<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K

           [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended June 30, 2000

                                      OR

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

                       Commission file number 000-23043

                            PERVASIVE SOFTWARE INC.
            (Exact name of registrant as specified in its charter)

               Delaware                              74-2693793
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)             Identification Number)

                    12365 Riata Trace Parkway, Building II
                              Austin, Texas 78727
                   (Address of principal executive offices)

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

                                (512) 231-6000
             (Registrant's telephone number, including area code)

       Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $.001 par value

                             (Title of each class)

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

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

                  (1)    Yes   X                No
                  (2)    Yes   X                No

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

   As of September 25, 2000 the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $32,686,792. Shares
of Common Stock held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

   As of September 25, 2000 there were 15,809,379 shares of the Registrant's
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Part III--Portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's Annual Meeting of Stockholders to be held
on November 9, 2000.

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<PAGE>

                            PERVASIVE SOFTWARE INC.
                            FORM 10-K ANNUAL REPORT
                           FOR THE FISCAL YEAR ENDED
                                 JUNE 30, 2000

                               TABLE OF CONTENTS

<TABLE>
 <C>         <S>                                                           <C>
                                                                           Page
 PART I.................................................................      1
    Item 1.  Business...................................................      1
    Item 2.  Properties.................................................     20
    Item 3.  Legal Proceedings..........................................     20
    Item 4.  Submission Of Matters To A Vote Of The Security Holders....     20
    Item 4a. Executive Officers of the Registrant.......................     21

 PART II................................................................     23
    Item 5.  Market for Registrant's Common Equity and Related
             Stockholder Matters........................................     23
    Item 6.  Selected Consolidated Financial Data.......................     24
    Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................     25
    Item 7a. Quantitative and Qualitative Disclosures About Market
             Risk.......................................................     32
    Item 8.  Consolidated Financial Statements and Supplementary Data...     32
    Item 9.  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure..................................     32

 PART III...............................................................     33
    Item 10. Directors and Executive Officers of the Registrant.........     33
    Item 11. Executive Compensation.....................................     33
    Item 12. Security Ownership of Certain Beneficial Owners and
             Management.................................................     33
    Item 13. Certain Relationships and Related Transactions.............     33

 PART IV................................................................     34
    Item 14. Exhibits, Financial Statement Schedules and Reports on Form
             8-K........................................................     34

 SIGNATURES.............................................................     35
</TABLE>

                                       i
<PAGE>

                                    PART I

ITEM 1. BUSINESS

   The statements contained in this Report on Form 10-K and in the Annual
Report that are not purely historical statements are forward-looking
statements within the meaning of Section 21E of the Securities and Exchange
Act of 1934, including statements regarding the Company's expectations,
beliefs, hopes, intentions or strategies regarding the future. These forward-
looking statements involve risks and uncertainties. Our actual results may
differ materially from those indicated in the forward-looking statements.
Please see "Risk Factors that May Affect Future Results," "Special Note
Regarding Forward-Looking Statements" and the factors and risks discussed in
other reports filed from time to time with the Securities and Exchange
Commission.

Overview

   Pervasive Software is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Medium Enterprises
("SME"). Our low cost of ownership database product, Pervasive.SQL, is widely
installed with over 3.5 million server seats licensed to date. With
Pervasive.SQL, software developers ("ISVs") can create sophisticated yet low
maintenance applications that reach beyond the desktop to easily share
information from workstations to the Web. Our software is designed to be
integrated by ISVs into their Web or client/server applications that are sold
to SMEs, which typically have little to no IT infrastructure. As a result,
these SME end users can concentrate on running their businesses instead of
managing the database underlying their applications, which is particularly
critical to this large market. Our comprehensive approach to selling,
marketing and supporting our offerings is designed to drive simplicity into,
and mask the complexity of, data management solutions, specifically addressing
the needs of ISVs who build software applications and value-added resellers
("VARs") who sell and deploy them to SMEs. We develop, market, sell and
support our offerings worldwide through our principal office in Austin, Texas,
and through international offices in Brussels, Frankfurt, Paris, London and
Tokyo.

Industry Background

   The Internet is affecting markets everywhere as it provides a mechanism to
compete globally and deliver goods and services without the traditional
business models required prior to its establishment. Businesses worldwide,
whether they are small and growing companies or large, well-established
enterprises, are looking for ways to take advantage of the Web. Web-enabled
businesses are being born at a rapid pace, and many established businesses are
just starting to develop a Web presence.

   Forrester Research predicts that the business-to-business electronic
commerce market will grow from $406 billion in 2000 to $2.7 trillion in 2004.
To address this market, companies must create robust e-business applications
that exchange complex information in real time with a high degree of
reliability. We believe there will be a proliferation of data-driven Web
applications, which will drive the application development market over the
next few years in the U.S., Europe and Asia Pacific.

   Similarly, Cahners In-Stat Group predicts that the domestic software market
for SMEs will grow from $48.2 billion in 2000 to $66.3 billion in 2003 and
domestic database spending by SMEs will grow from $11.2 billion in 2000 to
$13.6 billion in 2003. SMEs are phasing in their adoption of the Web,
beginning with a mere Web presence, followed by e-commerce and ultimately
complete integration of their business with the Web.

   Because of their relative size, SMEs are in a position to quickly and cost
effectively take advantage of emerging Web applications that integrate outside
services, sales, marketing, accounting and customer service. We believe SMEs
will require a new breed of software applications and significant integration
services as they integrate the Web into their businesses, creating a large
opportunity for ISVs developing and deploying applications targeted at SMEs.
We believe ISVs will require data management technology and development
services that speed their application time to market, with simplified,
reliable, high performance Web and data management functionality.
<PAGE>

   The Linux operating environment is contributing to the growth of business-
to-business e-commerce. According to IDC, shipments of Linux operating
environments will grow to 6.8 million worldwide by the year 2003. Linux is
quickly becoming a preferred platform for many types of development and
deployment because of its relatively low-cost operation, its reliability and
scalability. We believe ISVs and VARs require data management solutions that
operate in a broad range of operating system environments, including Linux.

   In addition, the emergence of XML, or Extensible Markup Language, as a
possible new information management standard, has the potential to
dramatically change information management methods. XML more effectively
stores, retrieves and exchanges complex data types and speeds the performance
of e-business applications allowing for improved business-to-business
interactivity. XML addresses the data interchange pains felt by developers
dependent on proprietary formats, and the need to integrate applications at
the information (data) layer. As a result, we believe the emergence of a
significant market for XML enabled applications is possible.

   The Web, Linux and XML are all driving the growth of e-business application
development for use by both SMEs and large enterprises alike. We believe ISVs
and VARs serving these markets will require simplified development
environments and tools, platform independent deployment options, and
integration services in order to develop and deploy fully functional and easy
to maintain Web applications.

The Pervasive Solution

   Pervasive Software is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for SMEs. Today, over 10,000
independent software developers, value-added resellers, and systems
integrators have developed or deployed applications that use our Pervasive.SQL
database products. Pervasive.SQL uniquely combines the high performance
associated with enterprise-class databases with numerous low maintenance
features, and is ideally suited for Web and client/server applications
deployed on a wide variety of operating systems and devices. Our offerings
allow a broad range of software developers to:

  .  Build low cost of ownership applications for use in SME environments
     characterized by little to no IT infrastructure,

  .  Build applications that support multiple operating systems, including
     NT, NetWare, Linux and Solaris,

  .  Embed our database inside their applications, permitting development of
     tightly integrated applications, and

  .  Satisfy small memory footprint requirements required by a wide range of
     application and hardware environments, maximizing resources available to
     the application.

   Many SME organizations with scarce IT resources rely on our channel of
software developers, value-added resellers, application service providers, Web
and systems integrators and consultants to help them develop, deploy and
maintain business applications. Our products and marketing approach are
specifically tailored to meet the needs of our channel partners and their
customers. In particular, we have designed sales, marketing, training,
professional services and licensing programs to encourage development of new
Web and client/server applications with Pervasive.SQL. We believe that our
sharp focus on our channel partners and their customers provides us with
multiple sales opportunities, a cost-effective, value-added source of service
and technical support and a large, loyal and well-educated channel that
develops and deploys applications using our offerings.

The Pervasive Strategy

   Pervasive's goal is to Web-enable SMEs worldwide by being the leading
provider of data management solutions and services for Web and client/server
applications. The Company has tailored its database and information management
offerings to meet the specific needs of ISVs and VARs that develop solutions
for SMEs with little to no IT infrastructure. Key elements of our strategy to
attain this goal are:

                                       2
<PAGE>

   Move SMEs to the Web. Our low cost of ownership database is widely
installed with over 3.5 million server seats licensed since our inception in
1994. Many of these seats are deployed in SME organizations and continue to
utilize previous versions of our database products. We believe we have a
significant opportunity in upgrading these seats to our current or next
generation Web and client/server database products. We intend to reach this
installed base through our loyal channel of more than 10,000 ISVs, VARs,
systems integrators and consultants. We intend to conduct joint marketing
programs with our channel partners encouraging upgrades to recent versions of
our databases, upgrades of additional user counts, upgrades to new or
additional platforms, as well as upgrades of the ISVs' applications
themselves.

   Move our Worldwide Channel Partners to the Web. We believe our past
investments in training and educating our channel partners worldwide, our
long-term relationships with ISVs and VARs and our success in encouraging them
to embed our products into their applications has created a competitive
advantage in the marketplace. Our channel approach is designed to further the
integration of our products into Web and client/server applications and to
stimulate sales of the applications themselves. We intend to continue to build
partner loyalty by providing significant revenue opportunities, ISV
certification programs, and VAR authorization programs via our enhanced
marketing, training, consulting and lead sharing programs.

   Explore New Markets. We have excelled in simplifying the complexity
associated with data management for thousands of client/server applications.
We believe the proliferation of the Web, new operating systems such as Linux,
as well as the potential for future changes in database standards such as XML
will dramatically increase the development of many new software applications
used by an even broader set of end users, as well as increase the demand for
implementation services required by those end users. To exploit these market
opportunities, we intend to:

  .  Market our technologies to our channel of ISVs developing applications
     on Windows 2000 and also on Linux and Solaris to which we recently
     ported our Pervasive.SQL database,

  .  Explore opportunities to provide application development and consulting
     services to our channel of ISVs to speed time to market of their Web
     applications and services, and

  .  Evaluate extensions of our technologies to next generation database
     standards as they emerge, including a possible extension of our database
     Microkernel to support XML.

                                       3
<PAGE>

Offerings

   Pervasive has a wide range of data management offerings that enable
software developers, application service providers, Web and systems
integrators, consultants and value-added resellers to quickly and easily
develop, deploy and maintain Web and client/server applications for SME. The
resulting applications enable organizations in multiple industries to automate
a wide range of business critical functions. The following tables describe our
comprehensive line of database products and development tools:

<TABLE>
<CAPTION>
  Product                                    Description                       Platforms

  <S>                      <C>                                              <C>
  Pervasive.SQL            High performance transactional and relational    Windows NT/
  Server                   database engine targeted at high volume          2000/98/95/3.1
                           transaction applications and optimized for       NetWare
                           reporting, ad hoc query and decision support     Sun Solaris
                           systems.                                         Linux
---------------------------------------------------------------------------------------------
  Pervasive.SQL            Multi-user configuration of Pervasive.SQL for    Windows NT/
  Workgroup                environments without a dedicated network server. 2000/98/95
---------------------------------------------------------------------------------------------
  Pervasive.SQL            Single user version of Pervasive.SQL that allows Windows NT/
  Workstation              migration from single user to client/server with 2000/98/95
                           little or no code changes.
---------------------------------------------------------------------------------------------
  Pervasive.SQL            Developer kit for Pervasive.SQL that provides    Windows NT/
  Software                 tight integration with leading development tools 2000/98/95
  Developer Kit            such as Microsoft's Visual Basic and Visual C++,
                           Symantec's Visual Cafe, and Inprise's Delphi and
                           supports industry standards such as ODBC, JDBC
                           and OLE DB.
---------------------------------------------------------------------------------------------
  Pervasive.SQL            Server that provides for the Internet enabling   Windows NT
  I*net Data               of existing Pervasive.SQL and Btrieve
  Server                   applications with little or no code changes
---------------------------------------------------------------------------------------------
  Pervasive.SQL            General-purpose system for replication and       Windows NT/
  Replication--Server      synchronizing database information across        2000/98/95 (beta)
  Edition and Workstation  databases backed by Pervasive.SQL 2000 servers.
  Edition
</TABLE>


   Our line of database and information management software offers the high
performance associated with enterprise databases combined with the simplicity
of our zero administration technology. These products enable our independent
software vendor and value-added reseller customers to more profitably develop,
deploy and maintain Web and client/server applications that provide robust
functionality and low overall cost of ownership in SME environments with
scarce IT resources. Pervasive's database and information management software
simplifies development by enabling developers to write applications capable of
running on multiple platforms and being scalable with little or no
modification from single user workstation to client/server environments.
Business critical applications built on our databases enable organizations to
implement Web and client/server systems and automate critical business
functions without the costs and complexities typically associated with
enterprise-class applications and databases.

   In addition to our database server products, we offer the Pervasive.SQL
Software Developer Kit, which includes tools, documentation, sample
applications and licenses to enable programmers to quickly and easily develop
and test applications that embed our databases. The Pervasive.SQL Software
Developer Kit is designed to attract new independent software vendors to the
Pervasive.SQL development community. It provides tight integration with
leading development tools such as Microsoft's Visual Basic and Visual C++,
Symantec's Visual Cafe, and Inprise's Delphi and supports industry standards
such as ODBC, JDBC and OLE DB.

                                       4
<PAGE>

Product Characteristics

   The following table describes the principal characteristics and benefits of
our data management product offerings.

<TABLE>
<CAPTION>
  Product Characteristics              Description                          Benefits

  <S>                       <C>                                <C>
  Embeddable                Designed to be "hidden" inside an  Allows broad deployment of complex
                            application, permitting            distributed applications into
                            development of a tightly           environments with minimal or no
                            integrated application.            information technology
                                                               infrastructure.
-------------------------------------------------------------------------------------------------
  Small Memory              Internal memory requirements:      Maximizes resources available to
  Footprint                 Pervasive. SQL    6 MB             the application and enables
                                                               operation on a wide range of
                                                               hardware.
-------------------------------------------------------------------------------------------------
  Simplified Data           Pervasive.SQL automates            Requires low level of IT support
  Management                administrative functions, such as  making complex and cost effective
  Features                  disk space allocation, memory and  Web and client/server applications
                            index management, which            easily adaptable to meet ever-
                            significantly reduces the need     changing business demands.
                            for ongoing maintenance.
-------------------------------------------------------------------------------------------------
  Multi-platform            Pervasive.SQL supports a broad     Provides flexibility and leverages
  Deployment                range of operating systems         existing company standards and
                            including Windows NT/2000/98/95,   infrastructures, decreasing
                            NetWare, Sun Solaris, Linux,       training time and increasing
                            Windows CE, Palm OS (beta)         productivity, while allowing the
                            and various RTOSs.                 user to use the best tools for the
                                                               job.
-------------------------------------------------------------------------------------------------
  Portability               Deployments of Pervasive.SQL can   Allows development and deployment
                            be easily migrated to any          to be done on the most optimal
                            supported platform                 platform that meets the business
                                                               and resource requirements.
-------------------------------------------------------------------------------------------------
  Replication/              A general-purpose system for       Provides support for asynchronous
  Synchronization           replicating and synchronizing      bi-directional database
  (in beta)                 database information across        replication across TCP/IP
                            databases backed by Pervasive.SQL  networks, including the Internet.
                            servers.
-------------------------------------------------------------------------------------------------
  Reliability               Pervasive.SQL is based on          Provides high degree of data
                            industry-proven technology.        integrity and stability to
                                                               business applications.
-------------------------------------------------------------------------------------------------
  Configurability           Pervasive.SQL can access local     Enables the storage and processing
                            and distributed data               of databases to be distributed
                            simultaneously.                    throughout the network.
-------------------------------------------------------------------------------------------------
  Application Scalability   Applications can run in any        Offers cost savings for developers
                            configuration from single user     and end users because a single
                            workstation to supporting          application can be deployed in
                            hundreds of concurrent users in    multiple configurations without
                            client/server and Web              modification.
                            environments.
-------------------------------------------------------------------------------------------------
  Industry                  Industry standard interface        Allows ODBC, JDBC and OLE DB
  Standard Connectivity     enabling any application to        compliant applications to access
                            communicate with any database.     data stored in any Pervasive.SQL
                                                               database.
-------------------------------------------------------------------------------------------------
  Common MicroKernel        Transactional and relational       Allows developers to choose the
  Database Engine           applications can simultaneously    appropriate data access method:
                            share common databases.            transactional access for high
                                                               volume and relational access for
                                                               reporting, queries and decision
                                                               support.
</TABLE>


                                       5
<PAGE>

Sales and Marketing

   Pervasive's sales and marketing organization focuses on our worldwide
channels by targeting software developers that build Web and client/server
applications and the ASPs, Web and systems integrators, consultants and value-
added resellers that sell and implement the applications to end users. Our
marketing organization has primary responsibility for product direction and
has developed a number of programs utilized by the sales organization to
support our channel partners, such as our OEM program for independent software
vendors and partner programs for Web and solutions integrators, consultants
and value-added resellers. These programs are worldwide in scope and capture
leads from a variety of marketing programs including direct response marketing
and advertising, joint marketing and public relations.

   Our OEM program focuses on recruiting independent software vendors
worldwide to embed our database products on an OEM basis. The OEM program is
designed to generate mutually beneficial strategic relationships between
Pervasive and our independent software vendors and ongoing royalties for us
through licensing contracts, which are typically for three-year terms. This
program offers our OEM partners joint marketing services volume discounts,
specialized technical support, training and consulting, which enable delivery
of tightly integrated solutions to end users.

