057)      (13,851)         (241)
================================================================
Total assets:
  United States               18,246        36,041        47,289
  United Kingdom               70,11        59,506        64,622
  Europe (excluding U.K.)     62,305        64,120        84,680
  Other                          646           687         1,049
----------------------------------------------------------------
                           $ 151,311       $160,35     $ 197,640
================================================================
</TABLE>



Inter-segment revenue principally represents license fees and sub-contracted
development charges between locations.


NOTE 10  EMPLOYEE STOCK AND RETIREMENT PLANS

SHARE OPTION PLANS

Micro Focus operates two plans both of which provide for the grant of share
options to acquire shares to all persons who devote substantially all their
working time to Micro Focus and such other eligible persons as the Board may
determine. The terms and exercise prices of options issued under these plans are
determined at the time the options are granted. Unexercised options lapse when
the optionholder ceases to be employed by Micro Focus or at a predetermined
expiry date (of up to ten years from the date of grant), whichever occurs first.

The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.

At January 31 1997 1,769,342 options were issued and outstanding under the Plan,
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.

In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further Micro Focus' policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares of Micro Focus Group Plc and to issue
options over those shares to directors and employees.

In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 (G.B. pounds) per share. Under
the terms of the grant these options vest, and therefore become exercisable, in
five equal annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the options lapsed when the announcement of financial results for
the year ended January 31 1996 indicated that the target in respect of that year
had not been achieved. In April 1996 376,840 of the remaining options were
exchanged for 282,630 new options, issued at a price of GBP 6.85 (G.B. pounds)
per share. These new options are exercisable in five equal cumulative annual
instalments commencing one year after the date of grant.

At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98 (G.B. pounds). The remaining 189,526 shares were
available for the grant of further options. Options issued by the Trust do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).

The shares held by the Trust are shown in the Balance Sheet as Treasury Stock
within Shareholders' Equity.


24

<PAGE>   19

Share option activity under the plans was as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------
                                                  Option price
                                   Number           per share
                                 of shares      (in G.B. pounds)

<S>                             <C>                <C> 
Outstanding, January 31 1994     1,310,176         0.92-28.83  
Options granted                    608,416         8.16-16.38  
Options exercised                 (148,206)        0.92-7.63   
Options cancelled                  (41,512)        2.20-28.83  
-------------------------------------------------------------                                                               
Outstanding, January 31 1995     1,728,874         0.92-28.83  
Options granted                    603,795         5.65-8.20   
Options exercised                 (114,865)        2.20-5.42   
Options cancelled                 (159,035)        2.20-28.83  
-------------------------------------------------------------                                                               
Outstanding, January 31 1996     2,058,769         5.42-28.83  
Options granted                  2,300,830         5.83-9.60   
Options exercised                  (24,156)        5.42-9.66   
Options cancelled               (1,840,411)        5.42-28.83  
-------------------------------------------------------------
Outstanding, January 31 1997     2,495,032         5.42-21.61  
-------------------------------------------------------------                                                   
</TABLE>

The following tables summarize information about share options outstanding at
January 31 1997:

Options outstanding:

<TABLE>
<CAPTION>
------------------------------------------------------------------
Ranges of               Number       Weighted          Weighted
exercise prices    outstanding        average          average
(in G.B. pounds)    at January    contractual life   exercise price
                       31 1997        (months)      (in G.B. pounds)
<S>                <C>            <C>              <C>
5.42-7.50            1,748,302           110                   6.83
7.51-10.00             525,340           113                   8.45
10.01-21.61            221,390           101                  15.36
--------------------------------------------------------------------
                     2,495,032           110                  7.93
--------------------------------------------------------------------
</TABLE>

Options exercisable:


<TABLE>
<CAPTION>
----------------------------------------------------------
Ranges of                        Number      Weighted
exercise prices             exercisable       average
(in G.B. pounds)             at January    exercise price
                                31 1997   (in G.B. pounds)
<S>                           <C>              <C> 
5.42-7.50                        45,502               5.58
7.51-10.00                        7,644               8.18
10.01-21.61                     114,916              15.48
----------------------------------------------------------
                                168,062              12.47
----------------------------------------------------------
</TABLE>


As stated in note 1, the Company has elected to follow APB 25 and related
Interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995: risk free interest rate based on Treasury Strip, No Principal from the
Wall Street Journal for maturity of six years, based on the date of grant,
dividend yields of 0%, volatility factors of the expected market price of 0.378
and an average expected life of the option of six years.

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

For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss was $11,779,000 and $10,639,000 and pro forma loss per share was
$0.77 and $0.70 in fiscal 1996 and 1995 respectively.

The effects on net loss and loss per share are not likely to be representative
of the effects on reported net income for future years since 1995 reflects
expense for only one year's vesting.


RETIREMENT PLANS

Micro Focus has entered into arrangements to provide pensions for its employees
on a defined contribution basis. Contributions, which are independently
administered by insurance companies and other financial institutions, are
expensed in the year in which they become payable.

In the United States, Micro Focus' plan qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, Micro Focus matches contributions made by
participating employees up to certain predetermined thresholds. Arrangements for
employees in other countries have been established on similar bases, subject to
local conditions and practices in the countries concerned.

In the years ended January 31 1997, 1996 and 1995 contributions totalling
$690,000, $949,000 and $1,086,000 respectively have been expensed.




                                                                              25
<PAGE>   20


NOTE 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the two years ended January 31 1997 is as
follows:



<TABLE>
<CAPTION>
In thousands (except per share data)
-------------------------------------------------------------------------------------------------
                                  First        Second        Third        Fourth
                                 quarter      quarter       quarter       quarter        Year
-------------------------------------------------------------------------------------------------
<S>                              <C>          <C>           <C>           <C>             <C>
Year ended January 31 1997:
Net revenue                       24,169        28,088        28,285        34,867        115,409
Restructuring charges             (8,000)           --            --            --         (8,000)
Operating (loss) income          (13,747)       (1,963)        1,101         3,552        (11,057)
Net (loss) income                (13,096)       (1,207)        1,080         2,715        (10,508)
Net (loss) income per share       ($0.86)       ($0.08)        $0.07         $0.18         ($0.69)
-------------------------------------------------------------------------------------------------
Year ended January 31 1996:
Net revenue                       28,683        30,147        27,841        35,285        121,956
Restructuring charges             (5,031)         --            --          (5,471)       (10,502)
Operating (loss) income           (9,883)          776        (1,200)       (3,544)       (13,851)
Net (loss) income                 (8,279)          984)         (516)       (2,625)       (10,436)
Net (loss) income per share       ($0.55)        $0.07        ($0.03)       ($0.17)        ($0.69)
-------------------------------------------------------------------------------------------------
</TABLE>



REPORT OF THE INDEPENDENT AUDITORS (US FORMAT)


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MICRO FOCUS GROUP Plc

We have audited the consolidated balance sheets of Micro Focus Group Plc and
subsidiaries as of January 31 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended January 31 1997 on pages 15 to 25. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.

We conducted our audits in accordance with United Kingdom auditing standards and
United States 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micro Focus Group
Plc and subsidiaries at January 31 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended January 31 1997 in conformity with United States generally accepted
accounting principles.

Ernst & Young
Chartered Accountants
Registered Auditor
Reading, England
March 6 1997

26
<PAGE>   21



                         FINANCIAL STATEMENTS UK FORMAT
                                

FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH U.K.
ACCOUNTING PRINCIPLES (IN GB POUNDS)

DIRECTORS' REPORT                                                             28

EXECUTIVE REMUNERATION COMMITTEE'S REPORT                                     31

SELECTED CONSOLIDATED FINANCIAL DATA                                          34

MANAGEMENT'S DISCUSSION AND ANALYSIS                                          35

CONSOLIDATED PROFIT AND LOSS ACCOUNT                                          40

CONSOLIDATED BALANCE SHEET                                                    41

CONSOLIDATED CASH FLOW STATEMENT                                              42

NOTES TO CONSOLIDATED CASH FLOW STATEMENT                                     43

COMPANY BALANCE SHEET                                                         44

STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES                                                                    45

MOVEMENT IN SHAREHOLDERS' FUNDS                                               45

NOTES TO THE FINANCIAL STATEMENTS

 1  Significant accounting policies                                           46
 2  Revenue (turnover)                                                        48
 3  Research and development costs                                            48
 4  Operating (loss)/profit                                                   48
 5  Directors and employees                                                   49
 6  Interest expense                                                          49
 7  Exceptional items                                                         49
 8  Taxation                                                                  50
 9 (Loss)/earnings per share                                                  50
10  Intangible fixed assets                                                   50
11  Tangible fixed assets                                                     51
12  Investments                                                               51
13  Stocks                                                                    52
14  Debtors                                                                   52
15  Creditors: amounts falling due within one year                            52
16  Creditors: amounts falling due after more than one year                   53
17  Lease commitments                                                         53
18  Deferred taxation                                                         53
19  Capital commitments                                                       53
20  Segmental information                                                     54
21  Share option plans                                                        54

                                                                              27


<PAGE>   22



             EXECUTIVE REMUNERATION COMMITTEE'S REPORT (UK FORMAT)


The Micro Focus Executive Remuneration Committee was established in December
1993. At present the Committee comprises the two non-executive directors, J.
Michael Gullard and Harold Hughes.

The remuneration of the executive directors is determined by the Committee. The
Commitee ensures that remuneration is appropriate to each executive director's
responsibilities, taking into consideration the overall financial and business
position of the Company, the highly competitive industry of which Micro Focus is
part, and the importance of recruiting and retaining management of the
appropriate calibre. The Company has complied with Section A of the Best
Practice Provisions annexed to the Listing Rules of the London Stock Exchange.

The Report of the Auditors on page 56 confirms that the scope of that report
covers the disclosures contained in this report that are specified for review by
the London Stock Exchange.


DIRECTORS' REMUNERATION POLICY

In framing its remuneration policy, the Committee has given full consideration
to Section B of the Best Practice Provisions annexed to the listing rules of the
London Stock Exchange. The chief components of remuneration are as follows:

BASIC SALARY: Salary rates for the executive directors are determined by
reference to relevant market data for the countries in which the directors
perform their duties, and are normally reviewed on an annual basis. In general,
the Committee's philosophy is to have base salary rates lower than those of
others in the market, with higher rates of pay for performance.

FEES: Non-executive directors receive an annual retainer and earn additional
fees for attendance at Board meetings and for time spent on other
company-related business. Such fees are determined in advance by the Executive
Directors and not by the Committee.

PERFORMANCE-RELATED PAY: Executive directors are eligible for annual
performance-related bonuses, which are calculated based on fixed formulae
measuring Micro Focus' performance against targets set at the beginning of each
year. Such bonuses are earned on a pro-rata basis in proportion to the level of
achievement relative to the performance targets set, subject to certain minimum
thresholds. The philosophy is to offer greater than market opportunities in
terms of bonus compensation, scaling upwards if the performance of Micro Focus
exceeds the targets set out at the beginning of the year.

In 1996 such bonuses were based on achievement against targets measuring
performance (measured in terms of earnings per share, excluding exceptional
items) for the ten month period ended January 31 1997. On the basis of that
achievement, executive directors would earn bonuses equivalent to between 33%
and 133% of their basic salary entitlements.

PENSION CONTRIBUTIONS: The Company does not operate a pension scheme for its
directors, but does make contributions to a director's own personal pension in
lieu of salary entitlement.

OTHER BENEFITS: Other benefits principally relate to the use of corporate
communications facilities by, and personal travel provided for, a former
director.

