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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, 2007

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 incorporation or organization) |  | (I.R.S. Employer Identification Number)



12365 Riata Trace
Parkway, Bldg. B

Austin, Texas 78727

(Address of principal executive offices) (Zip code)



---



(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
ü No

(2)        Yes ü 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  þ



Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No þ



Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No þ



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes þ  No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ̈No þ



As of December 31, 2006 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $47,740,399. 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 August 31, 2007 there were 20,961,417 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 13, 2007.



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PERVASIVE SOFTWARE INC.

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED

JUNE 30, 2007



TABLE OF CONTENTS



|                                                                                                                          |  |   
|------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I                                                                                                                    |  | 1 
|Item 1.      Business                                                                                                     |  | 1 
|Item 1A.  Risk Factors                                                                                                    |  | 13
|Item 1B.  Unresolved Staff Comments                                                                                       |  | 24
|Item 2.      Properties                                                                                                   |  | 24
|Item 3.      Legal Proceedings                                                                                            |  | 24
|Item 4.      Submission of Matters to a Vote of the Security Holders                                                      |  | 24
|                                                                                                                          | 
|PART II                                                                                                                   |  | 25
|Item 5.      Markets for Registrants Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities |  | 25
|Item 6.      Selected Consolidated Financial Data                                                                         |  | 26
|Item 7.      Managements Discussion and Analysis of Financial Condition and Results ofOperations                         |  | 27
|Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 36
|Item 8.      Consolidated Financial Statements and Supplementary Data                                                     |  | 36
|Item 9.      Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure                          |  | 36
|Item 9A.  Controls and Procedures                                                                                         |  | 36
|Item 9B.  Other Information                                                                                               |  | 37
|                                                                                                                          | 
|PART III                                                                                                                  |  | 38
|Item 10.   Directors, Executive Officers and Corporate Governance                                                         |  | 38
|Item 11.   Executive Compensation                                                                                         |  | 39
|Item 12.   Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters                  |  | 39
|Item 13.   Certain Relationships and Related Transactions, and Director Independence                                      |  | 39
|Item 14.   Principal Accountant Fees and Services                                                                         |  | 39
|                                                                                                                          | 
|PART IV                                                                                                                   |  | 40
|Item 15.   Exhibits, Financial Statements Schedules                                                                       |  | 40
|                                                                                                                          | 
|SIGNATURES                                                                                                                |  | 42



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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 (NASDAQ: PVSW) provides embeddable data management and integration software that helps companies grow and extend the value of their
data investments. Thousands of businesses worldwide rely on our solutions to help manage, integrate, analyze and secure their critical data. Our data management and integration product lines are designed specifically for small to mid-sized
businesses and departments of large enterprises where high performance, flexibility, rapid deployment and low total cost of ownership (TCO) are paramount. In addition, significant portions of our product line are embeddable into commercial
applications for sale predominantly to small to mid-sized enterprises (SMEs) through a well-developed channel of independent software vendors (ISVs), value-added resellers (VARs) and system integrators.



Our flagship Pervasive
PSQL® database, offering unparalleled data management technology combined with very low TCO, has millions of server seats licensed since the inception of Pervasive Software Inc. in 1994.
The full data management product line also includes specific solutions for data movement and synchronization, and addresses security challenges related to data integrity, accountability, continuity and availability throughout the data life cycle.
The product line is designed for integration by ISVs into client/server, Web and mobile applications which are sold predominantly to SMEs and other businesses having little to no information technology (IT) infrastructure, and requiring self-tuning,
low-administration products.



Our data and application
integration solutions feature a comprehensive set of visual design tools to rapidly build and test integration processes, regardless of size and complexity, across hundreds of data formats and applications within and outside of the enterprise. The
Pervasive integration product line is designed to grow and scale for the diverse data and application integration needs of small to mid-sized businesses and departments of large enterprises. Our focus on rapid implementation and ease of use helps
reduce the complexity, costs and risks associated with traditional labor-intensive integration methods.



Our strength is evidenced by the size and diversity of our customer base, serving tens of thousands of customers in virtually every industry and market
around the world. We sell products in more than 150 countries through direct sales and channel distribution. Our large customer base includes a distribution channel of ISVs, developers, VARs, systems integrators and partners who have built or
deployed applications on top of our data management and data integration platforms as well as a large customer base of end users for our integration products and services. Founded in 1994, Pervasive is headquartered in Austin, Texas, with
international offices in Brussels; Frankfurt; London; and Paris; and a joint venture in Japan. Our website address is www.pervasive.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments to those reports, are available free of charge through our website, http://www.pervasive.com, as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (SEC). Additionally, you
may read and copy materials that we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.