   Our other sales and marketing programs recruit software developers and
channel partners to develop applications that are designed to be deployed with
shrink-wrap versions of Pervasive's database products. These programs include
trade shows, direct mail, telemarketing and telesales activities and hands-on
seminars that are designed to further recruit, develop, support and train
software developers and channel partners to facilitate the deployment of Web
and client/server applications based on our products. And, if volumes become
sufficient, the sales group recruits these software developers into our OEM
program.

   The international sales organization utilizes a channel of distribution
partners and OEMs worldwide. The distribution partners implement sales and
marketing programs for a particular region, typically using our business
alliance, distributor or master distributor programs. In addition to managing
these distributor relationships, the international sales group recruits and
supports channel partners with the same programs as the domestic sales groups.
We currently have international sales offices in Frankfurt, Paris, Brussels,
London and Tokyo.

Customer Service and Technical Support

   We offer multiple levels of worldwide customer services, including
technical support, professional consulting services, training, and product
maintenance. First level, or front line, support responds to most customer
inquiries that are routine in scope via telephone and email. Second level, or
back line, support responds to escalated technical issues and supports our
large partners with dedicated technical expertise. Self-help support is also
available via our Web site, which includes a searchable knowledge base,
answers to frequently asked questions and technical white papers. Customer
service is provided at no charge for the first 30 days after initial purchase
and at any time via our Web site. After 30 days, we offer contract and fee-
based per-incident and premium support programs.

   We have a professional services group to fulfill demand for fee-based
consulting services from our developer customers and channel partners as they
retool their applications for use in Web environments. These consulting
services include development services to migrate existing applications to the
Web, design and build new Web applications, upgrade existing applications to
the latest Pervasive.SQL release, and optimize database functionality through
performance testing, database schema design and review, and replication
services. End user consulting opportunities are often referred to our channel
partners to strengthen channel loyalty, build the channel's technical ability
and increase the resource base available for future growth.

   We have a training group that trains our channel partners in the use of our
products for optimal performance and feature utilization. In addition, our
training group supports our channel partner certification and authorization
programs by participating in the delivery of training and certification
services to build the technical quality of our authorized channel partners.

                                       6
<PAGE>

   In order to provide a higher quality of customer support, we have a
specialized product maintenance group. This group combines traditional
technical support expertise with an engineering development team to provide
maintenance for all products, develop customer-driven enhancements to our
products, issue regularly scheduled service packs and handle escalations of
highly technical customer issues.

   Worldwide customer support, professional services and training are provided
through our corporate offices in Austin, Texas and through support and
development centers in Brussels and Tokyo.

Research and Development

   We have made substantial investments in research and development through
both internal development and technology acquisition. As of June 30, 2000, we
had 136 employees in research and development, and our research and
development expenditures for continuing operations for fiscal 1998, 1999 and
2000 were $9.6 million, $13.1 million and $13.7 million, respectively. In July
2000, we reduced our workforce by approximately 100 employees, the majority of
which were in research and development and technical support relating to our
discontinued Tango product line. Currently, we have 57 employees in research
and development dedicated to our Pervasive.SQL database products. We will
continue to invest heavily in focused research and development resources to
further our vision of software development environments that dramatically
simplify the development, deployment and maintenance of Web and client/server
applications.

   Our development efforts consist primarily of adding new differentiating
product features to simplify the development and deployment while expanding
the number of computer and network operating systems and device platforms on
which the products can be installed and maintaining the ability to run in
multiple operating system environments. We continue to focus development
activities on enhancing Pervasive.SQL with features and functionality required
by today's SME customer and the channel of ISVs, VARs and consultants who
serve them.

   We are also investing in synchronization technology for integration into a
future release of Pervasive.SQL. Once this integration is complete, future
versions of Pervasive.SQL will be designed to enable developers of mobile and
occasionally connected applications to deliver solutions featuring simple
implementation and low administration requirements.

Technology

   Pervasive.SQL utilizes our MicroKernel Database Architecture Engine, or
MKDE, architecture. A primary feature of the MKDE architecture is that it
enables applications to have simultaneous transactional and relational access
to data. Pervasive.SQL provides a number of advantages over other database
management systems including:

  .  Multi-platform functionality (NT, NetWare, Solaris, Linux);

  .  Integration with leading development tools and standards such as Visual
     Basic, C++, Visual Cafe, Delphi, ODBC, JDBC, and OLE DB;

  .  Scalability, from single member workstations, to workgroups,
     client/server systems and the Web, to embedded systems and mobile
     devices;

  .  Enhanced automatic tuning designed to increase performance;

  .  Support for larger storage needs (up to 64 gigabytes per table);

  .  Smart components for simplified installation and configuration;

  .  A file management utility to expedite data import, export and recovery
     tasks;

                                       7
<PAGE>

  .  Simultaneous transactional and relational access to the same data; and

  .  Built-in recovery capabilities.

   Applications based on Pervasive database engines can scale from single user
workstation to client/server environments without relinking or changing code.
Network environments can be customized to minimize network traffic and to
balance resource loading by distributing database files and data processing
throughout multi-platform computer networks.

   The database configurations available include the following:

  .  Server. In a Web environment, a small requester module on the Web
     application server routes requests to the server database engine. In a
     client/server environment, a workstation module routes requests to the
     server database engine. These configurations minimize both information
     transfer traffic and the use of application server or workstation
     resources.

  .  Workgroup. The workgroup configuration enables shared access to data
     files by a small team of users. The workgroup technology is suited for
     environments that support peer-to-peer networking but do not have a
     dedicated database management server.

  .  Single-User Workstation. The single-user workstation configuration
     provides mobile and stand-alone operation. All access modules and MKDE
     components reside locally, and data files are stored on the
     workstation's disk drive. This configuration is used when the
     workstation is not connected to a network or when data files do not need
     to be shared.

  .  Embedded Systems. The embedded systems configuration is a small foot-
     print (i50K) engine providing in-memory and file data storage suitable
     for applications built for real-time operating systems, such as Wind
     River VX Works and QNX Neutrino.

  .  Mobile Devices. The mobile device configuration is a small foot-print
     (i50K to i400K) engine that supports platforms such as Windows CE and
     Palm OS (in beta) and is suitable for applications running on devices
     such as hand held computers, PDAs, Internet screen phones, and other
     Internet appliances.

Competition

   We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase, IBM and
Progress. In particular, Sybase's small memory footprint database software
product, Adaptive Server Anywhere, and Microsoft's product, SQL Server,
currently compete with our products. Microsoft has devoted resources to making
its SQL Server product increasingly applicable to the market for our products.
We believe that Microsoft will continue to incorporate SQL Server technology
into its operating system software and certain of its server software
offerings, possibly at no additional cost to its users. Microsoft's activities
could materially adversely affect sales of our products on the Windows NT
platform. In addition, because there are relatively low barriers to entry in
the software market, we may encounter additional competition from other
established and emerging companies.

   Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition, and a larger installed base of customers. In
addition, some competitors have demonstrated willingness to, or may willingly
in the future, incur substantial losses as a result of deeply discounted
product offerings or aggressive marketing campaigns. As a result, our
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of competitive products, than
we can. There is also a substantial risk that announcements of competing
products by large competitors such as Microsoft, Oracle, Informix, Sybase,
IBM, Progress or others could result in the cancellation of customer orders in
anticipation of the introduction of such new products. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of their products to address customer needs and which may limit our ability to
sell our products through

                                       8
<PAGE>

particular distribution partners. Accordingly, new competitors or alliances
among, or consolidations of, current and new competitors may emerge and
rapidly gain significant market share in our current or anticipated markets.
We also expect that competition will increase as a result of software industry
consolidation. Increased competition is likely to result in price reductions,
fewer customer orders, reduced margins and loss of market share, any of which
could materially adversely affect our business. We cannot be certain that we
will be able to compete successfully against current and future competitors or
that the competitive pressures that we face will not materially adversely
affect our business, operating results and financial condition.

Proprietary Rights

   Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights. We
also believe that factors such as the technological and creative skills of our
personnel, new research and developments, frequent product enhancements, name
recognition and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. We seek to protect our software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. We cannot be certain that others
will not develop technologies that are similar or superior to our technology
or design around the copyrights and trade secrets owned by us. We license our
database software products primarily under "shrink wrap" licenses (i.e.,
licenses included as part of the product packaging). Shrink-wrap licenses are
not negotiated with or signed by individual licensees, and purport to take
effect upon the opening of the product package. We believe, however, that
these measures afford only limited protection.

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. Embedded software products, like those offered by us, can
be especially susceptible to software piracy. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the
laws of the U.S. Any such resulting litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
our business, operating results and financial condition. We cannot be certain
that our means of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar technology. Any failure
by us to meaningfully protect our property could have a material adverse
effect on our business, operating results and financial condition.

   We are not aware that we are infringing any proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by us of their intellectual property rights. We expect that
software product developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time consuming to defend, result
in costly litigation, divert management's attention and resources, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. In the event of a successful
claim of product infringement against us, should we fail or be unable to
either license the infringed or similar technology or develop alternative
technology on a timely basis, our business, operating results and financial
condition could be materially adversely affected.

   We rely upon certain software that we license from third parties, including
software that is integrated with our internally developed software and is used
in our products to perform key functions. There can be no assurance that these
third-party software licenses will continue to be available to us on
commercially reasonable terms. The loss of or inability to maintain any such
software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated
which could materially adversely affect our business, operating results and
financial condition.

                                       9
<PAGE>

Employees

   As of June 30, 2000, we employed 347 full-time employees, including 88 in
sales and marketing, 136 in research and development, 53 in technical support,
16 in professional services and training and 54 in general and administrative.
In July 2000, we reduced our workforce by approximately 100 employees, the
majority of which were in research and development and technical support
relating to our discontinued Tango product line. We believe that our future
success will depend in large part upon our continuing ability to attract and
retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can
be no assurance that we will be successful in attracting, assimilating and
retaining other qualified personnel in the future. We are not subject to any
collective bargaining agreement and we believe that our relationships with our
employees are good.

Facilities

   In October 1998 we moved our headquarters to a new facility in Austin,
Texas, and now lease approximately 91,000 square feet. The facility provides
additional space and expansion options at rental rates per square foot
consistent with our previous facility. This facility is leased through
September 2008. We currently lease international offices in Frankfurt, Paris,
Brussels, London and Tokyo. We continue to be obligated under a lease for
office space in Toronto. We are actively attempting to sublet this idle
facility.

                                      10
<PAGE>

                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

   You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Any of the following risks could harm our business,
financial condition or results of operations. In such case, the trading price
of our common stock could decline, and you may lose all or part of your
investment. Please see the "Special Note Regarding Forward-Looking Statements"
elsewhere in this Report on Form 10-K.

Our Financial Results May Vary Significantly from Quarter to Quarter

   Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in
the future due to a variety of factors. Many of these factors are outside of
our control. These factors include:

  .  Fluctuations in demand for our products or upgrades to our products;

  .  Fluctuations in the demand for and deployment of client/server
     applications in which our Pervasive.SQL products are designed to be
     embedded;

  .  Seasonality and the timing of product sales and shipments;

  .  Unexpected delays in introducing new or improvements to existing
     products and services;

  .  New product releases, licensing models or pricing policies by our
     competitors;

  .  Impact of changes to our product distribution strategy and pricing
     policies;

  .  Lack of order backlog;

  .  Loss of a significant customer or distributor;

  .  Changes in purchasing and/or payment practices by our distributors;

  .  A reduction in the number of independent software vendors, or ISVs, who
     embed our products or VARs who sell and deploy our products;

  .  Changes in the mix of domestic and international sales; and

  .  Losses associated with discontinued operations.

   Our revenues for each quarter in fiscal year 2000 decreased sequentially
from the previous quarter, due to a combination of factors, including: lower
sales pipelines, the reorganization of our domestic and European sales forces
during the year, management changes in our worldwide sales organization,
management changes in our Japanese subsidiary, our past focus of resources and
management attention on our discontinued Tango product line, competitive
forces and what we believe to be a general softening in the packaged
client/server applications market contributing to decreased orders for our
Pervasive.SQL products embedded in these applications. We believe each of
these factors could continue to negatively affect sales of our Pervasive.SQL
product in the future, particularly in upcoming quarters. In addition, we have
generally experienced relatively weaker demand in the quarter ending September
30 due to seasonal customer buying patterns.

   Significant portions of our expenses are not variable in the short term and
cannot be quickly reduced to respond to decreases in revenues. Therefore, if
our revenues are below our expectations, our operating results are likely to
be adversely and disproportionately affected. In addition, we may change our
prices, change our distribution strategy and policies, accelerate our
investment in research and development, sales or marketing efforts in response
to competitive pressures or pursue new market opportunities. Any one of these
activities may further limit our ability to adjust spending in response to
revenue fluctuations.

   In July 2000, we announced a restructuring to focus on our core database
business. As part of the restructuring, we recorded in the fourth fiscal
quarter a charge of $17 million or $1.08 per share for discontinued

                                      11
<PAGE>

operations related to our Tango product line. While we currently continue to
support our Tango customers, we are exploring strategic alternatives for the
Tango product line, including its possible sale. Our operating results have
fluctuated in the past due to charges relating to the discontinued Tango
operations and may continue to fluctuate in future quarters depending upon the
timing and nature of final disposition of our Tango product line. Our
operating results could also be harmed in the event that additional
liabilities related to the discontinued Tango product line arise.

   In addition, as part of the restructuring, we reduced our workforce by
approximately 100 employees, or approximately 28 percent of our worldwide
workforce. The majority of the reductions occurred in our Toronto office and
our Austin headquarters. The workforce reduction was primarily related to the
discontinuance of the Tango product line; however, we also reduced a portion
of our Pervasive.SQL related workforce. The cost of the Pervasive.SQL
workforce reduction is approximately $400,000 and will be recorded as an
operating cost in the quarter ending September 30, 2000.

   In addition, we may experience fluctuations in our operating results based
on our past and future acquisitions of businesses and product lines. For
example, we incurred losses in the quarters ended December 31, 1998 and 1999;
March 31, 2000 and June 30, 2000; primarily due to losses incurred by the now
discontinued Tango product line.

   We derive a portion of our revenues from relatively larger orders. The
sales cycles for these transactions tend to be longer than the sales cycles on
smaller orders. This longer sales cycle for large orders makes it difficult to
predict the quarter in which these sales will occur. Accordingly, our
operating results may fluctuate from quarter to quarter based on the existence
and timing of larger orders. A reduction in large orders during any quarter
could materially impact our revenues.

We Must Successfully Manage Our Recent Reduction in Workforce

   In July 2000, we reduced our workforce by approximately 100 employees or
approximately 28 percent of our worldwide workforce. The workforce reduction
was primarily related to the discontinuance of the Tango product line;
however, we also reduced a portion of our Pervasive.SQL related workforce,
primarily in our development organization. Any failure to manage the impact of
the Pervasive.SQL workforce reduction on our Pervasive.SQL product development
schedules, to retain our remaining Pervasive.SQL employees and to recruit new
employees in the future could have a material adverse effect on our business,
operating results and financial condition.

Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results

   Our business has, on occasion, experienced seasonal customer buying
patterns. In recent years, we have generally experienced relatively weaker
demand in the quarters ending March 31 and September 30. We believe that this
pattern may continue. In addition, to the extent international operations
constitute a greater percentage of our revenues in future periods, we
anticipate that demand for our products in Europe and Japan will decline in
the summer months because of reduced corporate buying patterns during the
vacation season.

We Currently Operate Without a Backlog

   We generally operate with virtually no order backlog because our software
products are shipped and revenue is recognized shortly after orders are
received. This lack of backlog makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter.
As a result, if orders in the first month or two of a quarter fall short of
expectations, it is likely we will not meet our revenue targets for that
quarter. As a result, our quarterly operating results would be materially and
adversely affected.

                                      12
<PAGE>

Our Success Depends on Our Management of Growth and Change Within Our Business

   We have generally expanded our operations since inception, resulting in new
and increased responsibilities for management and placing a strain upon our
financial and other resources. Since our inception, we have experienced
periods of revenue growth, a general increase in the number of our employees,
a general expansion in the scope of our operating and financial systems and an
expansion in the geographic area of our operations. In particular, we had a
total of 347 employees at June 30, 2000, as compared to 358 at June 30, 1999
and 220 at June 30, 1998. In July 2000, we announced the discontinuance of our
Tango operations and a reduction in our workforce of approximately 100
employees. In order to manage any future growth effectively, we will be
required to implement and improve our operational systems, procedures and
controls on a timely basis. If we experience future growth and fail to
implement and improve these systems, our business, operating results and
financial condition will be materially adversely affected.

Our Performance Depends on Market Acceptance of Pervasive.SQL

   We derive substantially all of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent
on market acceptance of our Pervasive.SQL 2000 product introduced in June
1999, as revenues from our older database products, Btrieve and Pervasive.SQL
7, have declined and are expected to continue to decline in subsequent
quarters. Market acceptance of Pervasive.SQL 2000 may be influenced heavily by
factors outside of our control such as new product offerings or promotions by
competitors, the product development and deployment cycles of developers and
resellers who embed or bundle our products into packaged software applications
and what we believe is a softening in the market for client/server
applications of the type built on Pervasive.SQL 2000. Market acceptance of
Pervasive.SQL 2000 and future upgrades also may be influenced by factors in
our control such as product quality and relative demand for feature and
functionality upgrades. Although we recognized increased revenue from
Pervasive.SQL 2000 in both the three months ended September 30, 1999 and the
three months ended December 31, 1999, one-time upgrades from earlier versions
of our products, our favorable upgrade pricing, or other factors may have
contributed to such increased revenues and such increases may not continue in
future quarters. In fact, revenue from Pervasive.SQL 2000 declined in the
three months ended March 31, 2000 relative to the three months ended December
31, 1999, but then grew in the three months ended June 30, 2000 relative to
the three months ended March 31, 2000.