LONG-TERM INCENTIVES/SHARE OPTIONS: All of the directors are eligible to
participate in the Micro Focus share option plans, details of which are set out
in note 21 to the financial statements on page 54. The grant of share options to
directors is designed to ensure that an element of their remuneration is
directly related to long-term growth in shareholder value.

None of the directors is eligible for any other long-term incentive payments.

SERVICE AGREEMENTS: None of the directors has a service contract with a notice
period in excess of one year, or with provision for predetermined compensation
on termination of an amount which equals or exceeds one year's salary and
benefits.


                                                                              31
<PAGE>   23



DIRECTORS' REMUNERATION

The following table analyses the remuneration earned by each director in 1996
and 1995. 


                        <TABLE>
                        <CAPTION>
                        ------------------------------------------------------------------------------
                        (In thousands of G.B. pounds)                            Performance-         
                                                                                   related     Other  
                                                           Salary        Fees        pay      benefits
                                                                                                      
                                                                                                      
                        <S>                                 <C>          <C>        <C>         <C>   
                        1996: J Michael Gullard              --           63         --          --   
                              Harold Hughes                  --           20         --          --   
                              Marcelo Gumucio               101            1        129          --   
                              Paul Adams                     79           --         50          --   
                              Ron Forbes                     79           --         16          --   
                              Brian Reynolds                 --           --         --          29   
                              (resigned March 24 1996)                                                
                              Paul O'Grady                   24           --         --          --   
                              (resigned April 1 1996)                                                 
                        ------------------------------------------------------------------------------
                                                                                                      
                                                            283           84        195          29   
                        ------------------------------------------------------------------------------
                                                                                                      
                        1995: J Michael Gullard              --           62         --          --   
                              (appointed May 2 1995)                                                  
                              Harold Hughes                  --           34         --          --   
                              Marcelo Gumucio                --            1         --          --   
                              (appointed January 27 1996)                                             
                              Paul Adams                    143           --         --          --   
                              Ron Forbes                     76           --          3          --   
                              Brian Reynolds                 --           --         --         117   
                              Paul O'Grady                  120           --         11          --   
                        ------------------------------------------------------------------------------
                                                                                                      
                                                            339           97         14         117   
                        ------------------------------------------------------------------------------
                        </TABLE>

                        <TABLE>
                        <CAPTION>
                                                           --------------------------------
                                                           Compensation                    
                                                            for loss     Pension           
                                                            of office  contributions  TOTAL
                                                                                           
                        <S>                                  <C>        <C>           <C>  
                        1996: J Michael Gullard                 --         --           63 
                              Harold Hughes                     --         --           20 
                              Marcelo Gumucio                   --         --          231 
                              Paul Adams                        --         --          129 
                              Ron Forbes                        --           6         101 
                              Brian Reynolds                    --         --           29 
                              (resigned March 24 1996)                                     
                              Paul O'Grady                      30         --           54 
                              (resigned April 1 1996)                                      
                        ------------------------------------------------------------------ 
                                                                                           
                                                                30           6         627 
                        ------------------------------------------------------------------ 
                                                                                           
                        1995: J Michael Gullard                 --         --           62 
                              (appointed May 2 1995)                                       
                              Harold Hughes                     --         --           34 
                              Marcelo Gumucio                   --         --            1 
                              (appointed January 27 1996)                                  
                              Paul Adams                        --         --          143 
                              Ron Forbes                        --           6          85 
                              Brian Reynolds                    --         --          117 
                              Paul O'Grady                      --         --          131 
                        ------------------------------------------------------------------ 
                                                                                           
                                                                --           6         573 
                        ------------------------------------------------------------------ 
                        </TABLE>

Upon the resignation of Paul O'Grady, the Company entered into a consultancy
agreement with an entity with which Mr. O'Grady is affiliated to provide
management consulting services to the Company in exchange for a payment of
$750,000 (GBP 490,000), plus reimbursement of expenses. As expected, the bulk of
the services that were anticipated to be performed under the agreement were
performed during 1996.

In the case of Brian Reynolds, the Company entered into an agreement with an
entity with which Mr. Reynolds is affiliated that provides for the Company to
receive management and technology consulting services in exchange for a payment
of $800,000 (GBP 500,000) and the transfer to the entity of certain computer and
telecommunications equipment which the Company has valued at $249,000 (GBP
155,000). As expected, the bulk of the services that were anticipated to be
performed under the agreement were performed during 1996.


The following additional information is provided in accordance with the
requirements of the Companies Act 1985.

In 1996 Ron Forbes was the highest-paid U.K. director. In 1995 Paul O'Grady was
the highest-paid U.K. director. The remuneration of the chairmen was as follows:


<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                       1996      1995

<S>                                                 <C>       <C>
Paul O'Grady (February 1 1995 - May 2 1995)           -        42
Brian Reynolds (May 2 1995 - March 24 1996)          29        89
J. Michael Gullard (since March 24 1996)             53         -
-----------------------------------------------------------------
</TABLE>


The emoluments, excluding pension contributions, of the individual directors
fell within the following ranges:

<TABLE>
<CAPTION>
(In G.B. pounds)                       1996      1995
                                        No.       No.

<S>                                    <C>      <C>  
20,001 - 25,000                          1        -
75,001 - 80,000                          -        1
90,001 - 95,000                          1        -
130,001 - 135,000                        -        1
Directors working mainly outside
the United Kingdom                       5        5
---------------------------------------------------
</TABLE>


32
<PAGE>   24

DIRECTORS' SHAREHOLDINGS

The interests of the directors (all of which are beneficial) in the share
capital of Micro Focus Group Plc are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------- 
                                             January 31   January 31 
                                                   1997         1996 
                                                                     
<S>                                           <C>            <C>     
J Michael Gullard, Chairman                                          
1,000                   -                                            
Harold Hughes, Deputy Chairman                  20,000              -
Marcelo Gumucio, Chief Executive Officer             -              -
Paul Adams                                     106,600        106,300
Ron Forbes                                      23,676         23,676
---------------------------------------------------------------------
</TABLE>

There have been no changes in these holdings since the year end.



DIRECTORS' SHARE OPTIONS

The following table sets out the number of options held by each director in
1996, including the changes in holdings during the year. No options were
exercised by any of the directors during the year.




<TABLE>
<CAPTION>
                              Number of options
                    -------------------------------------                          Option                 Latest
                    January                       January         Date              price                exercise
                    31 1996  Granted     Lapsed   31 1997       of grant       (in G.B. pounds)             date
<S>                 <C>      <C>        <C>       <C>         <C>                   <C>                  <C>
J. Michael Gullard  10,000                         10,000     June 2 1994           10.67                  June 2 2004
                              50,000               50,000     June 21 1996           8.35                 June 21 2006
Harold Hughes       10,000                         10,000     August 19 1992        14.98               August 19 2002
                     2,000                          2,000     June 16 1994          11.98                 June 16 2004
Marcelo Gumucio     10,000                         10,000     January 30 1996        6.05              January 30 2006
                             362,500              362,500     April 1 1996           6.53                 April 1 2006
                             362,500              362,500     June 21 1996           8.35                 June 21 2006
Paul Adams           1,600                          1,600     May 8 1990             5.42                August 8 1998
                    18,400              (18,400)        -     July 11 1991          16.72                 July 11 2001
                    16,000              (16,000)        -     August 19 1992        14.98               August 19 2002
                     6,000               (6,000)        -     September 21 1993     17.45            September 21 2003
                     6,000               (6,000)        -     June 2 1994           10.67                  June 2 2004
                     6,000               (6,000)        -     June 16 1994          11.98                 June 16 2004
                    30,000              (30,000)        -     August 8 1995          6.97                August 8 2005
                              57,300               57,300     August 10 1996         6.85                April 10 2006
Ron Forbes          18,400              (18,400)        -     July 11 1991          16.72                 July 11 2001
                    16,000              (16,000)        -     August 19 1992        14.98               August 19 2002
                     6,000               (6,000)        -     September 21 1993     17.45            September 21 2003
                     6,000               (6,000)        -     June 2 1994           10.67                  June 2 2004
                     6,000               (6,000)        -     June 16 1994          11.98                 June 16 2004
                    20,000              (20,000)        -     August 8 1995          6.97                August 8 2005
                              51,300               51,300     April 10 1996          6.85                April 10 2006
---------------------------------------------------------
</TABLE>


Notes:   1) In April 1996 the Company offered all employees the opportunity to
         cancel all outstanding options above the then fair market value and
         receive instead a new option, with a new vesting schedule, for three
         new shares for each four shares then under option. Mr. Adams and Mr.
         Forbes accepted these offers.

         2) The market price of the shares at January 31 1997 was GBP 10.55 and
         the range during the year was GBP 5.58 to GBP 13.35.



On behalf of the Committee

/s/ Harold Hughes
Harold Hughes
Chairman of the Executive
Remuneration Committee
March 4 1997

                                                                      33
<PAGE>   25


                SELECTED CONSOLIDATED FINANCIAL DATA (UK FORMAT)


The following selected financial data should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements of Micro
Focus, expressed in G.B. pounds, set out on pages 40 to 55 of this report.




<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
In thousands of G.B. pounds (except per  Years ended January 31:  1997      1996  
share data, percentages and employees)            Annual Report:  1996      1995  

<S>                                                            <C>       <C>      
OPERATING RESULTS FOR THE YEAR:
Revenue                                                          73,089    77,258   
Exceptional items *                                              (5,195)   (6,001)  
(Loss)/profit before taxation                                    (5,809)   (6,542)  
Retained (loss)/profit for the year                              (7,281)   (6,470)  
(Loss)/earnings per share                                        (48.0p)   (43.6p)  
(Loss)/earnings per share: excluding exceptional items *         (13.8p)   (11.7p)  
Average number of shares in issue (thousands)                    15,156    14,843   
                                                                                    
FINANCIAL POSITION AT END OF YEAR:                                                  
Cash and bank deposits                                           44,725    38,972   
Total assets                                                    100,204   111,828   
Creditors: amounts falling due after more than one year              15        66   
Total shareholders funds                                         61,124    70,187   
                                                                                    
FINANCIAL CONDITION:                                                                
Working capital                                                  26,611    27,306   
Current ratio                                                      1.81      1.76   
Return on revenue: excluding exceptional items *                    n/a      n/a    
Return on average equity: excluding exceptional items *             n/a      n/a    
                                                                                    
EMPLOYEE INFORMATION:                                                               
Average number of employees                                         646       735   
Number of employees at year end                                     626       708   
Revenue per employee                                                113       105   
----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
In thousands of G.B. pounds (except per   Years ended January 31:  1995       1994        1993
share data, percentages and employees)             Annual Report:  1994       1993        1992

<S>                                                             <C>        <C>           <C>
OPERATING RESULTS FOR THE YEAR:
Revenue                                                           89,885     83,842      68,882   
Exceptional items *                                               (4,148)      -           -      
(Loss)/profit before taxation                                      8,723     21,761      22,777   
Retained (loss)/profit for the year                                4,590     14,747      15,444   
(Loss)/earnings per share                                         32.0p     104.3p       110.3p   
(Loss)/earnings per share: excluding exceptional items *          61.0p     104.3p       110.3p   
Average number of shares in issue (thousands)                     14,336     14,138      13,998   
                                                                                                  
FINANCIAL POSITION AT END OF YEAR:                                                                
Cash and bank deposits                                            55,823     57,544      53,541   
Total assets                                                     124,302    109,915      96,892   
Creditors: amounts falling due after more than one year              193        404       2,712   
Total shareholders funds                                          72,856     75,100      60,549   
                                                                                                  
FINANCIAL CONDITION:                                                                              
Working capital                                                   36,554     48,686      42,073   
Current ratio                                                       1.80       2.38        2.16   
Return on revenue: excluding exceptional items *                     10%        18%         22%   
Return on average equity: excluding exceptional items *              12%        28%         35%   
                                                                                                  
EMPLOYEE INFORMATION:                                                                             
Average number of employees                                          751        667         599   
Number of employees at year end                                      788        698         636   
Revenue per employee                                                 120        126         115   
----------------------------------------------------------------------------------------------- 
</TABLE>

*  Details of the exceptional items are set out in note 7 to the financial 
   statements on page 49.