Our Efforts to Develop Brand Awareness of Our Products May Not be Successful

   We believe that developing and maintaining awareness of the "Pervasive"
brand name is critical to achieving widespread acceptance of our products.
Brand recognition is important given competition in the market for data
management products. We have not obtained a United States registration for all
of these names, and we are aware of other companies that use the word
"Pervasive" either in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party usage of
the Pervasive name and variations of this name for competing goods and
services. Competitors or others that use marks that are similar to our brand
name may cause confusion among actual and potential customers, which could
prevent us from achieving significant brand recognition. If we fail to promote
and maintain our brand or incur significant related expenses, our business,
operating results and financial condition could be materially adversely
affected.

We May Face Problems in Connection With Future Acquisitions or Joint Ventures

   In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement
or expand our business. Our negotiations of potential acquisitions or joint
ventures and our integration of acquired businesses, products or technologies
could divert management time and resources. Any future acquisitions could
require us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, or write-off purchased
research and development and other acquisition-related expenses. If we are
unable to fully integrate acquired businesses, products or technologies with
our existing operations, we may not receive the intended benefits of
acquisitions.

                                      13
<PAGE>

A Small Number of Distributors and Sales Related to Accounting Software
Applications Account For a Significant Percentage of Our Revenues

   The loss of a major distributor, changes in a distributor's payment
practices, changes in the financial stability of a major distributor or any
reduction in orders by such distributor, including reductions due to market or
competitive conditions, combined with the inability to replace the distributor
on a timely basis, or any modifications to our pricing or distribution channel
strategy could materially adversely affect our business, operating results and
financial condition. Many of our independent software vendors, value-added
resellers and end users place their orders through distributors. A relatively
small number of distributors have accounted for a significant percentage of
our revenues. In the fiscal year ended June 30, 2000, three distributors
combined accounted for an aggregate of approximately 20% of our revenues, as
compared to the fiscal year ended June 30, 1999, where three distributors
accounted for an aggregate of approximately 26% of our revenues. Additionally,
we estimate that approximately 20% of our revenues in the fiscal year ended
June 30, 2000 were from sales related to accounting software applications. We
expect that we will continue to be dependent upon a limited number of
distributors and sales related to accounting software applications for a
significant portion of our revenues in future periods. Moreover, we expect
that such distributors and sales related to accounting software applications
will vary from period to period. Our distributors have not agreed to any
minimum order requirements. Although we forecast demand and plan accordingly,
if a distributor purchases excess product, we may be obligated to accept the
return of some products.

We Depend on Our Indirect Sales Channel

   Our failure to continue to grow our indirect sales channel or the loss of a
significant number of members of our indirect channel partners would have a
material adverse effect on our business, financial condition and operating
results. We do not have a substantial direct sales force and derive
substantially all of our revenues from indirect sales through a channel
consisting of independent software vendors, value-added resellers, system
integrators, consultants and distributors. Our sales channel could be
adversely affected by a number of factors including:

  .  The emergence of a new platform resulting in the failure of independent
     software vendors to develop and the failure of value-added resellers to
     sell our products based on our supported platforms;

  .  Pressures placed on the sales channel to sell competing products;

  .  Our failure to adequately support the sales channel;

  .  Competing product lines offered by certain of our indirect channel
     partners; and

  .  Business model or licensing model changes of our channel partners or
     their competitors.

   We cannot be certain that we will be able to continue to attract additional
indirect channel partners or retain our current partners. We also could see a
consolidation of one or more of our indirect channel partners. We cannot be
certain that these consolidated entities will continue to sell our products at
the same volume as before such consolidation or will continue as our partners
at all. In addition, we cannot be certain that our competitors will not
attempt to recruit certain of our current or future partners.

We May Not Be Able to Develop Strategic Relationships

   Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We may not be able to enter into successful
new strategic relationships in the future, which could have a material adverse
effect on our business, operating results and financial condition. From time
to time, we have collaborated with other companies in areas such as product
development, marketing, distribution and implementation. Maintaining these and
other relationships is a meaningful part of our business strategy. However,
many of our current and potential strategic partners are either actual or
potential competitors with us. In addition, many of our current relationships
are informal or, if written, terminable with little or no notice.

                                      14
<PAGE>

We Depend on Third-Party Technology in Our Products

   We rely upon certain software that we license from third parties, including
software that is integrated with our internally developed software and used in
our products to perform key functions. These third-party software licenses may
not continue to be available to us on commercially reasonable terms. The loss
of, or inability to maintain or obtain any of these software licenses, could
result in shipment delays or reductions until we develop, identify, license
and integrate equivalent software. Any delay in product development or
shipment could damage our business, operating results and financial condition.

We May be Unable to Protect Our Intellectual Property and Proprietary Rights

   Our success depends to a significant degree upon our ability to protect our
software and other proprietary technology. We rely primarily on a combination
of copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our proprietary rights. However, these
measures afford us only limited protection. In addition, we rely in part on
"shrink wrap" and "click wrap" licenses that are not signed by the end user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
Unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Although we believe
software piracy may be a problem, we are unable to determine the extent to
which piracy of our software products occurs. In addition, portions of our
source code are developed in foreign countries with laws that do not protect
our proprietary rights to the same extent as the laws of the United States.

   Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties as the number of products
and competitors in our industry segment continues to grow and the
functionality of products in different industry segments increasingly
overlaps. Any infringement claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays or the
loss or deferral of sales or require us to enter into royalty or licensing
agreements. If we are required to enter into royalty or licensing agreements,
they may not be on terms acceptable to us. Unfavorable royalty and licensing
agreements could seriously damage our business, operating results and
financial condition.

We Must Adapt to Rapid Technological Change

   Our future success will depend upon our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and new industry standards and
satisfy increasingly sophisticated customer requirements. Rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards
characterize the market for our products. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. As a result of the
complexities inherent in client/server and Web computing environments and the
performance demanded by customers for data management products, new products
and product enhancements can require long development and testing periods. As
a result, significant delays in the general availability of such new releases
or significant problems in the installation or implementation of such new
releases could have a material adverse effect on our business, operating
results and financial condition. We have experienced delays in the past in the
release of new products and new product enhancements. We may not be successful
in:

  .  Developing and marketing, on a timely and cost-effective basis, new
     products or new product enhancements that respond to technological
     change, evolving industry standards or customer requirements;

  .  Avoiding difficulties that could delay or prevent the successful
     development, introduction or marketing of these products; or

  .  Achieving market acceptance for our new products and product
     enhancements.

                                      15
<PAGE>

Our Software May Contain Errors or Defects

   Errors or defects in our products may result in loss of revenues or delay
in market acceptance, and could materially adversely affect our business,
operating results and financial condition. Software products such as ours may
contain errors or defects, sometimes called "bugs," particularly when first
introduced or when new versions or enhancements are released. From time to
time, we discover software errors or defects in certain of our new products
after their introduction. Despite our testing, current versions, new versions
or enhancements of our products may still have defects and errors after
commencement of commercial shipments. Product defects can put us at a
competitive disadvantage and can be costly and time consuming to correct.

We May Become Subject to Product or Professional Services Liability Claims

   A product or professional services liability claim, whether or not
successful, could damage our reputation and our business, operating results
and financial condition. Our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential
product or service liability claims. However, these contract provisions may
not preclude all potential claims. Product or professional services liability
claims could require us to spend significant time and money in litigation or
to pay significant damages.

We Compete with Microsoft while Simultaneously Supporting Microsoft
Technologies

   We currently compete with Microsoft in the market for data management
products while simultaneously maintaining a working relationship with
Microsoft. Microsoft has a longer operating history, a larger installed base
of customers and substantially greater financial, distribution, marketing and
technical resources than the Company. As a result, we may not be able to
compete effectively with Microsoft now or in the future, and our business,
operating results and financial condition may be materially adversely
affected.

   We expect that Microsoft's commitment to and presence in the data
management products market will substantially increase competitive pressures.
We believe that Microsoft will continue to incorporate SQL Server database
technology into its operating system software and certain of its server
software offerings, possibly at no additional cost to its users. We believe
that Microsoft will also continue to enhance its SQL Server database
technology.

   We believe that we must maintain a working relationship with Microsoft to
achieve success. Many of our customers use Microsoft-based operating
platforms. Thus it is critical to our success that our products be closely
integrated with Microsoft technologies. Notwithstanding our historical and
current support of Microsoft platforms, Microsoft may in the future promote
technologies and standards more directly competitive with or not compatible
with our technology.

We Face Significant Competition From Other Companies

   We encounter competition for our database products primarily from large,
public companies, including Microsoft, Oracle, Informix, Sybase, IBM and
Progress. In particular, Sybase's small memory footprint database software
product, Adaptive Server Anywhere, and Microsoft's product, SQL Server,
directly compete with our products. In addition, because there are relatively
low barriers to entry in the software market, we may encounter additional
competition from other established and emerging companies providing database
products based on existing, new or open source technologies.

   Application service providers ("ASP") are beginning to enter our market and
could cause a change in revenue models from licensing of client/server and
Web-based applications to renting applications. Our competitors may be more
successful than we are in adopting these revenue models and capturing related
market share.

   Most of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers. In
addition,

                                      16
<PAGE>

some competitors have demonstrated a willingness to, or may willingly in the
future, incur substantial losses as a result of deeply discounted product
offerings or aggressive marketing campaigns. As a result, our competitors may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of competitive products, than we can. There is also a
substantial risk that changes in licensing models or announcements of
competing products by competitors such as Microsoft, Oracle, Informix, Sybase,
IBM, Progress or others could result in the cancellation of customer orders in
anticipation of the introduction of such new licensing models or products. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address customer needs and which may limit
our ability to sell our products through particular distribution partners.
Accordingly, new competitors or alliances among, or consolidations of, current
and new competitors may emerge and rapidly gain significant market share in
our current or anticipated markets. We also expect that competition will
increase as a result of software industry consolidation. Increased competition
is likely to result in price reductions, fewer customer orders, reduced
margins and loss of market share, any of which could materially adversely
affect our business. We cannot be certain that we will be able to compete
successfully against current and future competitors or that the competitive
pressures that we face will not materially adversely affect our business,
operating results and financial condition.

We Are Susceptible to a Shift in the Market for Client/Server Applications
Toward Web-Based Applications

   We have derived substantially all of our historical revenues from the use
of our products in client/server applications. We expect to rely on continued
market demand for client/server applications indefinitely. Although the market
for client/server applications has grown in recent years, we believe that the
rate of growth has slowed in recent quarters, that this trend will continue or
accelerate in future quarters, and that other application platforms are
emerging. In particular, we believe market demand is shifting from
client/server applications to Web-based applications. This shift is occurring
before our product line has achieved market acceptance for use in Web-based
applications. In addition, we cannot be certain that our existing
client/server developers will migrate to Web-based applications and continue
to use our products or that other developers of Web-based applications would
select our data management products. Further, this shift may result in a
change in revenue models from licensing of client/server and Web-based
applications to renting of applications from application service providers. A
decrease in client/server application sales coupled with an inability to
derive revenues from the Web-based application market could have a material
adverse effect on our business, operating results and financial condition.

We Increasingly Depend on the Growth of International Sales and Operations

   We anticipate that for the foreseeable future we will derive a significant
portion of our revenues from sources outside North America. In the fiscal year
ended June 30, 2000, we derived 49% of our revenues outside North America. Our
international operations are generally subject to a number of risks. These
risks include:

  .  Costs of translating and localizing products for foreign languages;

  .  Foreign laws and business practices favoring local competition;

  .  Dependence on local channel partners;

  .  Compliance with multiple, conflicting and changing government laws and
     regulations;

  .  Longer sales cycles;

  .  Greater difficulty or delay in collecting payments from customers;

  .  Difficulties in staffing and managing foreign operations;

  .  Foreign currency exchange rate fluctuations and the associated effects
     on product demand and timing of payment;

                                      17
<PAGE>

  .  Increased tax rates in certain foreign countries;

  .  Difficulties with financial reporting in foreign countries;

  .  Quality control of certain development activities; and

  .  Political and economic instability.

   We recently reorganized our sales and marketing organization in Europe to
centralize functions and better match our organizational structure to the type
of customer. However, these adjustments could negatively impact our revenue as
our sales representatives and sales managers become integrated into their new
assignments. Accordingly, our revenues may not increase, and could decline
sequentially, in future periods.

   We may continue expanding our sales and support operations internationally.
Despite our efforts, we may not be able to expand our sales and support
operations internationally in a timely and cost-effective manner. Such an
outcome would limit or eliminate any sales growth internationally, which in
turn would materially adversely affect our business, operating results and
financial condition. Even if we successfully expand our international
operations, we may be unable to maintain or increase international market
demand for our products.

   We expect that our international operations will continue to place
financial and administrative demands on us and our management, including
operational complexity associated with international facilities,
administrative burdens associated with managing relationships with foreign
partners and treasury functions to manage foreign currency risks and
collections.

Fluctuations in the Relative Value of Foreign Currencies Can Affect Our
Business

   To date, the majority of our transactions have been denominated in U.S.
dollars. The majority of our international operating expenses, substantially
all of our sales in Japan and certain other international sales have been
denominated in currencies other than the U.S. dollar. Therefore, our operating
results may be adversely affected by changes in the value of the U.S. dollar.
Certain of our international sales are denominated in U.S. dollars, especially
in Europe. Any strengthening of the U.S. dollar against the currencies of
countries where we sell products denominated in U.S. dollars will increase the
relative cost of our products and could negatively impact our sales in these
countries. To the extent our international operations expand, our exposure to
exchange rate fluctuations will increase. We have entered into limited hedging
transactions to mitigate our exposure to currency fluctuations. Despite these
hedging transactions, exchange rate fluctuations have caused, and will
continue to cause, currency transaction gains and losses. Although these
transactions have not resulted in material gains and losses to date, similar
transactions could have a damaging effect on our business, results of
operations or financial condition in future periods.

We Must Continue to Hire and Retain Skilled Personnel in a Tight Labor Market

   Qualified personnel are in great demand and short supply throughout the
software industry. Our success depends in large part on our ability to
attract, motivate and retain highly skilled employees on a timely basis,
particularly executive management, sales and marketing personnel, software
engineers and other senior personnel. Our efforts to attract and retain highly
skilled employees could be harmed by our July 2000 workforce reduction of
approximately 100 employees, or approximately 28% of our worldwide workforce.
Our failure to attract and retain the highly trained technical personnel that
are essential to our product development, marketing, service and support teams
may limit the rate at which we can generate revenue and develop new products
or product enhancements. This could have a material adverse effect on our
business, operating results and financial condition.

We Have Anti-Takeover Provisions

   The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions:
authorizing the issuance of "blank check" preferred stock; establishing
advance notice requirements for stockholder nominations for elections to

                                      18
<PAGE>

the Board of Directors or for proposing matters that can be acted upon at
stockholders' meetings; eliminating the ability of stockholders to act by
written consent; requiring super-majority voting to approve certain amendments
to the Restated Certificate of Incorporation; limiting the persons who may
call special meetings of stockholders; and providing for a Board of Directors
with staggered, three-year terms. In addition, certain provisions of Delaware
law and the Company's 1997 Stock Incentive Plan (the "1997 Plan") may also
have the effect of discouraging, delaying or preventing a change in control of
the Company or unsolicited acquisition proposals.

The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate
Substantially

   Our common stock is traded on the Nasdaq National Market. The market price
of our common stock has been volatile and could fluctuate substantially based
on a variety of factors outside of our control, in addition to our financial
performance. Furthermore, stock prices for many companies, including our own,
fluctuate widely for reasons that may be unrelated to operating results.

                                      19
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Some of the statements in the "Letter to Stockholders" in the Annual Report
and this Report on Form 10-K under "Business," "Risk Factors That May Affect
Future Results," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and elsewhere in this Report constitute forward-
looking statements within the meaning of Section 21E of the Securities and
Exchange Act of 1934. Forward-looking statements include statements regarding
the Company's expectations, beliefs, hopes, intentions or strategies regarding
the future. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's actual results, levels
of activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this Report on Form
10-K.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of such terms or other comparable terminology.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this Report to conform such statements to actual
results.

ITEM 2. PROPERTIES

   In October 1998 we moved our headquarters to a new facility in Austin,
Texas and now lease approximately 91,000 square feet. The facility provides
additional space and expansion options at rental rates per square foot
consistent with our previous facility. This new facility is leased through
September 2008. We currently lease international offices in Frankfurt, Paris,
Brussels, London, Hong Kong and Tokyo. We continue to be obligated under a
lease for vacant office space in Toronto. We are actively attempting to sublet
this idle office facility.

ITEM 3. LEGAL PROCEEDINGS

   Complaints were filed in November and December 1999 in the U.S. District
Court for the Western District of Texas against the Company and certain of its
officers and directors. The cases were consolidated in a class action suit
filed in January 2000. The class action complaint alleged that the Company and
certain of its officers and directors violated federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making
false statements and failing to disclose material information to artificially
inflate the price of the Company's common stock during the Class Period of
July 15, 1999 to October 21, 1999. The Company and other defendants filed
motions to dismiss the suit on February 7, 2000. On July 20, 2000, the U.S.
District Court entered its order dismissing plaintiffs' claims against the
Company and the other defendants. The case was dismissed without prejudice.
The Plaintiffs have the right to file an amended complaint.

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

   The Company did not submit any matters to a vote of security holders during
the fiscal year ended June 30, 2000.

                                      20
<PAGE>

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

   Set forth below are the biographical summaries of the executive officers of
the Company as of September 28, 2000:

   The executive officers and directors of the Company, and their ages as of
September 28, 2000, are as follows:

<TABLE>
<CAPTION>
          Name           Age                      Position
          ----           --- ---------------------------------------------------
<S>                      <C> <C>
Ron R. Harris...........  47 President, Chief Executive Officer and Director
James R. Offerdahl......  44 Chief Operating Officer and Chief Financial Officer
David R. Dunnigan.......  39 Senior Vice President, Sales and Marketing
Robert M. Arn, Ph.D.....  58 Vice President, Advanced Technology
John E. Farr............  40 Vice President, Finance
Richard A. Tusia........  40 Vice President, Customer Engineering
Gilbert van Cutsem......  37 Vice President, EMEA Sales and Marketing
Gary G. Allison.........  34 Vice President, Engineering
</TABLE>

   Ron R. Harris has served as our President and Chief Executive Officer since
our inception and as a director since June 1995. Prior to joining us, Mr.
Harris served as a Vice President of Citrix Systems, Inc., a developer of
thin-client/server software, from October 1990 to May 1993. He also serves as
a director of several private companies. Mr. Harris received his B.S. in
Computer Science from Vanderbilt University and an M.B.A. from the University
of Texas at Austin.