34

<PAGE>   26
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                      AND FINANCIAL CONDITION (UK FORMAT)

This discussion has been prepared in accordance with U.S. reporting practice and
is added to the U.K. format section of this Annual Report so that readers of the
U.K. format financial statements have the same information as readers of the
U.S. format financial statements. It should be read in conjunction with the
financial statements of Micro Focus Group Plc and its subsidiary undertakings
("Micro Focus") in G.B. pounds, on pages 40 to 55.

RESULTS OF OPERATIONS

Micro Focus reported a loss for the year after taxation of GBP 7.3m (1995: GBP
6.5m.) These results include exceptional charges of GBP 5.2m in 1996 and GBP
6.7m in 1995 and an exceptional credit of GBP 0.7m in 1995.

The table below sets out operating results as a percentage of revenue for the
three years ended January 31 1997. To further aid comparison, exceptional items
are identified separately in the table, and percentages shown against other cost
categories are exclusive of exceptional items.

                <TABLE>
                <CAPTION>
                -------------------------------------------------------------------------- 
                                                 Percentage of revenue   Percentage change 
                                                                            1995      1994 
                                                 1996      1995    1994  to 1996   to 1995 
                                                                                           
                <S>                              <C>       <C>     <C>     <C>         <C> 
                REVENUE                                                                    
                PRODUCT REVENUE                    57       57      70      (4)        (30)
                Service revenue                    43       43      30      (7)         23 
                -------------------------------------------------------------------------- 
                Total revenue                     100      100     100      (5)        (12)
                -------------------------------------------------------------------------- 
                Costs and expenses                                                         
                Cost of product revenue             9       11      12     (27)        (18)
                Cost of service revenue            16       16      12      (4)         12 
                Research and development           30       29      23      (1)          7 
                Sales and marketing                40       40      35      (7)         (1)
                General and administrative          8        7       6      14           3 
                Exceptional items                   7        8       -     (13)          - 
                Purchased research and                                                     
                  development costs                 -        -       5       -           - 
                -------------------------------------------------------------------------- 
                TOTAL COSTS AND EXPENSES          110      111      93      (6)          3 
                -------------------------------------------------------------------------- 
                OPERATING (LOSS)/PROFIT           (10)     (11)      7     (13)        n/a 
                Interest income                     2        3       2     (21)         (2)
                Interest expense                    -        -       -     (72)         (3)
                -------------------------------------------------------------------------- 
                (LOSS)/PROFIT BEFORE TAXATION      (8)      (8)      9     (11)        n/a 
                Taxation                           (2)       -      (4)    n/a         n/a 
                -------------------------------------------------------------------------- 
                (LOSS) FOR THE YEAR               (10)      (8)     (5)      1         115 
                -------------------------------------------------------------------------- 
                </TABLE>

REVENUE

Micro Focus derives its revenue from the license of software products and
related support and maintenance ("direct revenue") and from the licensing of
distribution rights to software products to original equipment manufacturers
("OEM revenue"). Direct revenue represented 90% of total revenue in 1996 (1995:
89%; 1994: 86%).

Revenue is analysed between product revenue, which consists of licensing of
software product to end-users and OEMs, and service revenue, consisting of
maintenance and other support services, including training and consulting.


Total revenue decreased by GBP 4.2m or 5% to GBP 73.1m in 1996, and by GBP 12.6m
or 12% to GBP 77.3m in 1995.

Product revenue decreased by GBP 2.0m or 4% to GBP 42.0m in 1996, and by GBP
18.9m or 30% to GBP 44.0m in 1995.

Service revenue decreased by GBP 2.2m or 7% to GBP 31.1m in 1996, having
increased by GBP 6.3m or 23% to GBP 33.3m in 1995.

Revenue by customer location is analysed in note 2 to the financial statements
on page 48.

Revenue decreased by 10% in the United States. Other territories showed no
overall sales increase, with growth in the United Kingdom, France and Japan
being offset by decreased sales to certain distributors, notably those in Italy
and Brazil.

Factors contributing to the decline in revenue in the first half of 1996
included slow conversion to 32-bit products and continuing uncertainties arising
from the 



                                                                              35
<PAGE>   27



fundamental changes caused by the Internet. The improved performance in
the second half of the year was reflected by increased sales of products to
address the century date change or "Year 2000" problem.

In 1995 revenue decreases were reported in the United States, and in other
territories. Factors contributing to the fall in revenue included postponed
investment decisions caused by uncertainties arising from the impact of the
Internet and the launch of Windows 95, and from delayed delivery of 32-bit
products.

COST OF PRODUCT REVENUE

Cost of product revenue is comprised principally of the cost of product
materials (including the purchase of disks and CDs, transfer of data to
electronic media, and printing of manuals), packaging and distribution costs,
and royalties to third party software developers for the licensing of certain
add-on software products.

Excluding exceptional items, such costs decreased by GBP 2.3m or 27% to GBP 6.3m
in 1996 and by GBP 1.9m or 18% to GBP 8.7m in 1995 and represented 15% of
product revenue in 1996 (1995: 20%; 1994: 17%).

The decrease in product costs during 1996 reflected savings in product materials
arising from the intro-duction of documentation being supplied on CD-ROM.

The decrease in 1995 reflected the fall in revenue.

COST OF SERVICE REVENUE

Cost of service revenue is comprised principally of compensation for technical
support personnel, plus the costs associated with training and consulting.

Excluding exceptional items, such costs decreased by GBP 0.5m or 4% to GBP 11.8m
in 1996, having increased by GBP 1.3m or 12% to GBP 12.3m in 1995, and
represented 38%, of service revenue in 1996 (1995: 37%; 1994: 41%). The decrease
in 1996 reflected reductions taken to better align expenses with revenue. The
increase in 1995 resulted from increases in product support for client/server
and rehosting programs.

RESEARCH AND DEVELOPMENT

Research and development costs consist principally of compensation for software
developers and related costs incurred, after adjusting for the proportion of
such costs capitalised and the amortisation of previously capitalised software
costs. Micro Focus' high level of research and development spending supports the
development and enhancement of new and existing products and is consistent with
the Company's strategy of investing heavily to improve and expand product lines.

Research and development spending in 1996 has been directed principally towards
further development of Revolve/2000(TM) products which address the Year 2000
problem; NetExpress(TM), a complete set of tools for developing business
applications targeted at graphical PC workstations, distributed computer
environments and the Internet; and tools to enhance the functionality and
capability of core legacy COBOL Workbench products for workstation development
of IBM mainframe applications.

Research and development spending in 1995 and 1994 was directed principally
towards enabling Micro Focus products to operate across multiple operating
systems and graphical user interfaces; development of new 32-bit products;
further development of client/server solutions; object oriented programming in
COBOL; Expenditure on internal software research and development, before
capitalisation, decreased by GBP 4.2m or 18% to GBP 19.2m in 1996, and by GBP
0.1m to GBP 23.4m in 1995. The decrease in 1996 reflected the impact of the
restructuring announced in the first quarter (see "Exceptional items" below).

In 1996 27% of these costs were capitalised as software product assets (1995:
42%; 1994: 41%). Provisions for amortisation excluding exceptional items,
amounted to GBP 8.1m (1995: GBP 8.8m; 1994: GBP 7.1m), resulting in a net charge
to income in 1996 of GBP 2.8m, compared to net credits of GBP 1.1m and GBP 2.6m
in 1995 and 1994 respectively.

Total research and development costs also include restructuring costs of GBP
2.3m and GBP 4.5m in 1996 and 1995 (see "Exceptional items", below, and note 7
to the financial statements on page 49).

SALES AND MARKETING

Sales and marketing costs include compensation, travel and facility costs for
sales, pre-sales and marketing personnel, and publicity costs such as
advertising and trade shows.

Excluding exceptional items, such costs decreased by GBP 2.1m or 7% to GBP 29.2m
in 1996, and by GBP 0.2m or 1% to GBP 31.3m in 1995. The decrease in 1996
reflects the impact of the worldwide cost reductions implemented in the first
quarter.

GENERAL AND ADMINISTRATIVE

General and administrative costs include the group management, finance, legal
and human resources operations of Micro Focus.

Excluding exceptional items, such costs increased by GBP 0.8m or 14% to GBP 6.0m
in 1996, having increased by GBP 0.1m to GBP 5.2m in 1995. In 1996 general and
administrative costs have increased following the strengthening of the Micro
Focus management team.



36
<PAGE>   28


EXCEPTIONAL ITEMS

In the first quarter of 1996 Micro Focus incurred a restructuring charge of GBP
5.2m. The charge consisted of costs associated with a reduction in the Company's
workforce of approximately 65 people, facility closures and consolidations, and
asset write-downs. The restructuring was essentially completed during the year,
but payments estimated at GBP 1.5m remain to be paid in 1997.

Exceptional items recorded in 1995 consisted of a charge of GBP 6.7m for
restructuring costs and a credit of GBP 0.7m in respect of an employer loan to
the Micro Focus Group Employee Benefit Trust 1994.

Restructuring costs of GBP 3.1m incurred in the first quarter of 1995
principally reflected employee terminations (including salary, benefit
continuation and outplacement costs for approximately 75 employees), closure of
surplus office facilities, and write-downs of related fixed assets. An
additional charge of GBP 3.6m, booked in the fourth quarter of 1995, was
primarily the result of a review into the carrying values of software product
assets.

In 1994 Micro Focus recorded exceptional charges of GBP 3.2m, representing the
write-off of intellectual property rights acquired from mbp and GBP 0.9m in
connection with the purchase of Burl Software Laboratories, Inc.("Burl").

INTEREST INCOME

Interest income represents interest earned on cash and short-term investments.

Interest income decreased by GBP 0.5m or 21% to GBP 1.7m in 1996, having
remained constant at GBP 2.2m in 1995 and 1994. The current decrease principally
reflects lower average cash balances, and, to a lesser degree, lower interest
rates.

INCOME TAXES

A tax provision of GBP 1.5m was recorded for 1996. The effective tax rate in
both 1996 and 1995 was affected by the distribution of taxable profits and
losses among the tax jurisdictions in which Micro Focus operates. The Company
has not recognised the tax effects of operating losses in U.S. subsidiaries.

An analysis of the charge for taxation, including an analysis of differences
between the effective rate and the U.K. statutory rate, is given in note 8 to
the financial statements on page 50.

ACQUISITIONS

In 1995 Micro Focus completed the agreed acquisition of Burl (see note 12 to the
financial statements on page 52). The transaction had been accounted for as a
purchase in 1994.

In 1994 Micro Focus acquired the intellectual property rights to certain
development tools from mbp, a German subsidiary of EDS, for U.S. $5.0m (GBP
3.2m) and the Expert Consulting Division of The Systems Group for U.S. $0.5m
(GBP 0.3m).

FACTORS THAT MAY INFLUENCE FUTURE OPERATING RESULTS

Micro Focus operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. This section highlights
some of these factors and the possible impact of these factors on future results
from operations.

This section has been included in both the U.S. and U.K. format of the
Management's Discussion and Analysis in this Annual Report in accordance with
the Private Securities Litigation Reform Act of 1995, which became effective in
the United States as of January 1 1996. For more information regarding such law
and forward-looking statements, see Further Information for Shareholders-Special
Note on Forward-Looking Statements above.