   James R. Offerdahl has served as our Chief Operating Officer, Chief
Financial Officer and Secretary since September 1998. In addition, Mr.
Offerdahl served as Chief Financial Officer, Vice President, Finance and
Administration and Secretary from October 1996 to September 1998. From May
1993 to September 1996, Mr. Offerdahl served as Chief Financial Officer and
Vice President of Administration of Tivoli Systems Inc., a provider of
enterprise systems management solutions, acquired by IBM in March 1996. Mr.
Offerdahl received a B.S. in Accounting from Illinois State University and an
M.B.A. from the University of Texas at Austin.

   David R. Dunnigan has served as our Senior Vice President, Worldwide Sales
and Marketing since March 2000. Mr. Dunnigan previously served as Vice
President, Worldwide Sales since November 1999. Prior to joining Pervasive,
Mr. Dunnigan served as Vice President, Sales and Marketing for Novient, Inc.,
a worldwide provider of professional services automation software for the
consulting and systems integration industry, from September 1998 to November
1999. Prior to Novient, Mr. Dunnigan served as General Manager, Front Office
VAR Division for Aurum Software, a Baan company, from March 1995 to September
1998. Mr. Dunnigan received a B.S. in Industrial Distribution form Clarkson
University.

   Robert M. Arn, Ph.D., has served as our Vice President, Advanced Technology
since Pervasive acquired EveryWare Development, Inc., in November 1998. From
June 1997 to November 1998, Dr. Arn served as Executive Vice President and
Director of EveryWare Development. In June 1991, Dr. Arn founded and served as
President and Chief Executive Officer of InContext Systems, Inc., which merged
with EveryWare Development in June 1997. From September 1981 to July 1992, he
served as Vice President and Director of Meridian Technologies, Inc. Dr. Arn
holds a B.Sc. from University of Saskatchewan, a Master's degree from Oxford
University, and a Ph.D. from Cambridge University.

   John E. Farr has served as our Vice President, Finance since October 1998.
Previously, Mr. Farr served as Director of Finance from April 1997 to October
1998 and as Controller from November 1994 to April 1997. Prior to joining
Pervasive, Mr. Farr served as Senior Audit Manager for KPMG LLP, an
international accounting firm. Mr. Farr received a B.B.A. in Accounting from
Southwestern University.

   Richard A. Tusia has served as our Vice President, Customer Engineering
since January 2000. Previously, Mr. Tusia served as Director of Worldwide
Support from April 1999 to January 2000. Prior to joining Pervasive,

                                      21
<PAGE>

Mr. Tusia was Director of Worldwide Technical Services at Trilogy Software
from March 1998 to April 1999. Mr. Tusia has held support and services
management positions with Cadence Design Systems, Tivoli Systems, and Digital
Equipment. Mr. Tusia received an AA in Electrical Engineering from Thames
Valley River College.

   Gilbert van Cutsem has served as our Vice President, EMEA Sales and
Marketing since April 2000. Mr. Van Custem has served Pervasive in various
sales and marketing roles since September 1995. Prior to joining Pervasive,
Mr. Van Cutsem was channel and product marketing manager at Novell Benelux and
director of marketing at AT&T's EMEA headquarters. Mr. Van Cutsem holds
degrees in Computer Science (Na.Ra.Fi. Brussels) and Business Administration
(V.E.H. Brussels) and earned his masters degree in Applied Economics from
FUCAM (Mons, Belgium).

   Gary G. Allison has served as our Vice President, Engineering since July
2000. Previously, Mr. Allison served as Director of Developer Solutions from
February 2000 to July 2000, as Director of Software Engineering from October
1998 to February 2000 and as Software Engineering Manager from October 1997 to
October 1998. Prior to joining Pervasive, Mr. Allison served as a senior
software engineer at DSC Communications Corporation and prior to that held
various software development positions at IBM. Mr. Allison received a B.S. in
Computer Science from Texas A&M University and a Master's degree in Software
Engineering from the University of Houston, Clear Lake.

                                      22
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   The common stock of the Company is traded on the Nasdaq National Market
under the symbol PVSW. The Company completed its initial public offering and
commenced trading on September 26, 1997. The following tables set forth the
high and low closing sales prices of the Company's common stock from September
26, 1997 to June 30, 2000.

<TABLE>
<CAPTION>
   Fiscal 1998                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter*................................................. $11.63 $11.00
   Second Quarter................................................. $11.50 $ 7.00
   Third Quarter.................................................. $14.63 $ 6.75
   Fourth Quarter................................................. $14.50 $10.38

<CAPTION>
   Fiscal 1999                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. $12.75 $ 7.50
   Second Quarter................................................. $19.25 $ 7.13
   Third Quarter.................................................. $21.00 $16.00
   Fourth Quarter................................................. $24.88 $13.31

<CAPTION>
   Fiscal 2000                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. $34.50 $18.63
   Second Quarter................................................. $36.31 $ 9.06
   Third Quarter.................................................. $17.00 $10.69
   Fourth Quarter................................................. $14.00 $ 4.13
</TABLE>
--------
* Commencing September 26, 1997

   As of September 25, 2000, there were approximately 250 stockholders of
record (which number does not include the number of stockholders whose shares
are held by a brokerage house or clearing agency, but does include such
brokerage house or clearing agency as one record holder). The Company believes
it has in excess of 11,000 beneficial owners of its common stock.

   The Company has never paid a cash dividend on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future.

                                      23
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the fiscal years ended June 30,
1998, 1999 and 2000 and the consolidated balance sheet data at June 30, 1999
and 2000 are derived from audited consolidated financial statements included
elsewhere in this Form 10-K. The consolidated statements of operations data
for the periods ended June 30, 1996 and 1997 and the consolidated balance
sheet data at June 30, 1996, 1997 and 1998 are derived from audited
consolidated financial statements not included herein.

<TABLE>
<CAPTION>
                                             Year Ended June 30,
                                   --------------------------------------------
                                    1996     1997     1998     1999      2000
                                   -------  -------  -------  -------  --------
                                    (in thousands, except per share data)
<S>                                <C>      <C>      <C>      <C>      <C>
Consolidated Statements of
 Operations Data:
Revenues.........................  $13,476  $24,481  $36,700  $58,038  $ 52,078
Costs and expenses:
 Cost of revenues and technical
  support........................    2,605    3,310    5,292    8,027     8,890
 Sales and marketing.............    6,998   10,034   15,438   18,154    19,402
 Research and development........    4,477    5,996    9,556   13,063    13,720
 General and administrative......    2,505    2,886    3,070    4,798     5,755
                                   -------  -------  -------  -------  --------
Total costs and expenses.........   16,585   22,226   33,356   44,042    47,767
                                   -------  -------  -------  -------  --------
Operating income (loss) from
 continuing operations...........   (3,109)   2,255    3,344   13,996     4,311
 Interest and other income, net..       99       55      573      825     1,602
 Income tax provision............     (170)    (593)  (1,101)  (4,452)   (1,774)
 Minority interest in earnings of
  subsidiary, net of income
  taxes..........................      (25)    (127)     (94)     (36)      (19)
                                   -------  -------  -------  -------  --------
Income (loss) from continuing
 operations......................   (3,205)   1,590    2,722   10,333     4,120
                                   -------  -------  -------  -------  --------
Discontinued Operations:
 Charge for purchased research
  and development................       --       --       --   (1,800)       --
 Loss from operations............       --       --       --   (6,986)  (17,146)
 Income tax benefit .............       --       --       --    2,031     1,094
 Loss on disposal................       --       --       --       --   (16,963)
                                   -------  -------  -------  -------  --------
Loss from discontinued
 operations......................       --       --       --   (6,755)  (33,015)
                                   -------  -------  -------  -------  --------
Net income (loss)................  $(3,205) $ 1,590  $ 2,722  $ 3,578  $(28,895)
                                   =======  =======  =======  =======  ========
Basic earnings (loss) per share:
 Income (loss) from continuing
  operations.....................  $(1,603) $  1.90  $  0.26  $  0.74  $   0.26
 Loss from discontinued
  operations.....................       --       --       --    (0.48)    (2.11)
                                   -------  -------  -------  -------  --------
 Net income (loss)...............  $(1,603) $  1.90  $  0.26  $  0.26  $  (1.85)
                                   =======  =======  =======  =======  ========
Diluted earnings (loss) per
 share:
 Income from continuing
  operations.....................  $    --  $  0.12  $  0.18  $  0.65  $   0.23
 Loss from discontinued
  operations.....................       --       --       --    (0.42)    (1.87)
                                   -------  -------  -------  -------  --------
 Net income (loss)...............  $    --  $  0.12  $  0.18  $  0.22  $  (1.64)
                                   =======  =======  =======  =======  ========
Weighted average shares used in
 computing basic earnings (loss)
 per share.......................        2      835   10,468   13,960    15,648
Weighted average shares used in
 computing diluted earnings
 (loss) per share................       --   13,080   14,741   15,998    17,622

<CAPTION>
                                                   June 30,
                                   --------------------------------------------
                                    1996     1997     1998     1999      2000
                                   -------  -------  -------  -------  --------
                                                (in thousands)
<S>                                <C>      <C>      <C>      <C>      <C>
Consolidated Balance Sheet Data:
Working capital..................  $ 1,768  $ 1,560  $19,815  $40,461  $ 22,365
Total assets.....................    7,471   10,445   32,643   72,873    47,248
Long-term liabilities, net of
 current portion.................      621       --       --      565        --
Redeemable convertible preferred
 stock...........................    4,026    4,026       --       --        --
Total stockholders' equity
 (deficit).......................   (2,083)    (394)  23,979   59,086    32,644
</TABLE>

                                      24
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Actual results may differ materially from those
indicated in the forward-looking statements. Please see the "Special Note
Regarding Forward-Looking Statements" elsewhere in this Report on Form 10-K.

Overview

   Pervasive Software Inc. is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Medium Enterprises
("SME"). Our low cost of ownership database product, Pervasive.SQL, is widely
installed with over 3.5 million server seats licensed to date. With
Pervasive.SQL, software developers ("ISVs") create sophisticated yet low
maintenance applications that reach beyond the desktop to easily share
information from workstations to the Web. Our software is designed to be
integrated by ISVs into their Web or client/server applications that are sold
to SMEs, which typically have little to no information technology ("IT")
infrastructure. Our comprehensive approach to selling, marketing and
supporting our offerings is designed to drive simplicity into, and mask the
complexity of, data management solutions, specifically addressing the specific
needs of ISVs who build software applications and value-added resellers
("VARs") who sell and deploy them to SMEs.

   We derive our revenues primarily from shrink-wrap licenses through
independent software vendors, value-added resellers and distributors and
through OEM license agreements with independent software vendors. Shrink-wrap
license fees are variable and based generally on user count. Our OEM licensing
program offers independent software vendors volume discounts and specialized
technical support, training and consulting in exchange for embedding our
products in software applications and paying us a royalty based on sales of
the applications. Additionally, we generate revenues from version upgrades,
user count upgrades, upgrades to new or additional platforms and from upgrades
to client/server or Web environments from single user workstation or workgroup
environments.

   We generally recognize revenues from software licenses when persuasive
evidence of an arrangement exists, the software has been delivered, the fee is
fixed or determinable and collectability is probable. We generally recognize
revenues related to agreements involving nonrefundable fixed minimum license
fees when we deliver the product master or first copy if no significant vendor
obligations remain. We recognize per copy royalties in excess of a fixed
minimum amount as revenues when such amounts are reported to us. We operate
with virtually no order backlog because our software products are shipped
shortly after orders are received. This makes product revenues in any quarter
substantially dependent on orders booked and shipped throughout that quarter.
We enter into agreements with certain distributors that provide for certain
stock rotation and price protection rights. These rights allow the distributor
to return products in a non-cash exchange for other products or for credits
against future purchases. We reserve for estimated sales returns, stock
rotation and price protection rights, as well as for uncollectable accounts
based on experience.

   Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
data management-related development, marketing and technical support resources
behind our current Pervasive.SQL products. Accordingly, revenue from the
license of Pervasive.SQL accounts for substantially all of our data
management-related revenues in fiscal 2000. Our future operating results will
depend upon continued market acceptance of Pervasive.SQL. Pervasive.SQL may
not achieve continued market acceptance. Any decrease in demand or market
acceptance for our Pervasive.SQL product would have a damaging effect on our
business, operating results and financial condition.

   In July 2000, we announced a restructuring to focus on our core data
management business, including the discontinuation of our Tango product line.
The operating results of the Tango product line did not achieve expected
results and thus we have ceased marketing the Tango product. We are presently
continuing to support our current Tango customers while attempting to sell the
Tango product line. Tango has been recorded as

                                      25
<PAGE>

a discontinued operation in the accompanying financial statements for fiscal
2000 and prior years; therefore, the following discussion and analysis refer
only to continuing operations.

   In addition, as part of the restructuring, we reduced our workforce by
approximately 100 employees, or approximately 28% of our worldwide workforce,
the majority of which were in research and development and technical support
relating to our discontinued Tango product line.

Results of Operations

   The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in our consolidated statements of
operations.

<TABLE>
<CAPTION>
                                                                Year Ended
                                                                 June 30,
                                                              ----------------
                                                              1998  1999  2000
                                                              ----  ----  ----
   <S>                                                        <C>   <C>   <C>
   Revenues.................................................. 100%  100%  100%
   Costs and expenses:
     Cost of revenues and technical support..................  14    14    17
     Sales and marketing.....................................  42    31    38
     Research and development................................  26    23    26
     General and administrative..............................   9     8    11
                                                              ---   ---   ---
   Total costs and expenses..................................  91    76    92
                                                              ---   ---   ---
   Operating income from continuing operations...............   9    24     8
     Interest and other income, net..........................   1     1     3
     Income tax provision....................................  (3)   (8)   (3)
                                                              ---   ---   ---
   Income from continuing operations.........................   7    17     8
                                                              ---   ---   ---
   Discontinued Operations:
     Charge for purchased research and development...........  --    (3)   --
     Loss from operations....................................  --   (12)  (33)
     Income tax benefit......................................  --     4     2
     Loss on disposal........................................  --    --   (32)
                                                              ---   ---   ---
   Loss from discontinued operations.........................  --   (11)  (63)
                                                              ---   ---   ---
   Net income (loss).........................................   7%    6%  (55)%
                                                              ===   ===   ===
</TABLE>

 Revenues

   We generated revenues from continuing operations of $36.7 million, $58.0
million and $52.1 million for the fiscal years ended June 30, 1998, 1999 and
2000, respectively, an increase of 58% from fiscal 1998 to 1999, and a
decrease of 10% from fiscal 1999 to 2000. We attributed the revenue increase
in fiscal year 1999 to increased market acceptance of our products operating
on Windows NT, the introduction of Pervasive.SQL in February 1998 and ongoing
expansion of our worldwide sales organization.

   The decrease in revenues from continuing operations in fiscal year 2000 was
primarily due to lower sales pipelines, the reorganization of our domestic and
European sales force during the year, management changes in our worldwide
sales organization, management changes in our Japanese subsidiary, our past
focus of resources and management attention on our discontinued Tango product
line, competitive forces, and also what we believe to be a general softening
in the packaged client/server applications market, contributing to decreased
orders for our Pervasive.SQL products embedded in these applications. We
believe each of these factors could continue to negatively affect license
revenues for Pervasive.SQL in the future.

                                      26
<PAGE>

   Licenses of our software operating on Windows NT or other Microsoft
operating systems increased to approximately 64% of our revenues in fiscal
2000 from approximately 54% in fiscal 1999 and 45% in fiscal 1998. Licenses of
our software operating on NetWare represented approximately 31% of revenues in
fiscal 2000, as compared to 36% in 1999 and 48% in 1998. We believe that the
increase in the percentage of revenues attributable to licenses of our
products operating on Windows NT and other Microsoft operating systems is due
to: (1) the increased market acceptance of our products operating on Microsoft
platforms and (2) the increased market penetration of Microsoft platforms
relative to other operating systems. During the second quarter of fiscal 2000,
we released new versions of Pervasive.SQL 2000 operating on Solaris and Linux
platforms. Revenues to date for these new releases have not been significant.
We expect that the percentages of our revenues attributable to licenses of our
software operating on particular platforms will continue to change from time
to time. We cannot be certain that our revenues attributable to licenses of
our software operating on Windows NT, or any other operating system platform,
will grow in the future, or at all.

   International revenues, consisting of all revenues from customers located
outside of North America, were $14.2 million, $25.5 million and $25.6 million
in fiscal 1998, 1999 and 2000, representing 39%, 43% and 49% of total
revenues, respectively. We attribute the increase in each period primarily to
expansion of our international sales organization, principally in Europe and
Japan. We believe that revenues from international markets represent a
significant opportunity. Therefore, we expect that international revenues may
continue to account for a significant portion of our revenues in the future as
we maintain, modify and potentially expand our international operations,
primarily in Europe and Japan, but also in other areas of the world.

 Costs and Expenses

   Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for
our shrink wrap software products, the cost to provide technical support,
primarily telephone support which is typically provided within 30 days of
purchase, and license fees for third-party technologies embedded in our
products. Cost of revenues and technical support for continuing operations was
$5.3 million, $8.0 million and $8.9 million in fiscal 1998, 1999 and 2000,
representing 14%, 14%, and 17% of revenues from continuing operations,
respectively. Cost of revenues and technical support increased in each period
due to increased sales volume, increased technical support and service
personnel in the U.S., Europe and Japan and increased license fees for third-
party technologies. Cost of revenues and technical support increased as a
percentage of revenue in fiscal year 2000 primarily due to the decline in
revenue. We anticipate that cost of revenues and technical support may
increase as a percentage of revenues in the future as we expand our
international operations, incur increased license fees for third-party
technologies embedded in our products, provide technical support for
additional products and invest in personnel to deliver professional services
and training services to others.

   Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, travel and entertainment, marketing programs
and promotional expenses. Sales and marketing expenses related to continuing
operations were $15.4 million, $18.2 million and $19.4 million in fiscal 1998,
1999 and 2000, representing 42%, 31% and 38% of revenues from continuing
operations, respectively. Sales and marketing expenses decreased as a
percentage of revenues in fiscal 1999 primarily because of significant revenue
growth that outpaced sales and marketing expenditures and our shifting of
significant sales and marketing resources from our database business to our
Tango product line. The subsequent increase in sales and marketing expense as
a percentage of revenue in fiscal 2000 is attributed to lower than anticipated
revenue for the period. Sales and marketing expenses increased in dollar
amount each period primarily due to increased costs associated with hiring
additional sales and marketing personnel, the promotion of Pervasive.SQL, and
increased infrastructure costs associated with foreign sales office expansion.
We expect that sales and marketing expenses will continue to increase in
dollar amount as we continue to invest in brand awareness campaigns, promote
Pervasive.SQL and future extensions of Pervasive.SQL, hire additional and more
experienced sales and marketing personnel and continue to invest in our
international operations. Sales and marketing expenses are likely to continue
to fluctuate as a percentage of revenues due to the timing of costs associated
with new product releases, marketing promotions, brand awareness campaigns and
international expansion.

                                      27
<PAGE>

   Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
related to continuing operations were $9.6 million, $13.1 million and $13.7
million in fiscal 1998, 1999 and 2000, representing 26%, 23% and 26% of
revenues from continuing operations, respectively. Research and development
expenses increased in dollar amount each period primarily due to the increased
hiring of, and contracting with, additional research and development
personnel. In July 2000, we reduced our worldwide workforce by approximately
100 employees the majority of which were in research and development and
technical support relating to our discontinued Tango product line. Currently,
we have 57 employees in research and development dedicated to our
Pervasive.SQL database products. Accordingly, we anticipate that research and
development expenses will be lower in future quarters; however, we will
continue to devote substantial resources to research and development and these
expenses are likely to continue to fluctuate as a percent of revenue due to
the timing and extent of costs associated with future product development
activities.

   Software development costs incurred in connection with long-term
development projects are accounted for in accordance with Statement of
Financial Accounting Standards No. 86. We have not capitalized any internal
costs through June 30, 2000 related to software development activities.

   In July 2000, Gary G. Allison was named Vice President, Engineering. Mr.
Allison joined Pervasive in October 1997 and has held various management
positions within the organization, most recently serving as Director of
Developer Solutions. Prior to joining Pervasive, Mr. Allison served as a
senior software engineer at DSC Communications Corporation and held various
software development positions at IBM.

   General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of our finance, human resources,
and administrative departments. General and administrative expenses related to
continuing operations were $3.1 million, $4.8 million and $5.8 million in
fiscal 1998, 1999 and 2000, representing 9%, 8% and 11% of revenues from
continuing operations, respectively. We attribute the increase in dollar
amount in each period primarily to the increased staffing and associated
expenses necessary to manage and support our increased scale of operations,
both domestically and internationally. General and administrative expenses
decreased as a percentage of revenue between fiscal years 1998 and 1999
primarily because of significant revenue growth that outpaced general and
administrative expenditures. General and administrative expenses increased as
a percentage of revenue between fiscal years 1999 and 2000 primarily because
of the decline in revenue during fiscal year 2000. We believe that our general
and administrative expenses will be similar in dollar amount in future
quarters.

   Provision for Income Taxes. Provision for income taxes related to
continuing operations was approximately $1.1 million, $4.5 million and $1.8
million in fiscal 1998, 1999 and 2000, respectively. Our effective tax rates
related to continuing operations were 28%, 30% and 30% for fiscal 1998, 1999
and 2000, respectively. Our effective tax rate for fiscal years 1998 and 1999
increased primarily due to foreign taxes associated with our increased
operations overseas.

   We believe that, based on a number of factors, it is more likely than not
that a substantial amount of our deferred tax assets may not be realized.
These factors include:

  .  Recent declines in revenue related to continuing operations;

  .  The potential impact of anticipated deductions due to exercise of
     employee stock options on deferred tax assets with limited carryforward
     periods;

  .  The intensely competitive market in which we operate and which is
     subject to rapid change.

   Accordingly, we have recorded a valuation allowance against the deferred
tax assets to the extent domestic deferred tax assets exceed the potential
benefit from carryback or carryover of deferred items to offset taxable income
in the current year, prior years or the next succeeding year. We expect our
effective tax rate will increase in the future as our foreign taxes associated
with our international operations continues to increase as a percent of our
worldwide tax expense. See Note 4 of Notes to Consolidated Financial
Statements for further discussion of our provision for income taxes.

                                      28
<PAGE>

   Loss from Discontinued Operations. Loss from discontinued operations
relates to the discontinuation of the Tango product line at the end of fiscal
2000. Total loss from discontinued operations was $33.0 million in fiscal 2000
as compared to $6.8 million in fiscal 1999, net of income tax benefits of $1.1
million and $2.0 million in 2000 and 1999, respectively. The loss in fiscal
year 2000 includes a $17.1 million loss from operations and a $17.0 million
charge for estimated loss on disposal, including a reduction of Tango related
assets to their estimated net realizable values and accrual for twelve months
estimated operating costs on the discontinued product line. The loss in fiscal
year 1999 is attributable to operating losses of $7.0 million for the seven
month period following our acquisition of the Tango product line in November
1998 and a $1.8 million charge for purchased research and development. We are
currently exploring strategic alternatives for the Tango product line,
including its possible sale.

Quarterly Results from Operations

   The following table sets forth selected unaudited quarterly information for
our last eight fiscal quarters. This information has been prepared on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Report and we believe that all necessary adjustments (consisting only of
normal recurring adjustments) have been included in the amounts stated below.
We also believe that this information presents fairly the results of such
periods when read in conjunction with the audited consolidated financial
statements and notes thereto.

<TABLE>
<CAPTION>
                                                    Quarter Ended
                          -------------------------------------------------------------------------
                          Sept. 30  Dec. 31  Mar. 31  June 30  Sept. 30  Dec. 31  Mar. 31  June 30
                            1998     1998     1999     1999      1999     1999     2000      2000
                          --------  -------  -------  -------  --------  -------  -------  --------
                                        (in thousands, except per share data)
<S>                       <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>
Revenues................  $11,776   $13,723  $15,547  $16,992  $16,237   $14,738  $11,254  $  9,849
Costs and expenses:
 Cost of revenues and
  technical support.....    1,620     1,941    2,002    2,464    2,067     2,576    2,230     2,018
 Sales and marketing....    4,979     4,789    4,230    4,155    4,476     5,230    5,063     4,633
 Research and
  development...........    2,960     3,110    3,501    3,492    3,177     3,607    3,572     3,364
 General and
  administrative........    1,041     1,164    1,237    1,356    1,112     1,635    1,524     1,484
                          -------   -------  -------  -------  -------   -------  -------  --------
Total costs and
 expenses...............   10,600    11,004   10,970   11,467   10,832    13,048   12,389    11,499
                          -------   -------  -------  -------  -------   -------  -------  --------
Operating income (loss)
 from continuing
 operations.............    1,176     2,719    4,577    5,525    5,405     1,690   (1,135)   (1,650)
Interest and other
 income, net............      218       122       85      400      491       430      406       275
Income tax benefit
 (provision)............     (426)     (852)  (1,399)  (1,775)  (1,769)     (636)     219       412
Minority interest in
 (earnings) loss of
 subsidiary, net of
 tax....................       14       (17)     (16)     (17)     (23)        4       --        --
                          -------   -------  -------  -------  -------   -------  -------  --------
Income (loss) from
 continuing operations..      982     1,972    3,247    4,133    4,104     1,488     (510)     (963)
                          -------   -------  -------  -------  -------   -------  -------  --------
Discontinued Operations:
 Charge for purchased
  research and
  development...........       --    (1,800)      --       --       --        --       --        --
 Loss from operations...       --    (1,206)  (2,655)  (3,125)  (3,480)   (4,189)  (4,668)   (4,808)
 Income tax benefit
  (provision)...........       --       346      777      908      923     1,551     (668)     (712)
 Loss on disposal.......       --        --       --       --       --        --       --   (16,963)
                          -------   -------  -------  -------  -------   -------  -------  --------
Loss from discontinued
 operations.............       --    (2,660)  (1,878)  (2,217)  (2,557)   (2,638)  (5,336)  (22,483)
                          -------   -------  -------  -------  -------   -------  -------  --------
Net income (loss).......  $   982   $  (688) $ 1,369  $ 1,916  $ 1,547   $(1,150) $(5,846) $(23,446)
                          =======   =======  =======  =======  =======   =======  =======  ========
Basic earnings (loss)
 per share:
 Income (loss) from
  continuing
  operations............  $  0.07   $  0.15  $  0.24  $  0.27  $  0.26   $  0.10  $ (0.03) $  (0.06)
 Loss from discontinued
  operations............       --     (0.20)   (0.14)   (0.14)   (0.16)    (0.17)   (0.34)    (1.43)
                          -------   -------  -------  -------  -------   -------  -------  --------
 Net income (loss)......  $  0.07   $ (0.05) $  0.10  $  0.12  $  0.10   $ (0.07) $ (0.37) $  (1.49)
                          =======   =======  =======  =======  =======   =======  =======  ========
Diluted earnings (loss)
 per share:
 Income (loss) from
  continuing
  operations............  $  0.06   $  0.13  $  0.20  $  0.24  $  0.23   $  0.08  $ (0.03) $  (0.06)
 Loss from discontinued
  operations............       --     (0.17)   (0.12)   (0.13)   (0.14)    (0.15)   (0.34)    (1.43)
                          -------   -------  -------  -------  -------   -------  -------  --------
 Net income (loss)......  $  0.06   $ (0.04) $  0.09  $  0.11  $  0.09   $  0.06  $ (0.37) $  (1.49)
                          =======   =======  =======  =======  =======   =======  =======  ========
</TABLE>

                                      29
<PAGE>

<TABLE>
<CAPTION>
                                                    Quarter Ended
                          -----------------------------------------------------------------
                          Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
                            1998    1998    1999    1999     1999    1999    2000    2000
                          -------- ------- ------- ------- -------- ------- ------- -------
<S>                       <C>      <C>     <C>     <C>     <C>      <C>     <C>     <C>
As a Percentage of
 Revenues:
Revenues................    100%     100%    100%    100%    100%     100%    100%    100%
Costs and expenses:
 Cost of revenues and
  technical support.....     14       14      13      15      13       18      20      21
 Sales and marketing....     42       35      27      24      28       36      45      47
 Research and
  development...........     25       23      23      21      19       24      32      34
 General and
  administrative........      9        9       8       8       7       11      13      15
                            ---      ---     ---     ---     ---      ---     ---    ----
Total costs and
 expenses...............     90       81      71      68      67       89     110     117
                            ---      ---     ---     ---     ---      ---     ---    ----
Operating income (loss)
 from continuing
 operations.............     10       19      29      32      33       11     (10)    (17)
 Interest and other
  income, net...........      2        1       1       2       3        3       4       3
 Income tax benefit
  (provision)...........     (4)      (6)     (9)    (10)    (11)      (4)      2       4
 Minority interest in
  (earnings) loss of
  Subsidiary, net of
  tax...................     --       --      --      --      --       --      --      --
                            ---      ---     ---     ---     ---      ---     ---    ----
Income (loss) from
 continuing operations..      8       14      21      24      25       10      (4)    (10)
                            ---      ---     ---     ---     ---      ---     ---    ----
Discontinued Operations:
 Charge for purchased
  research and
  development...........     --      (13)     --      --      --       --      --      --
 Loss from operations...     --       (9)    (17)    (18)    (21)     (28)    (42)    (49)
 Income tax benefit
  (provision)...........     --        3       5       5       6       10      (6)     (7)
 Loss on disposal.......     --       --      --      --      --       --      --    (172)
                            ---      ---     ---     ---     ---      ---     ---    ----
Loss from discontinued
 operations.............     --      (19)    (12)    (13)    (15)     (18)    (48)   (228)
                            ---      ---     ---     ---     ---      ---     ---    ----
Net income (loss).......      8%      (5)%     9%     11%     10%      (8)%   (52)%  (238)%
                            ===      ===     ===     ===     ===      ===     ===    ====
</TABLE>

   Our operating results have varied significantly from quarter to quarter in
the past and will continue to vary significantly from quarter to quarter in
the future due to a variety of factors. For example, we incurred losses in the
quarters ended December 31, 1998 and 1999; March 31, 2000 and June 30, 2000
primarily due to losses from our discontinued Tango operations. We incurred
losses from continuing operations in the quarters ended March 31, 2000 and
June 30, 2000 primarily due to decreases in revenues from continuing
operations.

Liquidity and Capital Resources

   Cash provided by continuing operations was $3.0 million, $9.0 million and
$4.7 million for fiscal 1998, 1999 and 2000, respectively. The increase in
cash provided by continuing operations from fiscal 1998 to 1999 resulted
primarily from increased earnings related to continuing operations. The
decrease in cash provided by continuing operations from fiscal 1999 to 2000
resulted primarily from the decrease in earnings from continuing operations in
fiscal 2000.

   During fiscal 1998 and 1999 we invested net amounts of $4.9 million and
$16.8 million, respectively, in marketable securities, consisting of various
taxable and tax advantaged securities. During fiscal 2000, we received net
proceeds of $8.5 million from the sale or maturity of marketable securities.
In addition, we purchased property and equipment totaling approximately $2.4
million, $5.7 million and $4.2 million in fiscal 1998, 1999 and 2000,
respectively. This property consisted primarily of computer hardware and
software for our growing employee base and approximately $1.3 million for
furniture and fixtures and improvements related to our new facility in 1999.
We expect that our capital expenditures will decrease in the next fiscal year
as a result of our discontinued Tango product line and related workforce
reduction.

   In November 1998, we acquired 93% of the outstanding stock of EveryWare
Development Inc., and acquired the remaining outstanding shares in December
1998. We financed the acquisition by using available funds of approximately
$11.8 million during the quarter ended December 31, 1998. In July 2000, we
discontinued the operations of the Tango product line acquired in our purchase
of EveryWare Development Inc.

                                      30
<PAGE>

   In February 1998, we acquired Smithware, Inc. a developer of database
development and reporting components for Pervasive products. We acquired
Smithware for approximately $390,000 consisting of $170,000 in cash, 23,752
shares of our common stock valued at $160,000 and acquisition costs of
$60,000, plus up to an additional $80,000 of cash and 47,502 shares of common
stock payable upon achievement of certain milestones. In conjunction with the
acquisition, we repaid Smithware's outstanding debts of approximately
$110,000. In fiscal 1999, we paid $80,000 in cash and issued 33,251 shares of
our common stock valued at $326,000 to the former Smithware shareholders upon
achieving the first three milestones specified in the acquisition agreement.
In fiscal 2000, we issued 14,251 shares of our common stock valued at $167,000
to the former Smithware shareholders upon achieving the final milestone
specified in the acquisition agreement.

   In February 1998, we purchased an additional 15% ownership interest in our
majority owned subsidiary, Pervasive Software Co., Ltd. (formerly known as
Btrieve Technologies Japan, Ltd.), by acquiring stock held by minority
shareholders for approximately $266,000 in cash. Following this purchase, we
held 80.5% of the outstanding stock of Pervasive Software Co., Ltd. In October
1999, we acquired the remaining 19.5% ownership interest in Pervasive Software
Co., Ltd. by purchasing stock held by a minority shareholder for $750,000 in
cash. The October 1999 acquisition was accounted for under the purchase method
and, accordingly the excess of purchase price over fair market value of net
assets acquired of $160,000 was recorded as goodwill and will be amortized
over a ten year period. After the acquisition, we hold 100% of the outstanding
stock of Pervasive Software Co., Ltd.

   In September 1997, we completed an initial public offering in which we sold
2,000,000 shares of common stock for net proceeds of $17.4 million, after
deducting the underwriter's discount and expenses of the offering. In March
1999, we completed a secondary offering in which we sold 1,894,500 shares of
common stock for net proceeds of $30 million, after deducting the
underwriter's discount and expenses of the offering.

   On June 30, 2000, we had $22.4 million in working capital including $26.1
million in cash and cash equivalents and marketable securities. We have a
binding commitment for a $10.0 million revolving line of credit with a bank.

Recently Issued Accounting Standards

   In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued Statement
137, Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133, which defers for one year the
effective date of Statement 133. Statement 133 is now effective for all fiscal
quarters of all fiscal years beginning in our fiscal year 2001. We do not
anticipate that the adoption of Statement 133 will have a significant effect
on our results of operations or financial position because of our minimal use
of derivatives.

   In December 1999, the Securities and Exchange Commission staff released SAB
101, Revenue Recognition in Financial Statements, which provides guidance on
the recognition, presentation and disclosure of revenue in financial
statements. We are currently studying the implications of SAB No. 101, but we
believe it will not have a material effect on our results of operations or
financial position.

   In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which further clarifies APB
Opinion No. 25, Accounting for Stock Issued to Employees. We believe that this
Interpretation will not have a material effect on our results of operations or
financial position.

Year 2000 Compliance

   The "Year 2000" issue results from an industry-wide practice of
representing years with only two digits instead of four. Beginning in the year
2000, date code fields need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates (2000 or 1900). As a
result, computer systems and/or software used by many companies need to be
upgraded to comply with such Year 2000 requirements.