The factors set forth below contain certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual results, performance or achievements in 1997 and beyond could
differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed in this
section below, as well as those in the Letter to Shareholders above and those
discussed elsewhere in this Annual Report. The Company undertakes no obligation
to release publicly any updates or revisions to any such forward-looking
statements that may reflect events or circumstances occurring after the date of
this Annual Report. For more information regarding forward-looking statements,
see Further Information for Shareholders - Special Note on Forward-Looking
Statements on page 6.

Micro Focus' future operating results are subject to quarterly and annual
fluctuations due to a variety of factors, including demand for the Company's
products, the size and timing of customer orders, product life cycles, the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the introduction and
acceptance of new products and product enhancements by the Company or its
competitors, customer order deferrals in anticipation of enhancements or new
products, changes in the mix of 



                                                                              37
<PAGE>   29




distribution channels through which the Company's products are offered,
purchasing patterns of distributors and retailers, quality control of products
sold, price and other competitive conditions in the industry, changes in the
Company's level of operating expenses, changes in the Company's sales incentive
plans, budgeting cycles of its customers, the cancellation of licenses during
the warranty period, nonrenewal of maintenance agreements, economic conditions
generally or in various geographic areas, and other factors discussed in this
section.

A high percentage of Micro Focus' operating expenses is fixed over the short
term and if anticipated revenue does not occur or is delayed, the operating
results for that quarter will be immediately and adversely affected. In
addition, a substantial portion of Micro Focus' revenue for most quarters is
booked and shipped in the last month of the quarter such that the magnitude of
the quarterly fluctuations may not become evident until late in or even at the
end of the particular quarter. Furthermore, while the Company's business has not
been subject to seasonal variations, the Company's customers tend to make
product purchase decisions in the fourth quarter of the Company's financial year
as a result of purchase cycles related to expiration of budgetary
authorizations. As a result, the Company experiences lower revenue for the first
quarter of its financial year than in the fourth quarter of the prior year. The
Company's revenue is also affected by seasonal fluctuations resulting from lower
sales that typically occur during the summer months in Europe and other parts of
the world. Due to all of the foregoing factors, it is possible that in some
future quarters Micro Focus' operating results will be below the expectations of
stock market analysts and investors and that the share price would be materially
adversely affected.

Micro Focus is in a market that is subject to rapid technological change. Micro
Focus must continually adapt to that change by improving its products and
introducing new products and technologies. The growth and financial performance
of Micro Focus will depend upon its ability, on a timely and cost-effective
basis, to develop and introduce enhancements of existing products and new
products that accommodate the latest technological advances and standards,
customer requirements and market conditions. The Company's ability to develop
and market new products depends upon its ability to attract and retain qualified
employees. In the past, Micro Focus has experienced delays and increased
expenses in developing new products. Any failure by the Company to anticipate or
respond adequately to changes in technology and market conditions, to complete
product development and introduce new products on a timely basis or to attract
and retain qualified employees, could materially adversely affect the Company's
business, results of operations and financial condition.

Substantially all of Micro Focus' revenue is currently, and is expected to
continue to be, derived from products and services related to applications
development in the COBOL language. As a result, Micro Focus' future operating
results depend upon continued market acceptance of the COBOL language. Any
decline in the demand for of the COBOL language or mainframe computers where
COBOL is a dominant language as a result of competition, technological change or
other factors would have a material adverse effect on Micro Focus' business,
financial condition and results of operations.

The markets in which the Company competes are characterized by rapid
technological change and aggressive competition and the quality of service
offerings. The Company believes that the principal competitive factors in the
Company's markets are product performance and reliability, functionality,
product quality, application portability, product enhancement, price, training,
support and services. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with similar, or substitute solutions including
vendors of other programming languages and database vendors with tools that may
be less costly or provide better performance or functionality. Some of the
Company's current and prospective competitors in the products and service
markets have greater financial, marketing or technical resources than Micro
Focus and may be able to adapt more quickly to new or emerging technologies, or
devote greater resources to the promotion and sale of their products than can
Micro Focus. There can be no assurance that other companies will not develop
competitive products in the future. In addition, the software industry is
characterized generally by low barriers to entry, as a result of which new
competitors possessing technological, marketing or other competitive advantages
may emerge and rapidly acquire market share. Furthermore, there can be no
assurance that the Company will be able to compete effectively in the future in
the professional services market and particularly the Year 2000 professional
services market.

The market price of the Company's securities has experienced significant price
volatility and such volatility may occur in the future. Factors such as actual
or anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software industry
and 




38
<PAGE>   30

other factors may have a significant impact on the market price of the Company's
securities. Further, the stockmarket has experienced extreme volatility that has
particularly affected the market prices of equity securities of many high
technology companies. These market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Company's securities.

Micro Focus is subject to the general economic climate in the various areas of
the world in which it does business. The risks inherent in conducting
international business generally include exposure to exchange rate fluctuations
(see "Exchange rate fluctuations" directly below), longer payment cycles,
greater difficulties in debtor collection and enforcing agreements, tariffs and
other restrictions on foreign trade, export requirements, economic and political
instability, withholding and other tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that the factors described above will
not have an adverse effect on the Company's future international revenues.

The Company markets certain of its products and services to customers for
managing the development and maintenance of mission-critical computer software
systems. In addition, an increasing portion of the Company's business is devoted
to addressing the Year 2000 problem, which affects the performance and
reliability of many mission-critical systems. The Company's agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in the Company's customer
agreements may not be effective as a result of existing or future domestic or
foreign laws or ordinances or unfavorable judicial decisions. Although the
Company has not experienced any product or service liability claims to date, the
sale and support of its products and services may entail the risk of such
claims, particularly in the Year 2000 market. A successful product or service
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.
Furthermore, the Company anticipates that demand in the Year 2000 market will
decline, perhaps rapidly, following the year 2000 and the demand for the
Company's Year 2000 solutions, products and services may also decline as a
result of new technologies, competition or other factors. If this decline in
demand were to occur, the Company's license revenues and professional services
fees could be materially and adversely affected.

EXCHANGE RATE FLUCTUATIONS

Micro Focus prepares separate consolidated financial statements expressed in
U.S. dollars and G.B. pounds. Revenue, costs and expenses arising in currencies
other than the reporting currency are translated using average exchange rates.
Assets and liabilities denominated in currencies other than the reporting
currency are translated at exchange rates in effect at the balance sheet date.
The majority of Micro Focus' revenue arises in U.S. dollars (approximately
two-thirds in 1996) whereas its costs and expenses are incurred approximately
equally in U.S. dollars and other currencies, predominately G.B. pounds.
Consequently fluctuations in exchange rates, particularly between the U.S.
dollar and the G.B. pound, may have a significant impact on Micro Focus'
operating results, notably when expressed in G.B. pounds. In 1996 and 1995
fluctuations between the U.S. dollar and the G.B. pound have not been
significant, and net exchange rate gains or losses on operational transactions
have been immaterial.

LIQUIDITY AND CAPITAL RESOURCES

Micro Focus continues to fund its activities through cash from operations. In
1996 cash provided by operating activities was GBP 12.1m (1995: GBP 9.7m). In
1996 Micro Focus invested GBP 2.4m (1995: GBP 8.6m) in property, plant and
equipment and GBP 5.3m (1995: GBP 9.9m) in software product assets. Investment
in 1995 included GBP 4.4m in the redevelopment of the Company's U.K.
headquarters office in Newbury, England. In 1995 the Company also paid GBP 3.9m
in connection with the acquisition of Burl and spent GBP 5.0m on the purchase of
shares in the Company for the benefit of the Micro Focus Group Employee Benefit
Trust 1994.

Net of these expenditures, cash and bank increased by GBP 5.7m to GBP 44.7m
(1995: decreased by GBP 16.9m to GBP 39.0m). Micro Focus may invest a further
GBP 5.8m on capital during 1997 in connection with occupying a new U.S.
facility, and on communications software and other information systems
improvements. The Company has in place a line of credit under the terms of which
unsecured financing of up to GBP 5.0m is available until December 1997. There
have been no borrowings under this line of credit to date.

Micro Focus believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid money
market investments. The Company's investment policy is designed to minimize
risk while maximizing return on cash given such levels of risk, and to keep
uninvested cash at a minimum. Cash management is centralized, although some cash
is held at various subsidiaries around the world to meet local operating
requirements. All cash is freely remittable. Micro Focus believes that existing

                                                                             39
<PAGE>   31
                CONSOLIDATED PROFIT AND LOSS ACCOUNT (UK FORMAT)

                <TABLE>
                <CAPTION>
                                                     Year ended January 31           
                                                     Continuing operations           
                                                                                     
                                                        Before                       
                In thousands of G.B. pounds           exceptional  Exceptional       
                (except per share data)        Notes    items     items (note 7)     
                                                                                     
                <S>                              <C>    <C>         <C>              
                Revenue                                                              
                  Product revenue                       42,020          --           
                  Service revenue                       31,069          --           
                ---------------------------------------------------------------      
                Total revenue                    2      73,089          --           
                ===============================================================      
                Costs and expenses                                                   
                  Cost of product revenue                6,352          54           
                  Cost of service revenue               11,848          44           
                  Research and development       3      22,044       2,255           
                  Sales and marketing                   29,158         988           
                  General and administrative             6,000       1,854           
                ---------------------------------------------------------------      
                Total costs and expenses                75,402       5,195           
                ===============================================================      
                Operating (loss)/profit          4      (2,313)     (5,195)          
                Interest income                                                      
                Interest expense                 6                                   
                Other acquisition charges                                            
                ---------------------------------------------------------------      
                (Loss)/profit before taxation                                        
                Taxation                         8                                   
                ---------------------------------------------------------------      
                (Loss)/profit for the year                                           
                ===============================================================      
                (Loss)/earnings per share        9                                   
                ===============================================================      
                (Loss)/earnings per share:       9                                   
                before exceptional items                                             
                ===============================================================      
                </TABLE>


                <TABLE>
                <CAPTION>
                In thousands of G.B.pounds      Year ended   Year ended   Year ended 
                (except per share data)         January 31   January 31   January 31 
                                                  1997         1996           1995   
                                                                                     
                <S>                               <C>           <C>           <C>    
                Revenue                                                              
                  Product revenue                 42,020        43,991        62,878 
                  Service revenue                 31,069        33,267        27,007 
                -------------------------------------------------------------------- 
                Total revenue                     73,089        77,258        89,885 
                ==================================================================== 
                Costs and expenses                                                   
                  Cost of product revenue          6,406         8,855        10,586 
                  Cost of service revenue         11,892        12,343        11,055 
                  Research and development        24,299        26,851        24,149 
                  Sales and marketing             30,146        32,857        31,464 
                  General and administrative       7,854         4,986         5,099 
                -------------------------------------------------------------------- 
                Total costs and expenses          80,597        85,892        82,353 
                ==================================================================== 
                Operating (loss)/profit           (7,508)       (8,634)        7,532 
                Interest income                    1,720         2,166         2,210 
                Interest expense                     (21)          (74)          (76)
                Other acquisition charges             --            --          (943)
                -------------------------------------------------------------------- 
                (Loss)/profit before taxation     (5,809)       (6,542)        8,723 
                Taxation                          (1,472)           72        (4,133)
                -------------------------------------------------------------------- 
                (Loss)/profit for the year        (7,281)       (6,470)        4,590 
                ==================================================================== 
                (Loss)/earnings per share         (48.0p)       (43.6p)        32.0p 
                ==================================================================== 
                (Loss)/earnings per share:        (13.8p)     (11.7p)          61.0p 
                before exceptional items                                             
                ==================================================================== 
                </TABLE>

The notes on pages 46 to 55 form part of these financial statements.


40
<PAGE>   32
<TABLE>
<CAPTION>
                     CONSOLIDATED BALANCE SHEET (UK FORMAT)


              In thousands of G.B. pounds                          January 31   January 31
                                                            Notes        1997         1996
              <S>                                            <C>         <C>          <C>
              Fixed assets
                Intangible fixed assets                      10         14,590       17,857
                Tangible fixed assets                        11         20,543       24,910
                Investments                                  12          5,634        5,634
              -----------------------------------------------------------------------------
              Total fixed assets                                        40,767       48,401
              =============================================================================
              Current assets                                                               
                Stocks                                       13            484        1,704
                Debtors                                      14         14,228       22,751
                Cash and bank deposits                                  44,725       38,972
              -----------------------------------------------------------------------------
              Total current assets                                      59,437       63,427
              =============================================================================
              Creditors: amounts falling due within                                        
                one year                                     15         16,180       16,461
              Deferred revenue                                          16,646       19,660
              -----------------------------------------------------------------------------
              Net current assets                                        26,611       27,306
              =============================================================================
              Total assets less current liabilities                     67,378       75,707
              Creditors: amounts falling due after more                                    
                than one year                                16             15           66
              Provisions for liabilities and charges:                                      
              Deferred taxation                              18          6,239        5,454
              -----------------------------------------------------------------------------
              Net assets                                                61,124       70,187
              =============================================================================
              Capital and reserves                                                         
                Called up share capital                                  1,517        1,514
                Share premium account                                   18,071       17,936
                Profit and loss account                                 41,536       50,737
              -----------------------------------------------------------------------------
              Total shareholders' funds                                 61,124       70,187
              =============================================================================

The financial statements on pages 40 to 55 were approved by the Board of
directors on March 4 1997.


/s/ M.A. Gumucio                      /s/ Ron Forbes
---------------------                 ---------------------
Marcelo Gumucio                       Ron Forbes
Director                              Director

The notes on pages 46 to 55 form part of these financial statements.

                                                                                         41
</TABLE>
<PAGE>   33
                     CONSOLIDATED BALANCE SHEET (UK FORMAT)

<TABLE>
<CAPTION>
In thousands of G.B. pounds                             Year ended    Year ended     Year ended
                                                        January 31    January 31     January 31 
                                                              1997          1996           1995

<S>                                                        <C>           <C>            <C>   
Net cash inflow from operating activities (note i)         12,135          9,725         26,436

Returns on investments and servicing of finance
Interest received                                           1,803          2,082          3,505
Interest paid                                                 (21)           (74)           (76)
-----------------------------------------------------------------------------------------------
Net cash inflow from returns on investments and
 servicing of finance                                       1,782          2,008          3,429
===============================================================================================
Taxation
U.K. corporation tax (paid)                                   (88)        (1,562)        (4,721)
Overseas tax refunded (paid)                                   70         (1,362)        (2,207)
-----------------------------------------------------------------------------------------------
Tax paid                                                      (18)        (2,924)        (6,928)
===============================================================================================
Investing activities
Purchase of tangible fixed assets                          (2,500)        (8,643)       (12,208)
Purchase of software product assets                            --           (226)          (333)
Capitalised software product assets                        (5,258)        (9,882)        (9,719)
Investment in own shares                                       --         (5,002)            -- 
Investment in subsidiary undertakings                          --         (3,892)            -- 
Investment in bank deposits                                    --             --         33,187
Disposal of tangible fixed assets                             546            298            149
-----------------------------------------------------------------------------------------------
Net cash (outflow)/inflow from investing activities        (7,212)       (27,347)        11,076
===============================================================================================

Net cash (outflow)/inflow before financing                  6,687        (18,538)        34,013
===============================================================================================
Financing (note ii)
Issue of ordinary shares, net of expenses                     138            278            224
Capital element of finance lease obligations                 (131)          (295)          (315)
-----------------------------------------------------------------------------------------------
Net cash inflow/(outflow) from financing                        7            (17)           (91)
===============================================================================================
Increase/(decrease) in cash                                 6,694        (18,555)        33,922
===============================================================================================

Increase/(decrease) in cash, as above (note iii)            6,694        (18,555)        33,922
(Repayment of) bank deposits (note iv)                         --             --        (33,187)
Effect of foreign exchange translation differences           (941)         1,704         (2,456)
-----------------------------------------------------------------------------------------------
Increase/(decrease) in cash and bank deposits               5,753        (16,851)        (1,721)
===============================================================================================
</TABLE>


The notes on pages 46 to 55 form part of these financial statements.

42
<PAGE>   34
               NOTES TO CONSOLIDATED CASH FLOW STATEMENT (UK FORMAT)

<TABLE>
<CAPTION>
In thousands of G.B. pounds                            Year ended     Year ended     Year ended 
                                                       January 31     January 31     January 31 
                                                             1997           1996           1995 

<S>                                                       <C>            <C>            <C>   
(i)  Reconciliation of operating (loss)/profit to 
"Net cash inflow from operating activities"

Operating (loss)/profit                                   (7,508)        (8,634)         7,532
Depreciation charges                                       5,655          6,186          4,351
Amortisation charges                                       8,012         12,639          7,093
Loss on sale of tangible fixed assets                        221             70             11
Decrease/(increase) in stocks                              1,171            117           (325)
Decrease in debtors                                        8,012          2,174          2,213
(Decrease)/increase in creditors                            (790)          (690)         2,475
(Decrease)/increase in deferred revenue                   (2,693)        (2,137)         3,086
----------------------------------------------------------------------------------------------
Net cash inflow from operating activities                 12,135          9,725         26,436
==============================================================================================

(ii)  Analysis of changes in financing:
----------------------------------------------------------------------------------------------
Share capital (including premium):
----------------------------------------------------------------------------------------------
Balance, beginning of year                                19,450         14,584         14,360
Shares issued to complete acquisition of Burl                 --          4,558             -- 
Share options exercised                                      138            308            224
----------------------------------------------------------------------------------------------
Balance, end of year                                      19,588         19,450         14,584
----------------------------------------------------------------------------------------------
Loans and finance lease obligations:
----------------------------------------------------------------------------------------------
Balance, beginning of year                                   214            509            700
Finance lease obligations                                   (131)          (295)          (191)
----------------------------------------------------------------------------------------------
Balance, end of year                                          83            214            509
==============================================================================================

(iii) Analysis of changes in cash during the year
----------------------------------------------------------------------------------------------
Balance, beginning of year                                38,972         55,823         23,433
Increase/(decrease) in cash                                7,526        (18,555)        33,922
Effect of foreign exchange rate changes on cash           (1,773)         1,704         (1,532)
----------------------------------------------------------------------------------------------
Balance, end of year                                      44,725         38,972         55,823
==============================================================================================

(iv)  Analysis of changes in bank deposits 
      during the year     
----------------------------------------------------------------------------------------------
Balance, beginning of year                                    --             --         34,111
(Decrease) in bank deposits                                   --             --        (33,187)
Effect of foreign exchange rate changes on 
  bank deposits                                               --             --           (924)
----------------------------------------------------------------------------------------------
Balance, end of year                                          --             --             -- 
==============================================================================================
</TABLE>

The notes on pages 46 to 55 form part of these financial statements.


                                                                              43
<PAGE>   35
<TABLE>
<CAPTION>
                                        COMPANY BALANCE SHEET (UK FORMAT)                              
                                                                                                       
                                                                                                       
                                                                              January 31    January 31 
                       In thousands of G.B. pounds                   Notes      1997          1996     
                       <S>                                            <C>         <C>           <C>    
                       Fixed assets                                                                    
                                                                                                       
                       Tangible fixed assets                          11          2,992          3,077 
                       Investments                                    12         32,809         33,319 
                       ------------------------------------------------------------------------------- 
                       Total fixed assets                                        35,801         36,396 
                       =============================================================================== 
                       Current assets                                                                  
                       Amounts owed by subsidiary undertakings                   11,214          8,436 
                       Other debtors                                                  2             -- 
                       Cash and bank deposits                                        18             76 
                       ------------------------------------------------------------------------------- 
                       Total current assets                                      11,234          8,512 
                       =============================================================================== 
                       Creditors: amounts falling due within                                           
                         one year:                                                   --             -- 
                       Amounts owed to subsidiary undertakings                   11,469         10,145 
                       Trade creditors                                                9              2 
                       Corporation tax                                              178            174 
                       Accrued expenses                                              47            109 
                       ------------------------------------------------------------------------------- 
                       Net current (liabilities)                                   (469)        (1,918)
                       =============================================================================== 
                       Total assets less current liabilities                     35,332         34,478 
                       Provisions for liabilities and charges:                                         
                       Deferred taxation                              18             19            19  
                       ------------------------------------------------------------------------------- 
                       Net assets                                                35,313         34,459 
                       =============================================================================== 
                       Capital and reserves                                                            
                       Called up share capital                                    1,517          1,514 
                       Share premium account                                     18,071         17,936 
                       Profit and loss account                                   15,725         15,009 
                       ------------------------------------------------------------------------------- 
                       Total shareholders' funds                                 35,313         34,459 
                       =============================================================================== 
                                                                                                       
                                                                                                       
                The financial statements on pages 40 to 55 were approved by the Board of               
                directors on March 4 1997.                                                             
                                                                                                       
                                                                                                       
                /s/ M.A. Gumucio                      /s/ Ron Forbes                                   
                ------------------------------        ----------------------------                     
                Marcelo Gumucio                       Ron Forbes                                       
                Director                              Director                                         
                                                                                                       
                This is the balance sheet of Micro Focus Group Plc, the holding company of the         
                Micro Focus group of companies, which is presented in accordance with section          
                226 of the Companies Act 1985 of Great Britain. No profit or loss account is           
                presented for Micro Focus Group Plc as provided by section 230 of the same Act.        

                The notes on pages 46 to 55 form part of these financial statements.                   