                                      31
<PAGE>

   Through the first half of the calendar year 2000, we have not experienced
any significant problems associated with the Year 2000 issue. Although it
appears that the Year 2000 issue will not have a significant adverse affect on
Pervasive, we continue to offer Year 2000 related support to our customers and
monitor the Year 2000 compliance of our internal systems world wide.
Undetected errors in our products or internal systems that may be discovered
in the future could have a material adverse affect on our business, operating
results or financial condition.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The majority of the Company's operations are based in the U.S. and,
accordingly, the majority of its transactions are denominated in U.S. Dollars.
However, the Company does have foreign-based operations where transactions are
denominated in foreign currencies and are subject to market risk with respect
to fluctuations in the relative value of currencies. Currently, the Company
has operations in Japan, Germany, France, Ireland, England, Belgium, and Hong
Kong and conducts transactions in the local currency of each location. In
fiscal 1999 the U.S. Dollar weakened against the Japanese Yen. Had the U.S.
Dollar to Japanese Yen rate remained unchanged throughout fiscal 1999, the
result would have been a decrease in revenue and operating income of
approximately $1.2 million and $85,000, respectively. Had the U.S. Dollar to
Japanese Yen rate remained unchanged throughout fiscal 2000, the result would
have been a decrease in revenue and operating income from continuing
operations of approximately $1.0 million and $20,000, respectively. The impact
of fluctuations in the relative value of other currencies for fiscal 1999 and
fiscal 2000 was not material.

   The Company monitors its foreign currency exposure and, from time to time
will attempt to reduce its exposure through hedging. Gains and losses on
foreign currency hedging were not material to the consolidated financial
statements for years ended June 30, 1998, 1999 and 2000.

   Pervasive is subject to interest rate risk on its cash and marketable
securities investments, however, this risk is limited as the Company's
investment policy requires the Company to invest in short-term securities and
maintain an average maturity of one year or less.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this Report.

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

   Not applicable.

                                      32
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information regarding directors is incorporated herein by reference
from the section entitled "Election of Directors" of the Company's definitive
Proxy Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934, as amended, for the registrants'
Annual Meeting of Stockholders to be Held on November 9, 2000. The Proxy
Statement is anticipated to be filed within 120 days after the end of the
registrant's fiscal year ended June 30, 2000. For information regarding
executive officers of the Company, see the Information appearing under the
caption "Executive Officers of the Registrant" in Part I, Item 4a of this
Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

   Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.

                                      33
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)(1) Financial Statements

   The following consolidated financial statements of the Company are filed as
part of this Annual Report on Form 10-K as follows:

Index to Consolidated Financial Statements

<TABLE>
<S>                                                                         <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at June 30, 1999 and 2000...................... F-3
Consolidated Statements of Operations for each of the three years in the
 period ended June 30, 2000................................................ F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
 Stock and Stockholders' Equity (Deficit) for each of the three years in
 the period ended June 30, 2000............................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the
 period ended June 30, 2000................................................ F-6
Notes to the Consolidated Financial Statements............................. F-7
</TABLE>

   (a)(2) Financial Statement Schedules

   Schedule II--Valuation and Qualifying Accounts is filed on page S-1 of this
Report on Form 10-K.

   All other schedules have been omitted because they are not applicable, not
required under the instructions, or the information requested is set forth in
the consolidated financial statements or related notes thereto.

   (a)(3) Exhibits

<TABLE>
 <C>     <S>
  3.1*   Restated Certificate of Incorporation
  3.2*   Bylaws of the Company
  4.1*   Reference is made to Exhibits 3.1, 3.2 and 4.3
  4.2*   Specimen Common Stock certificate
  4.3*   Investors' Rights Agreement dated April 19, 1995, between the Company
         and the investors named therein
 10.1*   Form of Indemnification Agreement
 10.2*   1997 Stock Incentive Plan
 10.3*   Employee Stock Purchase Plan
 10.4*   First Amended and Restated 1994 Incentive Plan
 10.5*   Amendment and Restatement of Credit Agreement dated March 31, 1997
         between the Company and Texas Commerce Bank National Association (now
         known as Chase Bank of Texas, National Association)
 10.8*   Sublease Agreement dated December 10, 1996 between the Company and
         Reynolds, Loeffler & Dowling, P.C.
 10.9*   Joint Venture Agreement dated March 26, 1995 between the Company and
         Novell Japan, Ltd., AG Tech Corporation and Empower Ltd.
 10.10** Lease agreement dated April 2, 1998 between the Company and
         CarrAmerica Realty, L.P. T/A Riata Corporate Park
 21.1    Subsidiaries of the registrant
 23.1    Consent of Independent Auditors
 27.1    Financial Data Schedule
</TABLE>
--------
 * Incorporated by reference to the Company's Registration Statement on Form
   S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on Form 10-K for
   the fiscal year ended June 30, 1998 (File No. 000-230431).

                                      34
<PAGE>

                                   SIGNATURES

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

                                          Pervasive Software Inc.
                                          (Registrant)

                                                   /s/ Ron R. Harris
                                          By: _________________________________
                                                       Ron R. Harris
                                               President and Chief Executive
                                                          Officer

                                          September 28, 2000
                                          -------------------------------------
                                          Date

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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Ron R. Harris              President and Chief        September 28, 2000
______________________________________   Executive Officer
            Ron R. Harris               (Principal Executive
                                        Officer)

      /s/ James R. Offerdahl           Chief Operating Officer    September 28, 2000
______________________________________  and
          James R. Offerdahl            Chief Financial Officer
                                        (Principal Financial and
                                        Accounting Officer)

      /s/ Nancy R. Woodward            Director and Chairman of   September 28, 2000
______________________________________  the Board
          Nancy R. Woodward

      /s/ Joseph C. Aragona            Director                   September 28, 2000
______________________________________
          Joseph C. Aragona

       /s/ David A. Boucher            Director                   September 28, 2000
______________________________________
           David A. Boucher

      /s/ David R. Bradford            Director                   September 28, 2000
______________________________________
          David R. Bradford

    /s/ Shelby H. Carter, Jr.          Director                   September 28, 2000
______________________________________
        Shelby H. Carter, Jr.
</TABLE>

                                       35
<PAGE>

                                  SCHEDULE II

                            PERVASIVE SOFTWARE INC.
                       VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

<TABLE>
<CAPTION>
                                     Additions    Deductions
                         Balance at   Charged     Write-offs              Balance
                         Beginning    to Costs     Charged      Other     at End
      Description        of Period  and Expenses to Allowance Additions* of Period
      -----------        ---------- ------------ ------------ ---------- ---------
<S>                      <C>        <C>          <C>          <C>        <C>
Allowance for Doubtful
 accounts:
Year ended June 30,
 1998...................  $   100      $  200       $  --       $   --    $   300
Year ended June 30,
 1999...................      300          50          78          257        529
Year ended June 30,
 2000...................      529         405         589           --        345


Valuation Allowance for
 Deferred Tax Asset:
Year ended June 30,
 1998...................  $ 1,698      $   --       $ 462       $   --    $ 1,236
Year ended June 30,
 1999...................    1,236          --         816        4,322      4,742
Year ended June 30,
 2000...................    4,742       9,578          --           --     14,320
</TABLE>
--------
*  Additions allocated as part of the purchase accounting treatment of the
   acquisition of EveryWare Development Inc.

                                       36
<PAGE>

                            PERVASIVE SOFTWARE INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at June 30, 1999 and 2000..................... F-3
Consolidated Statements of Operations for each of the three years in the
 period ended June 30, 2000............................................... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
 Stock and Stockholders' Equity (Deficit) for each of the three years in
 the period ended June 30, 2000........................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the
 period ended June 30, 2000............................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Pervasive Software Inc.

   We have audited the accompanying consolidated balance sheets of Pervasive
Software Inc. and Subsidiaries (the "Company") as of June 30, 2000 and 1999,
and the related consolidated statements of operations, changes in redeemable
convertible preferred stock and stockholders' equity (deficit) and cash flows
for each of the three years in the period ended June 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Pervasive
Software Inc. and Subsidiaries at June 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

                                          /s/ Ernst & Young LLP

Austin, Texas
July 20, 2000

                                      F-2
<PAGE>

                            PERVASIVE SOFTWARE INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 June 30,
                                                              ----------------
                                                               1999     2000
                                                              -------  -------
                                                              (in thousands,
                                                               except share
                                                                   data)
<S>                                                           <C>      <C>
ASSETS
Current assets:
  Cash and cash equivalents, including interest bearing
   investments of $17,164 in 1999 and $10,999 in 2000........ $18,126  $12,822
  Marketable securities......................................  21,777   13,322
  Trade accounts receivable, net of allowance for doubtful
   accounts of $529 in 1999 and $345 in 2000.................   9,352    6,350
  Inventory..................................................     270      299
  Deferred income taxes......................................   1,120       --
  Prepaid expenses and other current assets..................   2,589    4,176
                                                              -------  -------
Total current assets.........................................  53,234   36,969
Property and equipment, net..................................   7,509    7,244
Intangible assets:
  Excess of cost over fair value of net assets acquired......  10,705    1,133
  Purchased technology.......................................   1,200       --
  Accumulated amortization...................................    (770)    (172)
                                                              -------  -------
Total intangible assets......................................  11,135      961
Other assets.................................................     995    2,074
                                                              -------  -------
Total assets................................................. $72,873  $47,248
                                                              =======  =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable..................................... $ 2,517  $ 1,382
  Accrued payroll and payroll related costs..................   1,403    1,793
  Other accrued expenses.....................................   4,144    3,658
  Deferred revenue...........................................   2,252    1,531
  Income taxes payable.......................................   2,457       --
  Liabilities of discontinued operations.....................      --    6,240
                                                              -------  -------
Total current liabilities....................................  12,773   14,604
Deferred tax liability.......................................     565       --
                                                              -------  -------
Total liabilities............................................  13,338   14,604
Minority interest in subsidiary..............................     449       --
Stockholders' equity:
  Common stock, $0.001 par value; Authorized--75,000,000
   shares; issued and outstanding--15,495,394 shares in 1999
   and 15,805,531 shares in 2000.............................  57,869   59,950
  Accumulated other comprehensive loss.......................    (656)    (284)
  Retained earnings (deficit)................................   1,873  (27,022)
                                                              -------  -------
Total stockholders' equity ..................................  59,086   32,644
                                                              -------  -------
Total liabilities and stockholders' equity................... $72,873  $47,248
                                                              =======  =======
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                            PERVASIVE SOFTWARE INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      Year ended June 30,
                                                    --------------------------
                                                     1998     1999      2000
                                                    -------  -------  --------
                                                     (in thousands, except
                                                        per share data)
<S>                                                 <C>      <C>      <C>
Revenues........................................... $36,700  $58,038  $ 52,078
Costs and expenses:
  Cost of revenues and technical support...........   5,292    8,027     8,890
  Sales and marketing..............................  15,438   18,154    19,402
  Research and development.........................   9,556   13,063    13,720
  General and administrative.......................   3,070    4,798     5,755
                                                    -------  -------  --------
Total costs and expenses...........................  33,356   44,042    47,767
                                                    -------  -------  --------
Operating income from continuing operations........   3,344   13,996     4,311
  Interest and other income, net...................     573      825     1,602
                                                    -------  -------  --------
Income before income taxes and minority interest...   3,917   14,821     5,913
  Income tax provision.............................  (1,101)  (4,452)   (1,774)
  Minority interest in earnings of subsidiary, net
   of income taxes.................................     (94)     (36)      (19)
                                                    -------  -------  --------
Income from continuing operations..................   2,722   10,333     4,120
                                                    -------  -------  --------
Discontinued Operations:
  Charge for purchased research and development....      --   (1,800)       --
  Loss from operations.............................      --   (6,986)  (17,146)
  Income tax benefit...............................      --    2,031     1,094
  Loss on disposal.................................      --       --   (16,963)
                                                    -------  -------  --------
Loss from discontinued operations..................      --   (6,755)  (33,015)
                                                    -------  -------  --------
Net income (loss).................................. $ 2,722  $ 3,578  $(28,895)
                                                    =======  =======  ========
Basic earnings (loss) per share:
  Income from continuing operations................ $  0.26  $  0.74  $   0.26
  Loss from discontinued operations................      --    (0.48)    (2.11)
                                                    -------  -------  --------
  Net income (loss)................................ $  0.26  $  0.26  $  (1.85)
                                                    =======  =======  ========
  Weighted average shares..........................  10,468   13,960    15,648
Diluted earnings (loss) per share:
  Income from continuing operations................ $  0.18  $  0.65  $   0.23
  Loss from discontinued operations................      --    (0.42)    (1.87)
                                                    -------  -------  --------
  Net income (loss)................................ $  0.18  $  0.22  $  (1.64)
                                                    =======  =======  ========
  Weighted average shares..........................  14,771   15,998    17,622
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                            PERVASIVE SOFTWARE INC.

          CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
               PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                  Stockholders' Equity (Deficit)
                                      ---------------------------------------------------------
                          Redeemable                      Accumulated                 Total
                          Convertible                        Other     Retained   Stockholders'
                           Preferred  Preferred Common   Comprehensive Earnings      Equity
                             Stock      Stock    Stock       Loss      (Deficit)    (Deficit)
                          ----------- --------- -------  ------------- ---------  -------------
                                           (in thousands, except share data)
<S>                       <C>         <C>       <C>      <C>           <C>        <C>
Balances at June 30,
 1997...................    $ 4,026    $ 3,915  $   205      $ (87)    $ (4,427)    $   (394)
  Conversion of
   9,713,132 shares of
   preferred stock......     (4,026)    (3,915)   7,941         --           --        4,026
  Issuance of 2,000,000
   shares of common
   stock, net of
   issuance costs of
   $1,168...............         --         --   17,432         --           --       17,432
  Issuance of 23,752
   shares of common
   stock in purchase of
   a business...........         --         --      162         --           --          162
  Acquisition of 74,012
   treasury shares,
   cumulative treasury
   shares of 74,012 and
   cost of $10 at June
   30, 1998.............         --         --      (10)        --           --          (10)
  Issuance of 249,699
   shares of common
   stock pursuant to the
   exercise of stock
   options..............         --         --      170         --           --          170
  Issuance of 43,542
   shares of common
   stock pursuant to the
   employee stock
   purchase plan........         --         --      370         --           --          370
  Foreign currency
   translation
   adjustment...........         --         --       --       (499)          --         (499)
  Net income............         --         --       --         --        2,722        2,722
                                                                                    --------
   Total comprehensive
    income..............                                                               2,223
                            -------    -------  -------      -----     --------     --------
Balances at June 30,
 1998...................         --         --   26,270       (586)      (1,705)      23,979
  Issuance of 1,894,500
   shares of common
   stock, net of
   issuance costs of
   $742.................         --         --   29,977         --           --       29,977
  Issuance of 33,251
   shares of common
   stock in purchase of
   business.............         --         --      326         --           --          326
  Value assigned to
   replacement options
   issued in purchase of
   a business...........         --         --      269         --           --          269
  Acquisition of 31,662
   treasury shares,
   cumulative treasury
   shares of 105,674 and
   cost of $21 at
   June 30, 1999........         --         --      (11)        --           --          (11)
  Issuance of 191,625
   shares of common
   stock pursuant to the
   exercise of stock
   options..............         --         --      551         --           --          551
  Issuance of 59,956
   shares of common
   stock pursuant to the
   employee stock
   purchase plan........         --         --      487         --           --          487
  Foreign currency
   translation
   adjustment...........         --         --       --        (70)          --          (70)
  Net income............         --         --       --         --        3,578        3,578
                                                                                    --------
   Total comprehensive
    income..............                                                               3,508
                            -------    -------  -------      -----     --------     --------
Balances at June 30,
 1999...................         --         --   57,869       (656)       1,873       59,086
  Issuance of 14,251
   shares of common
   stock in purchase of
   business.............         --         --      167         --           --          167
  Acquisition of 58,062
   treasury shares,
   cumulative treasury
   shares of 163,736 and
   cost of $51 at
   June 30, 2000........         --         --      (30)        --           --          (30)
  Issuance of 236,600
   shares of common
   stock pursuant to the
   exercise of stock
   options..............         --         --    1,187         --           --        1,187
  Issuance of 112,004
   shares of common
   stock pursuant to the
   employee stock
   purchase plan........         --         --      757         --           --          757
  Foreign currency
   translation
   adjustment...........         --         --       --        372           --          372
  Net loss..............         --         --       --         --      (28,895)     (28,895)
                                                                                    --------
   Total comprehensive
    loss................                                                             (28,523)
                            -------    -------  -------      -----     --------     --------
Balances at June 30,
 2000...................    $    --    $    --  $59,950      $(284)    $(27,022)    $ 32,644
                            =======    =======  =======      =====     ========     ========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                            PERVASIVE SOFTWARE INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                      -------------------------
                                                       1998     1999     2000
                                                      -------  -------  -------
                                                          (in thousands)
<S>                                                   <C>      <C>      <C>
Cash from continuing operations
  Income from continuing operations.................  $ 2,722  $10,333  $ 4,120
  Adjustments to reconcile net income to net cash
   provided by continuing operations:
   Depreciation and amortization....................    1,442    2,323    3,126
   Non cash compensation expense pursuant to
    employee stock purchase plan....................      469      732      637
   Deferred income tax provision (benefit)..........     (782)    (856)     270
   Other non cash items.............................      110      253      130
   Change in current assets and liabilities:
     Decrease (increase) in current assets..........   (3,602)  (5,112)     522
     Increase (decrease) in accounts payable &
      accrued liabilities...........................    2,017      877   (3,745)
     Increase (decrease) in deferred revenue........      662      425     (633)
                                                      -------  -------  -------
Net cash provided by continuing operations..........    3,038    8,975    4,427
Cash from discontinued operations
  Loss from discontinued operations.................       --   (6,755) (33,015)
   Depreciation and amortization....................       --      835    1,443
   Charge for purchased research and development....       --    1,800       --
   Write-down of assets and liabilities of
    discontinued operations.........................       --     (386)  10,723
   Income tax benefit...............................       --    2,031    1,094
   Net change in assets and liabilities of
    discontinued operations.........................       --       --     (162)
   Accrued liabilities of discontinued operations...       --       --    6,240
                                                      -------  -------  -------
Net cash used in discontinued operations............       --   (2,475) (13,677)
Cash from investing activities
  Purchase of property and equipment................   (2,421)  (5,742)  (4,209)
  Purchase of marketable securities.................  (23,393) (26,273)  (1,540)
  Proceeds from sale of marketable securities.......   18,450    9,438    9,995
  Purchase of business, net of cash acquired........     (333) (11,867)    (750)
  Purchase of minority interest.....................     (266)      --       --
  (Increase) decrease in other assets...............      (60)      20   (1,079)
                                                      -------  -------  -------
Net cash provided by (used in) investing
 activities.........................................   (8,023) (34,424)   2,417
Cash from financing activities
  Proceeds from issuance of stock, net of issuance
   costs............................................   17,432   30,350       --
  Purchase of treasury stock........................      (10)     (11)     (30)
  Payment of royalty to Novell......................     (570)    (158)      --
  Proceeds from exercise of stock options...........      170      551    1,187
                                                      -------  -------  -------
Net cash provided by financing activities...........   17,022   30,732    1,157
Effect of exchange rate changes on cash and cash
 equivalents........................................     (508)    (269)     372
                                                      -------  -------  -------
Increase (decrease) in cash and cash equivalents....   11,529    2,539   (5,304)
Cash and cash equivalents at beginning of year......    4,058   15,587   18,126
                                                      -------  -------  -------
Cash and cash equivalents at end of year............  $15,587  $18,126  $12,822
                                                      =======  =======  =======
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                            PERVASIVE SOFTWARE INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 June 30, 2000