                44
</TABLE>
<PAGE>   36
<TABLE>
<CAPTION>
                             STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES (UK FORMAT)                   
                                                                                                          
                                                                   Year ended    Year ended     Year ended
                In thousands of G.B. pounds                        January 31    January 31     January 31
                                                                      1997          1996           1995   
                ------------------------------------------------------------------------------------------
                <S>                                                <C>           <C>            <C>       
                (Loss)/profit for the year                          (7,281)       (6,470)        4,590    
                                                                                                          
                Currency translation adjustment                     (1,920)        2,275        (2,978)   
                ------------------------------------------------------------------------------------------
                Total recognised gains and losses for the year      (9,201)       (4,195)        1,612    
                ==========================================================================================
                                                                                                          
                                   MOVEMENT IN SHAREHOLDERS' FUNDS (UK FORMAT)                            
                --------------------------------------------------------------------------------------    
                                                                                                          
                In thousands of G.B. pounds                                                               
                (except per share data)                                                                   
                                                                Ordinary shares of 10p each :             
                                                        Authorised    Issued      Amount       Premium    
                                                                                                          
                                                         '000        '000                                 
                                                                                                          
                <S>                                   <C>          <C>          <C>          <C>          
                Balance, January 31 1994              16,500       14,217       1,422        12,938       
                Share options exercised                   --          147          15           209       
                Transfer between reserves                 --           --          --            --       
                Agreed acquisition of Burl                --           --          --            --       
                Goodwill arising on acquisitions          --           --          --            --       
                Profit for the year                       --           --          --            --       
                Currency translation adjustment           --           --          --            --       
                -----------------------------------------------------------------------------------       
                Balance, January 31 1995              16,500       14,364       1,437        13,147       
                Share options exercised                   --          115          11           297       
                Shares issued to complete Burl                                                            
                  acquisition                             --          665          66         4,492       
                (Loss) for the year                       --           --          --            --       
                Currency translation adjustment           --           --          --            --       
                -----------------------------------------------------------------------------------       
                Balance, January 31 1996              16,500       15,144       1,514        17,936       
                Increase in authorised share capital   6,000           --          --            --       
                Share options exercised                   --           24           3           135       
                (Loss) for the year                       --           --          --            --       
                Currency translation adjustment           --           --          --            --       
                -----------------------------------------------------------------------------------       
                                                                                                          
                                                        Share       Deferred     Other    Retained        
                                                       purchase     reserves    earnings     Total        
                                                     consideration                                        
                                                                                                          
                                                                                                          
                <S>                                      <C>         <C>        <C>        <C>            
                Balance, January 31 1994                     --        1         60,739     75,100        
                Share options exercised                      --       --             --        224        
                Transfer between reserves                    --       (1)             1         --        
                Agreed acquisition of Burl                3,340       --             --      3,340        
                Goodwill arising on acquisitions             --       --         (7,420)    (7,420)       
                Profit for the year                          --       --          4,590      4,590        
                Currency translation adjustment              --       --         (2,978)    (2,978)       
                ----------------------------------------------------------------------------------        
                Balance, January 31 1995                  3,340       --         54,932     72,856        
                Share options exercised                      --       --             --        308        
                Shares issued to complete Burl                                                            
                  acquisition                            (3,340)      --             --      1,218        
                (Loss) for the year                          --       --         (6,470)    (6,470)       
                Currency translation adjustment              --       --          2,275      2,275        
                ----------------------------------------------------------------------------------        
                Balance, January 31 1996                     --       --         50,737     70,187        
                Increase in authorised share capital         --       --             --         --        
                Share options exercised                      --       --             --        138        
                (Loss) for the year                          --       --         (7,281)    (7,281)       
                Currency translation adjustment              --       --         (1,920)    (1,920)       
                ----------------------------------------------------------------------------------        
                                                                                                          
                The issued ordinary shares are allotted, called up and fully paid.                        
                                                                                                          
                Micro Focus Group Plc has been authorised by its members to make market                   
                purchases of its own shares (within the meaning of section 163(3) of the                  
                Companies Act 1985).                                                                      
                                                                                                          
                The notes on pages 46 to 55 form part of these financial statements.                      
                                                                                                          
                                                                                          45              
</TABLE>
<PAGE>   37
                  NOTES TO THE FINANCIAL STATEMENTS (UK FORMAT)


The statutory financial statements of Micro Focus, within the meaning of section
240 of the Companies Act 1985 of Great Britain, for the year ended January 31
1997 are contained on pages 40 to 55.


NOTE 1  SIGNIFICANT ACCOUNTING POLICIES

To enable the reader to see immediately any information provided in addition to
the common policy statements, the text of this note and the corresponding note 1
to the financial statements in U.S. format on page 19 is italicised where the
text is identical.


BASIS OF PREPARATION

The financial statements have been prepared under the historical cost convention
and in accordance with applicable U.K. Accounting Standards, which, as applied
by Micro Focus, do not differ in any significant respect from U.S. generally
accepted accounting principles ("GAAP") except with regard to the treatment of
acquisitions and goodwill and the presentation of certain items in the financial
statements.


BASIS OF CONSOLIDATION

The consolidated financial statements are those of Micro Focus Group Plc ("the
Company") and all of its subsidiary undertakings ("Micro Focus"). All
significant inter-company balances and transactions have been eliminated on
consolidation.

Certain changes have been made to the presentation of data in the financial
statements this year in line with current best practice. The profit and loss
account has been amended to disclose an analysis of revenue between that derived
from products and that derived from services. Cost of revenue has been similarly
analysed. Also, the Company has revised the presentation of debtors and deferred
revenue in the balance sheet. These reclassifications have not impacted the
results of operations or financial position of the Company. Certain amounts
previously reported in 1995 and 1994 have been reclassified to conform with the
1996 presentation.

REVENUE RECOGNITION

Revenue represents the amounts derived from the provision of goods and services
which fall within Micro Focus' ordinary activities, stated net of applicable
sales taxes.

Revenue from licensing software packaged products to end users and resellers is
recognised on delivery.

Revenue from sales to original equipment manufacturers ("OEMs") under
non-cancellable licence agreements generally provide for development fees and
initial licence fees, which are recognised at the later of (a) the date product
is delivered to the OEM and (b) the date payment becomes due within twelve
months and (c) the date of receipt of monies if collection cannot be assessed
with reasonable assurance. When sales by the OEM exceed the initial licence fee
commitment, revenue is recognised as unit shipments are reported by the OEM.

Revenue from maintenance agreements is recognised pro-rata over the life of the
agreement corresponding to notional delivery of the service.


SOFTWARE PRODUCT ASSETS - DEVELOPMENT COSTS

Costs related to the initial development and design of new software products
prior to the establishment of technological feasibility are written off as
research and development costs. Once technological feasibility has been
reasonably established, either by the completion and successful testing of a
detailed program design, or by the creation and testing of an operative working
model, further development costs incurred are capitalised as software product
assets.

Software purchased for inclusion in the Micro Focus product set, including
software acquired on acquisitions, is also included in software product assets.

Software product assets are amortised using the straight line method over the
estimated economic life of the products, which in most cases is assumed to be
four years. Where market expectations dictate, amortisation is accelerated.

Amortisation of software product assets is included in research and development
costs.


GOODWILL

Goodwill represents the excess of the amount paid on the acquisition of a
business over the aggregate fair value of the net assets acquired. Such amounts
are set off against reserves as incurred.


46
<PAGE>   38


TANGIBLE FIXED ASSETS

Tangible fixed assets are stated at cost less accumulated depreciation and
amortisation. Depreciation and amortisation is computed using the straight-line
method over estimated economic lives from the time the asset is put into use.
Present estimated economic lives are as follows:

<TABLE>
<S>                           <C>
Freehold office buildings                40 years
Leasehold improvements        over the lease term
Computer equipment                    3 - 5 years
Office equipment                          7 years
Transportation equipment              3 - 4 years
</TABLE>


LEASING

Leases which transfer substantially all the benefits and risks of ownership of
an asset to Micro Focus are capitalised as fixed assets. The amount capitalised
is that sum for which the leased asset could be purchased at the start of the
lease, this sum also being treated as a liability.

Depreciation on such leased assets is provided at rates calculated to write off
the capitalised cost over the shorter of the lease term and the asset's economic
life. Lease payments are apportioned between finance charges (computed on the
basis of implicit interest rates) and a reduction in the original liability.

Rentals paid under operating leases are charged to income on a straight-line
basis over the lease term.


DEFERRED TAXATION

Deferred taxation is provided on the liability method on all timing differences
to the extent that they are expected to reverse in the future without being
replaced, calculated at the rate at which it is anticipated the timing
differences will reverse.


STOCKS

Stocks, consisting principally of diskettes and technical manuals, are stated
at the lower of cost and net realisable value, using the first-in, first-out
method. Contracts in progress, representing engineering costs associated with
non-cancellable licence agreements prior to delivery,are included in stocks
and charged to income when the related revenue is recognised.


CASH AND BANK DEPOSITS

Cash and bank deposits includes cash placed on deposit where the maturity
date is between three and twelve months from the initial date of deposit.


INVESTMENTS

Investments are recorded at cost less any provision for permanent diminution in
value.


TRANSLATION OF FOREIGN CURRENCIES

Micro Focus' policy on foreign currency translation complies with U.K. Statement
of Standard Accounting Practice No. 20 "Foreign Currency Translation".

Assets and liabilities denominated in currencies other than G.B. pounds are
translated at exchange rates in effect at the balance sheet date. Closing G.B.
pound to U.S. dollar rates at January 31 1997, 1996 and 1995 were GBP 1 =
$1.60, GBP 1 = $1.51 and GBP 1 = $1.59 respectively. Revenues, costs and
expenses are translated using average rates. Monthly average G.B. pound to U.S.
dollar rates used during 1996 range between GBP 1 = $1.50 and GBP 1 = $1.71,
and average GBP 1 = $1.58 (1995: GBP 1 = $1.58; 1994: GBP 1 = $1.54.)
Translation adjustments resulting from the process of translating financial
statements denominated in currencies other than G.B. pounds are dealt with
through reserves.


(LOSS)/EARNINGS PER SHARE

(Loss)/earnings per share is based on the (loss)/profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the year.

Fully diluted earnings per share is based on the profit for the year after
taxation, and on the weighted average number of ordinary shares outstanding
during the period as adjusted for shares issuable upon exercise of share
options. The computation assumes the proceeds from the exercise of share options
are invested in 2.5% Consolidated Stock. Fully diluted earnings per share is
disclosed where dilution from earnings per share is greater than 3%.


                                                                              47
<PAGE>   39
PENSIONS

Micro Focus has entered into arrangements under which it makes defined
contributions to personal pension schemes operated by its employees.
Contributions, which are independently administered by insurance companies and
other financial institutions, are charged to income in the year in which they
become payable.


NEW ACCOUNTING STANDARDS

Compliance with Financial Reporting Standard 8 - Related Party Disclosures ("FRS
8"), which was issued by the Accounting Standards Board in 1995, became
mandatory in 1996. The financial statements of Micro Focus have not been
affected by the increased disclosures required by FRS 8.

NOTE 2  REVENUE (TURNOVER)

The following table analyses revenue by customer location:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)            1996      1995      1994


Revenue:

<S>                                    <C>       <C>       <C>   
United States                          38,640    42,824    53,215
Japan                                   3,519     2,720     4,185
United Kingdom                          6,811     7,178     8,136
Europe (excluding U.K.)                19,297    19,400    19,269
Other                                   4,822     5,136     5,080
-----------------------------------------------------------------
                                       73,089    77,258    89,885
=================================================================
</TABLE>


An analysis of revenue based on the location of Micro Focus facilities is
included in note 20 on page 54.

NOTE 3  RESEARCH AND DEVELOPMENT COSTS
-----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)          1996     1995      1994 

<S>                                    <C>      <C>       <C>   
Research and development costs,

  before capitalisation                19,235   23,423    23,505
Costs capitalised as software
  product assets                       (5,258)  (9,882)   (9,719)
Amortisation of capitalised costs       8,067    8,805     7,093
Previously deferred costs expensed
  on contract completion                   --       --        65
-----------------------------------------------------------------
                                       22,044   22,346    20,944

Exceptional items (note 7):
Restructuring costs:
  - accelerated amortisation               --    3,834        -- 
  - other costs                         2,255      671        -- 
Purchased research and development
  costs written off                        --       --     3,205
-----------------------------------------------------------------
                                       24,299   26,851    24,149
=================================================================
</TABLE>


NOTE 4  OPERATING (LOSS)/PROFIT

Operating (loss)/profit is stated after charging:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)              1996     1995     1994
<S>                                       <C>      <C>      <C>  
Auditors' remuneration:

  audit services: U.K                       105       96      130
  audit services: overseas                   93      100      104
  non-audit services: U.K                   181      141      125
  non-audit services: overseas              218      179      156
Operating lease rentals:
  equipment                                 743      903      883
  land and buildings                      1,811    2,137    2,187
Depreciation on leased assets                39      118      190
Other depreciation and
  amortisation                            5,616    6,068    4,161
</TABLE>


The profit attributable to the ordinary shareholders of Micro Focus Group Plc,
dealt with in the financial statements of Micro Focus, is GBP 716,000 (1995:
profit GBP 1,449,000; 1994: loss GBP 7,790,000).


48
<PAGE>   40
NOTE 5  DIRECTORS AND EMPLOYEES

An analysis of the directors' remuneration, including details of the
remuneration of the chairmen and highest-paid U.K. director, is set out in the
Executive Remuneration Committee's Report on page 31.

The average monthly number of staff employed by Micro Focus during the year was:

<TABLE>
<CAPTION>
--------------------------------------------------------------------
                                1996            1995            1994
                                 No.             No.             No.
<S>                             <C>             <C>             <C>
U.S. and Japan                  316             362             378
Europe                          330             373             373
--------------------------------------------------------------------
                                646             735             751
====================================================================
</TABLE>

Staff costs, which include salaries, bonus and commissions, amounted to:

<TABLE>
<CAPTION>
----------------------------------------------------------------------
(In thousands of G.B. pounds)   1996            1995            1994
<S>                             <C>             <C>             <C>
U.S. and Japan                  17,270          18,272          20,333
Europe                          12,215          13,552          13,450
----------------------------------------------------------------------
                                29,485          31,824          33,783
Social security costs            2,797           2,884           2,808
Other pension costs                437             596             710
----------------------------------------------------------------------
                                32,719          35,304          37,301
======================================================================
</TABLE>

Other pension costs principally represent amounts paid by Micro Focus to
personal pension schemes operated by its employees. In the United Kingdom, Micro
Focus matches contributions made by participating employees up to certain
predetermined thresholds. Arrangements for employees in other countries have
been established on similar bases, subject to local regulations and practices in
the countries concerned.


NOTE 6  INTEREST EXPENSE

Interest expense principally represents finance charges payable in respect of
finance leases.


NOTE 7  EXCEPTIONAL ITEMS

Exceptional items recorded in 1996 represent a charge of GBP 5,195,000 for
restructuring costs. The charge consists of the costs associated with a
reduction in the Company's workforce of approximately 65 people, with facility
closures and consolidations, and with asset write-downs. The restructuring was
essentially completed during the year, but payments estimated at GBP 1,500,000
remain to be paid in 1997.

Exceptional items recorded in 1995 consist of a charge of GBP 6,667,000 for
restructuring costs and a credit of GBP 666,000 resulting from the adoption of
Abstract 13 "Accounting for ESOP Trusts" which was issued by the Urgent Issues
Task Force of the Accounting Standards Board in June 1995.

Restructuring costs of GBP 3,125,000 announced in May 1995 principally related
to employee terminations, closure of surplus office facilities, and fixed asset
write-downs. Additional asset write-downs of GBP 3,542,000 booked in the fourth
quarter of 1995 were primarily the result of a review into the carrying value of
software product assets.

In 1994 non-recurring exceptional items charged against income consisted of GBP
3,205,000 of intellectual property rights acquired from mbp and GBP 943,000 of
costs related to the acquisition of Burl Software Laboratories, Inc.


                                                                              49
<PAGE>   41
In 1996 and 1995 the effective tax rate was distorted principally as a result of
losses incurred in the United States which can only be offset against profits
arising in future periods. The effective tax rate for 1994 was distorted by the
impact of exceptional items.

The corporation tax returns of a U.S. subsidiary undertaking for the years ended
January 31 1991 and 1992 are under examination by the U.S. Internal Revenue
Service, which has proposed certain adjustments. The Company believes that the
outcome of the examination will not give rise to any material adjustment to the
financial statements.
<PAGE>   42
NOTE 8  TAXATION

The taxation charge for the year consists of the following:
------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)        1996     1995     1994 

<S>                                  <C>      <C>    <C>  
U.K. corporation tax at 33%           237      133    2,383
Deferred taxation                     870     (458)     760
Double taxation relief               (174)    (105)    (356)
Overseas taxation:
  U.S. federal                          4        5     (163)
  U.S. state                            1       --        3
  Other                               276     (118)   1,966
------------------------------------------------------------
                                    1,214     (543)   4,593

Taxation underprovided/(over-
  provided) in previous years:
Corporation tax                       258       --     (403)
Deferred taxation                      --      202     (361)
Overseas taxation:
  U.S. federal                         --      193      281
  U.S. state                           --       (2)      73
  Other                                --       78      (50)
------------------------------------------------------------
                                    1,472      (72)   4,133
===========================================================
</TABLE>

In 1996 and 1995 the effective tax rate was distorted principally as a result
of losses incurred in the United States which can only be offset against
profits arising in future periods.  The effective tax rate for 1994 was
distorted by the impact of exceptional items.

The corporation tax returns of a U.S. subsidiary undertaking for the years
ended January 31 1991 and 1992 are under examination by the U.S. Internal
Revenue Service, which has proposed certain adjustments.  The Company believes
that the outcome of the examination will not give rise to any material
adjustment to the financial statements.

NOTE 9  (LOSS)/EARNINGS PER SHARE

The calculation of (loss)/earnings per share is based on the loss after taxation
of GBP 7,281,000 (1995: loss GBP 6,470,000; 1994: profit GBP 4,590,000) and on
15,156,000 ordinary shares (1995: 14,843,000; 1994: 14,336,000), being the
weighted average number of shares in issue.

Adjusted (loss)/earnings per share, excluding exceptional items, has been
calculated in addition to the (loss)/earnings per share required by FRS 3 since
in the opinion of the directors this will provide shareholders with a better
indication of the underlying (loss)/earnings per share.

NOTE 10  INTANGIBLE FIXED ASSETS

Intangible fixed assets consist of software product assets, as follows:
---------------------------------------------------------------
<TABLE>
<CAPTION>
                                             Amort-    Net book 
(In thousands of G.B. pounds)      Cost     isation      value 


<S>                               <C>        <C>        <C>   
At January 31 1996                70,816     52,959     17,857
Currency fluctuations             (1,858     (1,400)      (458)

Additions                          5,258         --      5,258
Amortisation for the year             --      8,067     (8,067)
--------------------------------------------------------------
At January 31 1997                74,216     59,626     14,590
==============================================================
</TABLE>


50
<PAGE>   43
NOTE 11  TANGIBLE FIXED ASSETS

(a)  Micro Focus:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>                                                       
                                                                 
(In thousands of                  Freehold      Leasehold              
  G.B. pounds)                    land and      improve-     Office    
                                  buildings      ments       equipment 

<S>                               <C>           <C>           <C>      
Cost:
At January 31 1996                 13,142        1,983         4,852   
Currency fluctuations                  --          (75)         (211)  
Additions                             414          101            77   
Disposals                              --       (1,169)          (28)  
---------------------------------------------------------------------
At January 31 1997                 13,556          840         4,690   
=====================================================================
Depreciation:
At January 31 1996                    205        1,847         2,779   
Currency fluctuations                  --          (55)         (125)  
Provision for the year                231          135           678   
Disposals                              --       (1,167)          (20)  
---------------------------------------------------------------------
At January 31 1997                   436          760         3,312   
=====================================================================
Net book values:
At January 31 1996                 12,937          136         2,073   
At January 31 1997                 13,120           80         1,378   
=====================================================================

<CAPTION>
                                Computer & 
(In thousands of              communications    Trans- 
  G.B. pounds)                    equipment    portation 
                                 & software    equipment        Total 

<S>                                <C>            <C>         <C>   
Cost:
At January 31 1996                  25,014         594         45,585
Currency fluctuations               (1,076)         (3)        (1,365)
Additions                            1,891          17          2,500
Disposals                           (1,875)       (316)        (3,388)
---------------------------------------------------------------------
At January 31 1997                  23,954         292         43,332
=====================================================================
Depreciation:
At January 31 1996                  15,581         263         20,675
Currency fluctuations                 (737)         (3)          (920)
Provision for the year               4,531          80          5,655
Disposals                           (1,257)       (177)        (2,621)
---------------------------------------------------------------------
At January 31 1997                  18,118         163         22,789
=====================================================================
Net book values:
At January 31 1996                   9,433         331         24,910
At January 31 1997                   5,836         129         20,543
=====================================================================
</TABLE>


The above figures include transportation equipment held under finance leases as
follows:
----------------------------------------------------------
<TABLE>
<CAPTION>
                                         Amort-     Net book 
(In thousands of G.B. pounds)  Cost     isation      value 


<S>                           <C>         <C>         <C>
At January 31 1996             374         165         209

Provision for the year           -          39         (39)
Disposals                     (249)       (138)       (111)
----------------------------------------------------------
At January 31 1997             125          66          59
==========================================================
</TABLE>

(b) Company:

The Company's tangible fixed assets consist of freehold land and buildings,
valued at cost which includes capitalized interest amounting to GBP 385,000.


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

<TABLE>
<CAPTION>
                                                 Net book 
(In thousands of G.B. pounds) Cost  Depreciation   value 

<S>                          <C>         <C>       <C>  
At January 31 1996           3,088       11        3,077

Provision for the year          --       85          (85)
--------------------------------------------------------
At January 31 1997           3,088       96        2,992
========================================================
</TABLE>

NOTE 12  INVESTMENTS

(a)  Micro Focus:

Investments represents an investment in the Company's own shares.

In 1995 the Company funded the acquisition of 915,216 shares by Micro Focus
Trustees Limited on behalf of the Micro Focus Group Employee Benefit Trust 1994
("the Trust"). The cost to Micro Focus amounted to GBP 5,634,000. Options have
been granted to employees over 693,690 of these shares (see note 21 to the
financial statements on page 54). As at January 31 1997 the market value of the
shares was GBP 9,656,000 (January 31 1996: GBP 5,674,000); if they had been sold
at this value a liability to corporation tax of approximately GBP 1,100,000
(January 31 1996: GBP nil) would have arisen. The Trust has not waived its right
to dividends in respect of this shareholding.

In accordance with FRS 5 "Reporting the Substance of Transactions" and as
recommended in UITF Abstract 13 "Accounting for ESOP Trusts", the assets and
liabilities of the Trust, as well as its operating costs, are included in Micro
Focus' consolidated financial statements.


                                                                              51
<PAGE>   44
(b)  Company

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                    1996          1995

<S>                                             <C>           <C>   
Investments in subsidiary undertakings
Beginning of year                               27,685        27,289
Effect of exchange rate changes                   (510)          396
--------------------------------------------------------------------
End of year                                     27,175        27,685

Investment in own shares (see (a) above)
Beginning and end of year                        5,634         5,634
--------------------------------------------------------------------
                                                32,809        33,319
====================================================================
</TABLE>

The principal subsidiary undertakings, all of which are wholly-owned, are:

<TABLE>
<CAPTION>
                                                Country of incorporation
                                                       and operation

<S>                                      <C> 
Micro Focus Limited                                        UK (1) 
Micro Focus International Limited                          UK (2) 
Micro Focus Holdings Limited                               UK (1) 
Micro Focus Incorporated                                  USA (2) 
Stingray Software Company Incorporated                    USA (2)
Burl Software Laboratories, Inc                           USA (1) 
Micro Focus Japan                                       Japan (2) 
Micro Focus Gmbh                                      Germany (2) 
Micro Focus SARL                                       France (2) 
Micro Focus SA                                          Spain (2) 
Micro Focus Investments Limited                        Jersey (3) 
Micro Focus Securities Limited                         Jersey (3) 
Micro Focus Finance Limited                            Jersey (3) 
System Focus BV                                   Netherlands (2) 
Micro Focus Technology NV                Netherlands Antilles (2)
</TABLE>

(1)   Held directly by the Company
(2)   Held by a subsidiary undertaking
(3)   Held directly by the Company, operating as financing companies. The
      activities of the other subsidiary undertakings are described in the
      Directors' Report.