1. The Company

   Pervasive Software Inc. (the "Company"), is a leading worldwide provider of
data management solutions and services which dramatically simplify the
development, deployment and management of business applications for Small and
Medium Enterprises ("SME"). Pervasive.SQL, the primary product, combines the
high performance associated with enterprise-class databases with low
maintenance features, and is ideally suited for Web and client/server
applications deployed on a wide variety of operating systems and devices. The
Company develops, markets, sells and supports its offerings worldwide through
its principal office in Austin, Texas and through international offices in
Brussels, Frankfurt, Paris, London and Tokyo. In July 2000, the Company
announced its intention to sell it's Tango product line, and accordingly, the
Tango product line is accounted for as a discontinued operation (see Note 9).
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

 Revenue Recognition

   The Company licenses its software through OEM license agreements with
software developers ("ISVs") and through shrink-wrap software licenses, sold
through ISVs, value-added resellers ("VARs"), systems integrators and
distributors. Revenues are generally recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable. Revenues related to OEM license
agreements involving nonrefundable fixed minimum license fees are generally
recognized upon delivery of the product master or first copy if no significant
vendor obligations remain. Per copy royalties related to OEM license
agreements in excess of a fixed minimum amount are recognized as revenue when
such amounts are reported to the Company. The Company generally provides
telephone support to customers and end users in the 30 days immediately
following the sale at no additional charge and at a minimal cost per call. The
Company accrues the cost of providing this support. Revenue from training is
recognized when the related services are performed. The Company enters into
agreements with certain distributors that provide for certain stock rotation
and price protection rights. These rights allow the distributor to return
products in a non-cash exchange for other products or for credits against
future purchases. Upon revenue recognition, the Company reserves for the cost
of estimated sales returns, rotation and price protection rights.

 Software Development Costs

   Software development costs incurred by the Company in connection with its
long-term development projects are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. The Company has not
capitalized any internal costs through June 30, 2000 related to its software
development activities.

 Advertising Costs

   The Company expenses costs of producing advertising and sales related
collateral materials as incurred. Other production costs associated with
direct mail programs, placement costs associated with magazine or other
printed media and all direct costs associated with trade shows and other sales
related events are expensed when the related direct mail is sent, advertising
space is used or the event is held. These expenses for continuing and
discontinued operations combined in 1998, 1999 and 2000 were approximately
$700,000, $3.0 million and $6.4 million, respectively.

                                      F-7
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Income Taxes

   Under the asset and liability method of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (Statement 109), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and net
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.

 Cash and Cash Equivalents

   Cash and cash equivalents include cash, certificates of deposit, and
securities with original maturities less than ninety days when purchased.

 Marketable Securities

   Marketable securities have been classified as available-for-sale and such
designation is reevaluated as of each balance sheet date. While the Company's
intent is to hold debt securities to maturity, they are classified as
available-for-sale because the sale of such securities may be required prior
to maturity. Realized gains and losses are recorded on the specific
identification method and are included in other income. Realized and
unrealized gains and losses have been insignificant for all periods presented.

   All of the Company's marketable securities mature on or before June 30,
2001. All are stated at cost, which approximates fair market value as of June
30, 1999 and 2000, and consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   June 30,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Marketable securities
     U.S. Government agencies.................................. $13,827 $ 7,390
     Treasury Notes............................................   3,926   3,926
     Corporate Notes...........................................   2,004      --
     Medium Term Notes.........................................   1,011   1,005
     Certificates of Deposit...................................   1,009   1,001
                                                                ------- -------
       Total................................................... $21,777 $13,322
                                                                ======= =======
</TABLE>

 Inventory

   Inventories, consisting primarily of finished goods, are stated at the
lower of cost (first in, first out) or market. The Company utilizes the
services of fulfillment houses to manufacture, store and ship inventory, and
process returned product. The Company does not take title to product in
inventory until the point at which the product is packaged by the fulfillment
houses and is available for shipping.

 Property and Equipment

   Property and equipment are stated at cost and are being depreciated over
their estimated useful lives (2 to 7 years) using the straight-line method.
Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter.

 Intangible Assets

   Intangible assets are being amortized using the straight-line method over a
ten year period.

                                      F-8
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company periodically reviews the carrying amounts of property, plant,
and equipment, identifiable intangible assets and excess of cost over fair
value of net assets acquired both purchased in the normal course of business
and acquired through acquisition to determine whether current events or
circumstances, as defined in Financial Accounting Standards Board Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, warrant adjustments to such carrying amounts by
considering, among other things, the future cash inflows expected to result
from the use of the asset and its eventual disposition less the future cash
outflows expected to be necessary to obtain those inflows. Other than the
write-down of the long-lived assets related to the Tango product line, as
discussed in Note 9, at this time, estimated future cash inflows exceed
estimated future cash outflows; thus, no impairment loss has been recognized.
Management reviews the valuation and amortization periods of excess of cost
over fair value of net assets acquired on a periodic basis, taking into
consideration any events or circumstances which might result in diminished
fair value or revised useful life. No events or circumstances have occurred to
warrant a diminished fair value or reduction in the useful life of excess of
cost over fair value of net assets acquired.

 Foreign Currency Transactions

   For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income and were not material in 1998, 1999
or 2000.

   Financial instruments, principally forward pricing contracts, are used by
the Company from time to time in the management of its foreign currency
exposures. Gains and losses on foreign currency transaction hedges are
recognized in income when realized and offset the foreign exchange gains and
losses on the underlying transactions. The Company does not hold or issue
derivative financial instruments for trading purposes.

 Fair Value of Financial Instruments

   Cash equivalents, accounts receivable, accounts payable, accrued
liabilities and other liabilities are stated at cost which approximates fair
value due to the short-term maturity of these instruments.

 Concentration of Credit Risk

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist of short-term investments, including
marketable securities, and trade receivables. The Company's short-term
investments, which are included in cash and cash equivalents and in marketable
securities for reporting purposes, are placed with high credit quality
financial institutions and issuers. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. Estimated credit losses are provided for in the financial
statements and historically have been within management's expectations.

   For the year ended June 30, 1998, Distributor A accounted for $3,700,000,
or 10% of the Company's total revenues. For the year ended June 30, 1999,
Distributor B accounted for $7,200,000, or 12% of the Company's total
revenues. No other customers accounted for more than 10% of the Company's
revenues during the years ended June 30, 1998, 1999 or 2000.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles 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.

                                      F-9
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Stock-Based Compensation

   The Company has adopted the provisions of Financial Accounting Standards
Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123").
As allowed by Statement 123, the Company has elected to continue to account
for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

 Net Income (Loss) Per Share

   The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("Statement 128"). Basic earnings (loss)
per share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share includes the weighted average number of
common shares outstanding and the number of common equivalent shares which
would be issued related to options, warrants, contingently issued shares, and
convertible securities using the treasury method, unless such additional
shares are anti-dilutive.

 Segments

   The Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), in fiscal 1999. The
adoption of Statement 131 did not have a significant effect on the disclosure
of segment information as the Company continues to consider its business
activities as a single segment.

 Reclassifications

   Certain prior year amounts have been reclassified to conform to current
year presentation.

 Recently Issued Accounting Standards

   In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("Statement 133"). In June 1999, the FASB issued Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133 ("Statement 137"), which defers for
one year the effective date of Statement 133. Statement 133 is now effective
for all fiscal quarters of all fiscal years beginning in fiscal year 2001.
Management does not anticipate that the adoption of Statement 133 will have a
significant effect on the results of operations or financial position because
of the Company's minimal use of derivatives.

   In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Management is currently
studying the implications of SAB No. 101, but it is not likely to have a
material impact on the financial statements of the Company. SAB No. 101 will
be effective for the Company beginning in the fourth quarter of the year ended
June 30, 2001.

   In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which further clarifies APB
Opinion No. 25, Accounting for Stock Issued to Employees. Management believes
that this interpretation will not have a material impact on the Company's
financial position or results of operations.

                                     F-10
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. Property and Equipment

   Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   June 30,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
   <S>                                                          <C>     <C>
   Computer equipment and purchased software................... $8,560  $11,357
   Office equipment, furniture and fixtures....................  3,477    4,484
   Leasehold improvements......................................  1,217    1,432
                                                                ------  -------
                                                                13,254   17,273
   Less accumulated depreciation and amortization.............. (5,745) (10,029)
                                                                ------  -------
                                                                $7,509  $ 7,244
                                                                ======  =======
</TABLE>

4. Income Taxes

   The components of income from continuing operations before income taxes and
minority interest consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                          Year ended June 30,
                                                         ---------------------
                                                          1998   1999    2000
                                                         ------ ------- ------
   <S>                                                   <C>    <C>     <C>
   Domestic income...................................... $2,820 $13,671 $5,242
   Foreign income.......................................  1,097   1,151    671
                                                         ------ ------- ------
   Income from continuing operations before taxes and
    minority interest................................... $3,917 $14,822 $5,913
                                                         ====== ======= ======
</TABLE>

   As of June 30, 2000, the Company had federal net operating loss
carryforwards of approximately $2,747,000, a research and development credit
carryforward of approximately $306,000 and a foreign tax credit carryforward
of approximately $1,277,000. The net operating loss will expire in 2020 if not
utilized. The research and development credit will begin to expire in varying
amounts between 2013 and 2020, if not utilized. The foreign tax credit will
begin to expire in varying amounts between 2003 and 2005, if not utilized.

   Significant components of expense (benefit) for income taxes attributable
to continuing operations are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         Year ended June 30,
                                                         ----------------------
                                                          1998    1999    2000
                                                         ------  ------  ------
   <S>                                                   <C>     <C>     <C>
   Income tax provision:
     Current:
       Federal.......................................... $  942  $4,039  $1,027
       Foreign..........................................    850   1,125     396
       State............................................     91     144      81
                                                         ------  ------  ------
     Total current......................................  1,883   5,308   1,504
                                                         ------  ------  ------
     Deferred:
       Federal..........................................   (782)   (731)    405
       Foreign..........................................     --    (125)   (135)
                                                         ------  ------  ------
     Total deferred.....................................   (782)   (856)    270
                                                         ------  ------  ------
                                                         $1,101  $4,452  $1,774
                                                         ======  ======  ======
</TABLE>

                                     F-11
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company's provision for income taxes differs from the expected
provision amount computed by applying the statutory federal income tax rate of
34% to income from continuing operations before income taxes and minority
interest for 1998, 1999 and 2000 as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                       ----------------------
                                                        1998    1999    2000
                                                       ------  ------  ------
   <S>                                                 <C>     <C>     <C>
   Computed at statutory rate of 34%.................. $1,332  $5,040  $2,010
   Effect of foreign operations.......................    266     441       7
   State income taxes, net of federal benefit.........     60      94      53
   Tax exempt interest................................    (63)    (91)     --
   Research tax credit................................    (40)    (72)   (111)
   Future benefits not currently recognized...........   (462)   (816)     --
   Foreign Sales Corporation benefit..................     --      --    (258)
   Non-deductible charges and amortization related to
    acquisitions......................................     --      34      73
   Other..............................................      8    (178)     --
                                                       ------  ------  ------
                                                       $1,101  $4,452  $1,774
                                                       ======  ======  ======
</TABLE>

   The components of deferred income taxes at June 30, 1999 and 2000 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                June 30,
                                                            -----------------
                                                             1999      2000
                                                            -------  --------
   <S>                                                      <C>      <C>
   Deferred tax assets:
     Purchased technology, net............................. $   690  $  3,792
     Domestic net operating loss carryforwards.............      --       935
     Domestic tax credit carryforwards.....................      --     1,585
     Canadian net operating loss carryforwards.............   3,727     3,814
     Canadian capitalized research and development
      carryforwards........................................     595       595
     Accrued expenses not deductible for tax purposes......     968     3,283
     Revenue deferred for financial purposes...............     390       273
     Other.................................................     132        43
                                                            -------  --------
   Total deferred tax assets...............................   6,502    14,320
   Valuation allowance for deferred tax assets.............  (4,742)  (14,320)
   Deferred tax liabilities:
     Purchased software technology, net....................    (484)       --
     Other.................................................     (81)       --
                                                            -------  --------
   Total deferred tax liabilities..........................    (565)       --
                                                            -------  --------
   Net deferred tax assets................................. $ 1,195  $     --
                                                            =======  ========
</TABLE>

   At June 30, 2000, the Company's Canadian subsidiary, EveryWare, had
Canadian Federal and Provincial net operating loss carryforwards ("NOL") of
approximately $8.8 million and capitalized research and development cost
carryforwards of approximately $1.4 million. Unless utilized, the NOLs will
expire in varying amounts between fiscal 2000 and fiscal 2006. The capitalized
research and development cost may be carried forward without limitation.

   Management determined that it is more likely than not that all of the
Company's federal deferred tax assets may not be realized. Accordingly, the
valuation allowance was increased by $1,760,000 to reflect this change in
judgment. Additionally, the valuation allowance was increased by $7,818,000
during the period ended June 30, 2000 due to operations.

                                     F-12
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Employee Benefits

   The Company's employees are offered health coverage under a partially self-
funded plan in which the Company purchases specific stop-loss insurance
coverage at $50,000 per year, per employee. The Company has also purchased an
aggregate stop-loss insurance coverage to limit its maximum annual exposure to
claims funded. Based on the policy census at June 30, 2000, such maximum
annual exposure for the policy year ending December 31, 2000 is approximately
$1,482,000. The Company pays a fixed fee per covered individual for
administrative costs of the administrator and the cost of the stop-loss
insurance purchased on the Company's behalf. The Company contributes 100%
toward the cost to insure each employee and 75% toward the cost to insure
dependents for which coverage is requested by the employee. Expenses for the
partially self-funded plan including premiums and claims funded for the years
ended June 30, 1998, 1999 and 2000 were approximately $508,000, $902,000, and
$1,244,000 respectively.

   The Company has a 401(k) retirement plan which is available to all
domestic, full-time employees. The Company's expenses related to the plan were
not significant in the years ended June 30, 1998, 1999 or 2000.

6. Common Stock and Stock Options

   On September 25, 1997 the Company completed an initial public offering in
which the Company sold 2,000,000 shares of common stock for net proceeds to
the Company of $17.4 million, after deducting the underwriters' discount and
other costs of the offering.

   On March 18, 1999, the Company completed a secondary public offering in
which the Company sold 1,500,000 shares of its common stock for net proceeds
of $23.6 million, after deducting expenses of the offering. In addition,
certain of the Company's stockholders sold 1,130,000 shares in the offering.
In April 1999, the Company sold an additional 394,500 shares of common stock
for net proceeds of $6.4 million upon the exercise of an option granted to the
underwriters of the offering to cover over-allotments.

   The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors in July 1997 and approved by the
stockholders in August 1997. A total of 1,250,000 shares of common stock has
been reserved for issuance under the 1997 Purchase Plan. The 1997 Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code and
has consecutive and overlapping twenty-four month offering periods that begin
every six months. The 1997 Purchase Plan commenced after the completion of the
initial public offering. Each twenty-four month offering period includes four
six-month purchase periods, during which payroll deductions are accumulated
and at the end of which, shares of common stock are purchased with a
participant's accumulated payroll deductions. The 1997 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up
to 500 shares per purchase period. The price of common stock to be purchased
under the 1997 Purchase Plan is 85% of the lower of the fair market value of
the common stock at the beginning of the offering period or at the end of the
relevant purchase period.

   The Company's 1997 Stock Incentive Plan (the 1997 Plan) was adopted by the
Board of Directors on May 22, 1997, and approved by the stockholders on August
12, 1997, as the successor to the First Amended and Restated 1994 Incentive
Plan (the 1994 Plan). Outstanding options under the 1994 Plan have been
incorporated into the 1997 Plan and no further option grants will be made
under the 1994 Plan. The incorporated options will continue to be governed by
their existing terms, unless the Plan Administrator elects to extend one or
more features of the 1997 Plan to those options.

   Incentive stock options may be granted to employees of the Company
entitling them to purchase shares of common stock for a maximum of ten years
(five years in the case of options granted to a person possessing more than
10% of the combined voting power of the Company as of the date of grant). The
exercise price for

                                     F-13
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

incentive stock options may not be less than fair market value of the common
stock on the date of the grant (110% of fair market value in the case of
options granted to a person possessing more than 10% of the combined voting
power of the Company). Nonqualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company.
The exercise price for nonqualified stock options may not be less than 85% of
the fair market value of the common stock on the date of the grant (110% of
fair market value in the case of options granted to a person possessing more
than 10% of the combined voting power of the Company). The Company may also
award Restricted Stock and Stock Appreciation Rights subject to provisions in
the 1997 Plan.