In May 1995 Micro Focus completed the acquisition of Burl Software
Laboratories, Inc. for a total of US$13.5m (GBP 8.5m), which was satisfied by
the issue of 664,979 ordinary shares and the payment of US$6.3m (GBP 3.9m) in
cash.  The transaction was accounted for as an acquisition.

NOTE 13  STOCKS

The replacement value of stocks is not considered to be materially different
from their balance sheet values.


NOTE 14  DEBTORS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)            1996         1995

<S>                                      <C>          <C>   
Trade debtors                            12,672       20,513
Other debtors and prepaid expenses        1,556        2,238
------------------------------------------------------------
                                         14,228       22,751
============================================================
</TABLE>


Trade debtors includes GBP 1,693,000 (1995: GBP 1,825,000) which is due more
than twelve months from the balance sheet date.

Other debtors and prepaid expenses includes:

   - loans to an officer of Micro Focus totalling GBP 57,000 (1995: two officers
     - GBP 117,000).

   - amounts due more than twelve months from the balance sheet date totalling
     GBP 164,000 (1995: GBP 270,000).


NOTE 15  CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                         1996         1995

<S>                                                 <C>         <C>
Obligations under finance leases (note 17)              68          148
Trade creditors                                      3,054        5,323
Current corporation tax                              2,590        2,001
Other taxes and social security costs                1,129          850
Product royalties and purchases                        602          647
Accrued employee compensation and commissions        3,632        4,459
Accrued expenses                                     5,105        3,033
-----------------------------------------------------------------------
                                                    16,180       16,461
=======================================================================
</TABLE>



Accrued expenses includes GBP 123,000 (1995: GBP 147,000) in respect of an
unfunded defined benefit scheme operated by a foreign subsidiary undertaking,
and other outstanding contributions payable by Micro Focus in connection with
employees' pension arrangements.


52
<PAGE>   45
NOTE 16  CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Creditors due after more than one year represent obligations under lease
commitments (see note 17).

Micro Focus has in place a line of credit under the terms of which financing is
available until December 1997, either in G.B. pounds or such other currency as
Micro Focus may determine, of up to the equivalent of GBP 5.0m. Any borrowings
under this line of credit will bear interest at 1% above the London Interbank
Offered Rate (LIBOR) and would be unsecured. There have been no borrowings under
this line of credit to date.


NOTE 17  LEASE COMMITMENTS

Financial commitments for future periods under lease agreements existing at
January 31 1997 were as follows:

Finance leases:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                1996        1995 

<S>                                            <C>        <C>
Amounts payable within one year                71         152
Amounts payable from one to two years          15          67
-------------------------------------------------------------
                                               86         219
Less financial charges allocated after
  the balance sheet date                       (3)         (5)
-------------------------------------------------------------
                                               83         214
=============================================================

Finance leases are shown as:
Amounts due within one year (note 15)          68         148
Amounts due after more than one year           15          66
-------------------------------------------------------------
                                               83         214
=============================================================
</TABLE>

Operating leases:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     Land and buildings
(In thousands of G.B. pounds)                         1996        1995 

<S>                                                  <C>         <C>   
Commitment for 1997 under leases which expire:
  within one year                                    1,117         808 
  in the second to fifth
  years inclusive                                    3,131         556 
  thereafter                                         4,302         138 
-----------------------------------------------------------------------
                                                     8,550       1,502 
=======================================================================

<CAPTION>
                                                            Other
(In thousands of G.B. pounds)                           1996      1995

<S>                                                      <C>       <C>
Commitment for 1997 under leases which expire:
  within one year                                        114       101
  in the second to fifth
  years inclusive                                        459       351
  thereafter                                              --        --
----------------------------------------------------------------------
                                                         573       452
======================================================================
</TABLE>

NOTE 18  DEFERRED TAXATION

Deferred taxation has been fully provided as follows:


(a)  Micro Focus:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                         1996        1995

<S>                                                   <C>         <C>  
Capital allowances in advance of depreciation
  and amortisation                                      169         309
Other timing differences in recognising revenue
  and expense items in different periods
  for taxation purposes                               6,070       5,145
-----------------------------------------------------------------------
                                                      6,239       5,454
=======================================================================

(b)  Company:


(In thousands of G.B. pounds)                         1996        1995


Capital allowances in advance of depreciation
  and amortisation                                       19          18
Other timing differences in recognising revenue
  and expense items in different periods
  for taxation purposes                                  --           1
-----------------------------------------------------------------------
                                                         19          19
=======================================================================
</TABLE>

NOTE 19  CAPITAL COMMITMENTS

At January 31 1997 and January 31 1996 Micro Focus had no material capital
expenditure commitments.


                                                                              53
<PAGE>   46
NOTE 20  SEGMENTAL INFORMATION

Micro Focus operates in one business segment - the development and marketing of
computer software products. The following table analyses worldwide operations by
geographical area, based on the location of Micro Focus facilities.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)                 1996            1995            1994 

<S>                                        <C>             <C>             <C>   
Revenue:
  United Kingdom                            33,974          33,988          35,863
  United States                             42,856          49,503          58,544
  Europe (excluding U.K.)                   20,588          20,196          25,135
  Other                                      1,910           1,300           1,369
----------------------------------------------------------------------------------
                                            99,328         104,987         120,911

Inter-segment revenue:
  United Kingdom                           (15,900)        (16,728)        (15,583)
  United States                             (3,501)         (4,790)         (2,770)
  Europe (excluding U.K.)                   (6,381)         (5,362)        (11,720)
  Other                                       (457)           (849)           (953)
----------------------------------------------------------------------------------
Total revenue:                              73,089          77,258          89,885
==================================================================================
Operating (loss)/profit:
  United Kingdom                            (2,384)          1,350           5,848
  United States                             (4,699)         (4,429)         (1,671)
  Europe (excluding U.K.)                     (796)         (5,097)          4,222
  Other                                        371            (458)           (867)
----------------------------------------------------------------------------------
                                            (7,508)        (8,634)          7,532
==================================================================================
Net operating assets/(liabilities):
  United Kingdom                            16,075          20,264           9,209
  United States                             (8,199)         (3,087)           (162)
  Europe (excluding U.K.)                    2,988           9,176           8,609
  Other                                        (16)           (558)           (113)
----------------------------------------------------------------------------------
                                            10,848          25,795          17,543
==================================================================================
</TABLE>

Inter-segment revenue principally represents licence fees and charges for
research and development between locations. Operating (loss)/profit excludes
interest income and expense and, correspondingly, net operating
assets/(liabilities) exclude interest-bearing assets and liabilities. A
reconciliation of the net operating assets/(liabilities) as shown above to net
assets as shown in the balance sheet is as follows:

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands of G.B. pounds)           1996           1995           1994 

<S>                                   <C>            <C>            <C>   
Net operating assets                  10,848         25,795         17,543
Cash and bank deposits                44,725         38,972         55,823
Investment in own shares               5,634          5,634             -- 
Finance lease obligations                (83)          (214)          (510)
--------------------------------------------------------------------------
Net assets                            61,124         70,187         72,856
==========================================================================
</TABLE>

An analysis of revenue by customer location is included in note 2 to the
financial statements on page 48.


NOTE 21  SHARE OPTION PLANS

Micro Focus operates two plans both of which provide for the grant of options to
acquire shares to all persons who devote substantially all their working time to
Micro Focus and such other eligible persons as the Board may determine. The
terms and exercise prices of options issued under these plans are determined at
the time the options are granted. Unexercised options lapse when the
optionholder ceases to be employed by Micro Focus or at a predetermined expiry
date (of up to ten years from the date of grant), whichever occurs first.

The Micro Focus Share Option Plan ("the Plan") was established in 1984. It meets
the terms and conditions required by the U.S. Internal Revenue Code in order
that the options will qualify as Incentive Stock Options, and as required by the
U.K. Inland Revenue in order to qualify as an approved Company Share Option
Plan. Options issued under the Plan are generally exercisable in five equal
cumulative annual instalments commencing one year after the date of grant.

At January 31 1997 1,769,342 options were issued and outstanding under the Plan
and a further 427,911 had been approved for grant by shareholders of the Company
but were currently unissued.

In 1994 Micro Focus established a discretionary employee benefit trust, the
Micro Focus Group Employee Benefit Trust 1994 ("the Trust"), the purpose of
which is to further the Company's policy of encouraging share ownership by its
employees. Under the terms of the Trust, Micro Focus Trustees Limited ("MFTL")
is permitted to acquire ordinary shares in the Company and to issue options over
those shares to directors and employees.

In 1995 MFTL purchased 915,216 shares in the Company and granted options on
530,700 of these shares at a price of GBP 6.97 per share. Under the terms of the
grant, these options vest, and therefore become exercisable, in five equal
annual instalments only on the achievement by Micro Focus of certain
predetermined annual earnings per share targets in respect of each of the
financial years ended January 31 1996 to January 31 2000. In March 1996
one-fifth of the outstanding options lapsed when the announcement of financial
results for the year ended January 31 1996 indicated that the target in respect
of that year had not been achieved. In April 1996 the Company offered all
employees the opportunity to cancel all outstanding options above the then fair
market value and receive instead a new option, with a new vesting schedule, for
three new shares for each four shares then under option. As a result 376,840 of
the remaining options 


54
<PAGE>   47
were exchanged for 282,630 new options, issued at a price of GBP 6.85 per share.
These new options are exercisable in five equal cumulative annual instalments
commencing one year after the date of grant.

At January 31 1997 693,690 of the options issued by MFTL in 1995 and 1996 were
outstanding. A further 32,000 shares over which options had been granted prior
to their acquisition by MFTL remained outstanding at January 31 1997 at prices
between GBP 6.05 and GBP 14.98. The remaining 189,526 shares were available for
the grant of further options. Options issued by the Trust under this plan do not
qualify as Incentive Stock Options (for U.S. taxation purposes), nor does the
plan qualify as an approved Company Share Option Plan (for U.K. taxation
purposes).

The shares held by the Trust are included in Investments (see note 12 to the
financial statements on page 51).

Share option activity under the plans was as follows:

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In G.B. pounds, except share data)    Number            Option price
                                     of shares            per share

<S>                                 <C>                   <C>
January 31 1994                      1,310,176             0.92-28.83
Options granted                        608,416             8.16-16.38
Options exercised                     (148,206)             0.92-7.63 
Options cancelled                      (41,512)            2.20-28.83
---------------------------------------------------------------------
January 31 1995                      1,728,874             2.20-28.83
Options granted                        603,795              5.65-8.20 
Options exercised                     (114,865)             2.20-5.42 
Options cancelled                     (159,035)            2.20-28.83
---------------------------------------------------------------------
January 31 1996                      2,058,769             2.20-28.83
Options granted                      2,300,830              5.83-9.70 
Options exercised                      (24,156)             5.42-9.66 
Options cancelled                   (1,840,411)            5.42-28.83
---------------------------------------------------------------------
January 31 1997                      2,495,032             5.42-21.61
=====================================================================
</TABLE>


The total of 2,495,032 options outstanding at January 31 1997 is represented by
1,769,342 unissued shares and 725,690 shares held by MFTL.

The outstanding options are exercisable between 1997 and 2006; the proceeds on
exercise at January 31 1997 would be GBP 19,790,000 (January 31 1996: GBP
25,233,000).

At January 31 1997 options for 168,000 shares (January 31 1996: 728,000 shares)
were currently exercisable at prices per share of between GBP 5.42 and GBP
21.61; the proceeds on exercise of such options at January 31 1997 would be GBP
2,095,000 (January 31 1996: 10,729,000).


                                                                              55