   The vesting period for stock options is generally a four-year period.
Options granted prior to July 1, 1997 are exercisable by the holder prior to
vesting, however, unvested shares are subject to repurchase by the Company at
the exercise price should the employee be terminated or leave the Company
prior to vesting in such options.

   A summary of changes in common stock options during the year ended June 30,
1998, 1999 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                    Range of      Weighted
                                                    Exercise      Average
                                         Shares      Prices    Exercise Price
                                       ----------  ----------- --------------
   <S>                                 <C>         <C>         <C>
   Options outstanding, June 30,
    1997..............................  2,259,697  $0.10- 4.60     $ 0.59
     Granted..........................    726,400  $6.00-13.88     $ 8.09
     Exercised........................   (249,699) $0.10- 3.60     $ 0.72
     Surrendered......................   (177,599) $0.10-10.63     $ 1.86
                                       ----------
   Options outstanding, June 30,
    1998..............................  2,558,799  $0.10-13.88     $ 1.68
     Granted..........................  1,572,604  $2.87-24.88     $13.51
     Exercised........................   (191,625) $0.10-13.88     $ 2.85
     Surrendered......................   (336,750) $0.13-16.75     $ 8.31
                                       ----------
   Options outstanding, June 30,
    1999..............................  3,603,028  $0.10-24.88     $ 7.03
     Granted..........................  2,056,475  $6.88-20.06     $ 9.09
     Exercised........................   (236,600) $0.10-13.88     $ 5.21
     Surrendered...................... (1,252,244) $0.13-24.88     $11.98
                                       ----------
   Options outstanding, June 30,
    2000..............................  4,170,659  $0.10-24.88     $ 6.66
                                       ==========
</TABLE>

                                     F-14
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is additional information relating to options outstanding at
June 30, 2000:

<TABLE>
<CAPTION>
                                                           Options
                          Options Outstanding            Exercisable
                  ----------------------------------- ------------------
                            Weighted-Average Weighted           Weighted
                               Remaining     Average            Average
    Range of      Number of Contractual Life Exercise Number of Exercise
 Exercise Price    Options     of Options     Price    Options   Price
 --------------   --------- ---------------- -------- --------- --------
<S>               <C>       <C>              <C>      <C>       <C>
$ 0.10 to $ 0.30  1,360,167       4.78        $ 0.10  1,360,167  $ 0.10
$ 0.60 to $ 0.90     31,575       6.44        $ 0.69     31,575  $ 0.69
$ 2.00 to $ 5.58     82,753       7.22        $ 3.38     62,680  $ 3.12
$ 6.00 to $ 9.88  1,814,174       9.23        $ 8.10    137,409  $ 8.72
$10.00 to $13.88    466,363       8.89        $11.85     63,588  $12.21
$14.75 to $24.88    415,627       8.80        $17.18     93,532  $16.84
                  ---------                           ---------
$ 0.10 to $24.88  4,170,659       7.64        $ 6.66  1,748,951  $ 2.24
                  =========                           =========
</TABLE>

   Of the options exercised, 72,988 shares remain unvested at June 30, 2000
and may be repurchased by the Company at the option's exercise price and
recorded as treasury stock should vesting requirements not be fulfilled. At
June 30, 2000, 4,466,402 shares of common stock were reserved for exercise of
stock options. As part of the Company's 1997 Plan, the number of shares of
common stock available for issuance automatically increases on July 1 each
calendar year beginning July 1, 1998 and ending July 1, 2000, by an amount
equal to five percent (5%) of the shares of common stock and common stock
equivalents outstanding on the trading day immediately preceding July 1, with
a maximum annual increase of 1,000,000 shares.

   Pro forma compensation expense regarding net income and earnings per share
is required by Statement 123, which also requires the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995, under the fair value method prescribed by
Statement 123. The pro forma net income information required by Statement 123
is not likely to be representative of the effects on reported net income for
future years. During fiscal 1998, 1999 and 2000, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-
pricing model, with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                         Employee Stock      Employee Stock
                                             Options          Purchase Plan
                                        -------------------  ----------------
                                        1998   1999   2000    1999     2000
                                        -----  -----  -----  -------  -------
   <S>                                  <C>    <C>    <C>    <C>      <C>
   Risk free interest rate.............  5.80%  5.12%  6.22%    4.89%    6.12%
   Dividend yield......................  0.00%  0.00%  0.00%    0.00%    0.00%
   Volatility factor................... 0.582  0.945  1.414    0.945    1.414
   Weighted average expected life of
    options (in years).................     4      4      4      0.5      0.5
</TABLE>

   For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods and stock purchased
under the 1997 Employee Stock Purchase Plan is amortized over the six month
purchase period. The Company's pro forma information follows (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                         1998   1999    2000
                                                        ------ ------ --------
   <S>                                                  <C>    <C>    <C>
   Pro forma stock based compensation expense.......... $  387 $3,220 $  3,362
   Pro forma net income (loss)......................... $2,335 $  358 $(32,221)
   Pro forma basic earnings (loss) per share........... $ 0.22 $ 0.03 $  (2.06)
   Pro forma diluted earnings (loss) per share......... $ 0.16 $ 0.02 $  (1.95)
   Weighted average grant date fair value.............. $ 4.39 $ 9.43 $   7.83
</TABLE>

                                     F-15
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Preferred Stock

   On September 25, 1997, the effective date of the Company's initial public
offering, all of the outstanding preferred stock was converted into 9,713,132
shares of common stock. In addition, the Company's Certificate of
Incorporation was amended authorizing the Board of Directors to issue
preferred stock ("new preferred stock") in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders. At June 30, 2000, the Company had not
issued any new preferred stock.

8. Earnings Per Share

   The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                                          ---------------------
                                                           1998   1999    2000
                                                          ------ ------- ------
<S>                                                       <C>    <C>     <C>
Numerator:
    Income from continuing operations.................... $2,722 $10,333 $4,120
                                                          ====== ======= ======
Denominator:
  Denominator for basic earnings per share--weighted
   average shares........................................ 10,468  13,960 15,648
  Effect of dilutive securities:
    Convertible preferred shares.........................  2,315      --     --
    Employee stock options...............................  1,958   2,038  1,974
                                                          ------ ------- ------
    Potentially dilutive common shares...................  4,273   2,038  1,974
                                                          ------ ------- ------
  Denominator for diluted earnings per share--adjusted
   weighted average shares and assumed conversions....... 14,741  15,998 17,622
                                                          ====== ======= ======
Basic earnings per share from continuing operations...... $ 0.26 $  0.74 $ 0.26
                                                          ====== ======= ======
Diluted earnings per share from continuing operations.... $ 0.18 $  0.65 $ 0.23
                                                          ====== ======= ======
</TABLE>

   At June 30, 2000, 1999 and 1998, approximately 699,000, 142,000 and 24,000
shares, respectively, were not included in the diluted earnings per share
calculations since the shares are antidilutive.

9. Business Combinations and Divestitures

 Investment in Pervasive Software Co., Ltd.

   In May 1995, the Company acquired a 65.5% controlling interest in a newly
formed entity, Pervasive Software Co., Ltd. ("Pervasive Japan", formerly known
as Btrieve Technologies Japan, Ltd.). Pervasive Japan was formed for the
purpose of localization, support and marketing in Japan of the Company's
database products.

   On February 10, 1998, the Company acquired an additional 15% ownership
interest in Pervasive Japan by acquiring stock held by minority shareholders
for approximately $266,000 in cash, which approximated its proportionate share
of book value. The acquisition was accounted for under the purchase method. On
October 29, 1999, the Company acquired an additional 19.5% ownership interest
in Pervasive Software Japan by purchasing stock held by a minority shareholder
for $750,000 in cash. The acquisition was also accounted for under the
purchase method and, accordingly the excess of purchase price over the fair
market value of net assets acquired of $160,000 was recorded as goodwill and
will be amortized over a ten year period. After the acquisition, the Company
holds 100% of the outstanding stock of Pervasive Japan.

                                     F-16
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Smithware, Inc.

   On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware") a
developer of database development and reporting components for Pervasive
products. The Company acquired Smithware for approximately $390,000 consisting
of $170,000 in cash, 23,752 shares of common stock of the Company valued at
$160,000 and acquisition costs of $60,000, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future. The Company issued 33,251 shares of common stock valued at
$326,000 and 14,251 shares of common stock valued at $167,000 relating to
milestones achieved in fiscal 1999 and 2000 respectively. In conjunction with
the acquisition, the Company repaid Smithware's outstanding debts of
approximately $110,000. The acquisition has been accounted for under the
purchase method and, accordingly, the operating results of Smithware have been
included in the consolidated financial statements from the date of the
acquisition. The acquisition did not have a material effect on operations. The
excess of purchase price over the fair value of the net assets of $951,000
(including increases related to milestone achievements in 1999 and 2000), was
recorded as goodwill and is being amortized over a ten year period. As of June
30, 2000, accumulated amortization of goodwill related to the Smithware
acquisition was approximately $172,000.

 EveryWare Development Inc.

   On November 12, 1998, Pervasive acquired for cash approximately 93% of the
outstanding common shares of EveryWare Development Inc. ("EveryWare"), a Web
development tool and Web-application server provider based in Toronto, Canada.
Pervasive acquired the remaining outstanding shares of EveryWare in December
1998. The total value of the acquisition, including assumption of outstanding
options and transaction costs, was approximately $11.8 million. In addition,
the Company made advances to EveryWare totalling $705,000 in October and
November 1998.

   The acquisition was accounted for under the purchase method and,
accordingly, the operating results of EveryWare have been included in the
consolidated financial statements since the date of acquisition. The net
assets acquired were recorded at their estimated fair values at the effective
date of the acquisition. The following table presents the allocation of the
purchase price (in thousands):

<TABLE>
   <S>                                                                <C>
   Software technology............................................... $ 1,200
   Purchased research and development................................   1,800
   Excess of cost over fair value of net assets acquired.............   9,761
   Deferred tax adjustment related to intangible assets acquired.....    (600)
   Net fair value of tangible assets acquired and liabilities
    assumed..........................................................    (351)
                                                                      -------
                                                                      $11,810
                                                                      =======
</TABLE>

   During June 2000, the Company adopted a formal plan to sell the Tango
product line acquired in the EveryWare acquisition. Accordingly, the Tango
product line is accounted for and presented as a discontinued operation in the
accompanying consolidated financial statements.

                                     F-17
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Tango revenues were $1.4 million and $3.9 million for 1999 and 2000
respectively. The net assets related to the Tango product line included in the
consolidated balance sheets as of June 30, 1999 and 2000 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
                                                              1999     2000
                                                             -------  -------
   <S>                                                       <C>      <C>
   Accounts receivable and other current assets............. $   341  $   348
   Property and equipment, net..............................   1,449       95
   Excess of cost of our fair value of net assets acquired
    and other intangibles...................................  10,411       --
   Accounts payable and other current liabilities...........    (712)    (557)
   Other liabilities........................................    (565)  (6,240)
                                                             -------  -------
   Net assets (liabilities) of discontinued operations...... $10,924  $(6,354)
                                                             =======  =======
</TABLE>

   Included in the $17.0 million loss on disposal in the accompanying
statement of operations for fiscal 2000 is a charge of $10.4 million related
to the write-down of certain long-lived assets (primarily purchased
intangibles and goodwill related to the Tango product line), termination
benefits of $0.7 million related to Tango employees and estimated operating
costs for Tango in fiscal 2001 of $5.9 million. The long-lived assets were
deemed to be impaired by the decision to discontinue sales of the Tango
product line and therefore, these assets were written down to their fair
market value less cost to sell. The termination benefits were paid to 54 Tango
employees in July and August 2000.

10. Commitments and Contingencies

   The Company leases its headquarters and remote office space and, in some
cases, is obligated for its proportionate share of utilities and other defined
operating expenses of the related building. Office rent expense for domestic
and international offices for the years ended June 30, 1998, 1999 and 2000 was
approximately $1,204,000, $2,359,000, and $3,215,000, respectively.

   The Company moved its headquarters to a new facility of approximately
91,000 square feet in the second quarter of fiscal 1999. The new facility
provides additional space and expansion options and renewal options to
accommodate future growth at rental rates per square foot consistent with the
previous facility. Future minimum lease payments at June 30, 2000, under the
operating leases for worldwide office space, net of minimum sublease rent
payments of approximately $53,000 through December 2000, are as follows (in
thousands):

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $ 2,548
   2002.................................................................   1,982
   2003.................................................................   1,958
   2004.................................................................   1,927
   2005.................................................................   2,031
   Thereafter...........................................................   6,321
                                                                         -------
                                                                         $16,767
                                                                         =======
</TABLE>

11. General Litigation

   Complaints were filed in November and December 1999 in the U.S. District
Court for the Western District of Texas against the Company and certain of its
officers and directors. The cases were consolidated into a class action suit
filed in January 2000. The class action complaint alleged that the Company and
certain of its officers and directors violated federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making
false statements and failing to disclose material information to artificially
inflate the price of the

                                     F-18
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's common stock during the Class Period of July 15, 1999 to October 21,
1999. The Company and the other defendants filed motions to dismiss the suit
on February 7, 2000. On July 20, 2000, the U.S. District Court entered its
order dismissing plaintiffs' claims against the Company and the other
defendants. The case was dismissed without prejudice. The plaintiffs have the
right to file an amended complaint.

   The Company is also involved in various legal proceedings that have arisen
in the normal course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them to have a
material adverse effect on the consolidated financial position and results of
operations.

12. Segments of Business and Geographic Area Information

   The Company is engaged in the design, development and marketing of database
and information management software for Web-based and client/server
applications. The Company considers its business activities to constitute a
single segment of business.

   A summary of the Company's operations by geographic area follows (in
thousands):

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                     ------------------------
                                                      1998     1999    2000
                                                     -------  ------- -------
   <S>                                               <C>      <C>     <C>
   Revenue:
     North America.................................. $22,476  $32,809 $26,515
     Europe (all originating from U.S.).............   9,293   15,883  15,644
     Japan..........................................   3,877    7,890   8,679
     Rest of World (all originating from U.S.)......   1,054    1,456   1,240
                                                     -------  ------- -------
       Total........................................ $36,700  $58,038 $52,078
                                                     =======  ======= =======
   Operating income (loss)(A):
     North America.................................. $  (711) $ 4,814 $(1,987)
     Europe (inclusive of revenue originating from
      U.S.).........................................   3,765    8,383   6,666
     Japan..........................................     290      799    (368)
                                                     -------  ------- -------
       Total........................................ $ 3,344  $13,996 $ 4,311
                                                     =======  ======= =======
   Identifiable assets:
     North America.................................. $29,253  $66,889 $41,738
     Europe.........................................     620    1,362   1,753
     Japan..........................................   2,770    4,622   3,757
                                                     -------  ------- -------
       Total........................................ $32,643  $72,873 $47,248
                                                     =======  ======= =======
</TABLE>
(A) Operating income for Europe does not include any allocation of marketing,
    product development, technical support and administrative costs incurred
    in the United States.

13. Foreign Currency Swap Agreement

   The Company has historically entered into foreign currency swap contracts
to minimize foreign exchange exposure related to yen-denominated intercompany
transactions. At June 30, 1999 and 2000, the Company had no foreign currency
contracts outstanding. At June 30, 1998, the Company had two offsetting
foreign currency contracts outstanding with a notional amount of approximately
$224,000 and maturing in March 1999. Gains and losses on currency swaps were
not material to the consolidated financial statements as of June 30, 1998,
1999 and 2000.

                                     F-19
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14. Statements of Cash Flows

   The increase in current assets from continuing operations reflected in the
consolidated statements of cash flows is comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                      Year ended June 30,
                                                    -------------------------
                                                     1998     1999     2000
                                                    -------  -------  -------
   <S>                                              <C>      <C>      <C>
   Decrease (increase) in trade accounts
    receivable..................................... $(2,550) $(3,806) $ 3,013
   Decrease (increase) in inventory................    (234)      93      (97)
   Increase in prepaid expenses and other current
    assets.........................................    (818)  (1,399)  (2,394)
                                                    -------  -------  -------
                                                    $(3,602) $(5,112) $   522
                                                    =======  =======  =======
</TABLE>

   The increase in accounts payable and accrued liabilities from continuing
operations reflected in the consolidated statements of cash flows is comprised
of the following (in thousands):

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                       ----------------------
                                                        1998   1999    2000
                                                       ------ ------  -------
   <S>                                                 <C>    <C>     <C>
   Increase (decrease) in trade accounts payable...... $  289 $1,117  $(1,086)
   Increase (decrease) in accrued payroll and payroll
    related costs.....................................    362    (71)     408
   Increase (decrease) in income taxes
    refundable/payable................................    906   (930)  (2,701)
   Increase (decrease) in other accrued expenses......    460    761     (366)
                                                       ------ ------  -------
                                                       $2,017 $  877  $(3,745)
                                                       ====== ======  =======
   Supplemental disclosures:
     Interest paid during the year.................... $   -- $   --  $    --
                                                       ====== ======  =======
     Income taxes paid (refunds received) during the
      year:
       Domestic....................................... $  426 $1,185  $  (564)
                                                       ====== ======  =======
       Foreign........................................ $  271 $  793  $   800
                                                       ====== ======  =======
     Noncash activities:
       Issuance of common stock and options in
        purchase of business.......................... $  160 $  595  $   167
                                                       ====== ======  =======
       Issuance of common stock under employee stock
        purchase plan................................. $  370 $  487  $   757
                                                       ====== ======  =======
</TABLE>

15. Subsequent Event (Unaudited)

   The Company has a binding commitment for a $10.0 million revolving line of
credit with a bank. Borrowings under such line would be collateralized by
cash, cash equivalents or marketable securities and would bear interest at
LIBOR plus 50 basis points. The revolving line of credit, when finalized, will
expire on February 12, 2001.

                                     F-20