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Market Opportunity



Over the past 20 years, businesses of all sizes have invested billions of dollars in application software that enabled them to automate and simplify their
business processes. As the sales and implementation of these application packages proliferated since the early 1990s, organizations have faced increasing data and application infrastructure challenges and an entire software market segment emerged to
address these challenges. The growth of the infrastructure software market in the United States, we believe, can primarily be traced to the demand for technologies that extend the use of established systems, enable the rapid deployment of new
applications, and improve the ability to collaborate and communicate with customers and suppliers.



At the same time, we believe that the software markets as a whole are going through a maturation and commoditization phase. The emergence of Linux and
other open source software solutions is testament to this trend. As markets mature and commoditize, having a value orientationdelivering the highest performance with the lowest TCObecomes increasingly critical, particularly
when serving SMEs. We believe infrastructure software will be a key ingredient for small to mid-sized businesses that seek to integrate and streamline their back-end systems and eliminate delays in the management and execution of critical processes.
Infrastructure software includes, among other things, application development tools, integration tools and solutions, business intelligence, database, and security solutions.



We believe that maturation and commoditization trends in the software market, trends in the SME market, and trends in the
data and application integration market will favor Pervasive. We believe that the market for data infrastructure software, in particular, is experiencing significant market disruption due to the high cost of many competing, more labor-intensive
solutions. We further believe that in maturing and cost-sensitive markets, value leaders tend to prevail. Pervasive, with its strengths in high-performance, low-cost data management and integration solutions, is well-positioned to benefit from the
trends in these markets.



The Pervasive Strategy



Our goal is to be the global value leader in embeddable data management and
integration software, enabling businesses to capitalize on their data investments, while leveraging the inevitable transition from high cost to high value. Pervasives family of low-cost, high performance data infrastructure products, combined
with a well-established channel, positions us to expand our role in one of the most dynamic and challenging IT markets in recent memory. Key elements of our strategy are:



Leverage our Core Competencies in Data Infrastructure.    We have excelled in simplifying
the complexity associated with data management for thousands of client/server applications, representing nearly every industry in every major region of the world. Extensive communication with a diverse set of customers enables us to understand their
needs and prioritize the requirements for future product development. This includes identifying needs relevant to a particular horizontal or vertical market. Due to our strength in high-volume transaction markets including Accounting, Healthcare,
Banking and Financial Services, and Retail Point-of-Sale, we intend to leverage our understanding of, as well as our success in, these markets for new business development.



Our low-TCO database is widely installed, with millions of server seats licensed since the inception of Pervasive Software
Inc. in 1994. Many of these seats are deployed in SME organizations that have not yet adopted the latest generation of our database products. Therefore, we believe we have an opportunity in upgrading these seats to our current or next-generation
data management products. We plan to reach these customers through our well-developed channel of ISVs, VARs, systems integrators and consultants and continue to seek their input to guide our product development activities. We intend to conduct joint
marketing programs with our channel partners and customers encouraging upgrades to recent versions of our database, upgrades of additional user counts, upgrades to new or additional platforms, as well as upgrades of the ISVs applications
themselves.



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Our most-recent version, Pervasive PSQL v9, was
released in March 2005, and incorporates many of the most-requested customer features and benefits, as well as a boost in SQL performance, providing opportunities for upgrades and competitive wins in the marketplace. Our next major release,
Pervasive PSQL Summit v10, which is planned for release in early fiscal year 2008, will deliver, as always, improved performance and increased simplicity of development, deployment and ease of use. In addition, this release will feature
support for the Microsoft® Windows Vista desktop operating system and provide the foundation for a future update which will
support the next Microsoft server operating system, Windows Server® 2008.



Our ongoing and past investments in training and educating our customers worldwide, our long-term relationships with ISVs and VARs and our success in
encouraging them to embed our products into their applications have created a competitive advantage in the marketplace. We intend to continue to build customer loyalty by providing significant revenue opportunities, meaningful certification programs
and other offerings via our enhanced marketing, training, consulting and lead-sharing programs, as well as by ensuring customer satisfaction through the delivery of high-quality products and support programs.



Grow our Integration Product and Services
Revenues.    We continue to deliver our suite of integration products to our existing channel of ISV customers, and new ISV customers, to speed and simplify the movement of data in the field when they win
competitive deals, and to enable them to pre-wire their products with embedded integration to interoperate with adjacent business applications. ISVs, including Software-as-a-Service vendors, CRM vendors and packaged software vendors, have two
critical problemsonce they sell a new customer on their solution, they need to help their customers migrate and integrate legacy data to the new application. Today, customers expect migration and integration to be included in the solution.
Combining our deep knowledge and more than 20 years of migration and integration expertise, we provide easy-to-use, cost-effective migration and integration technology, services, training and partner programs. These programs help ISVs,
Software-as-a-Service (SaaS) vendors and systems integrators transform their application into integration-ready solutions that are scalable from one-time data migration to ongoing application integration within and beyond organizational
boundaries.



We intend to continue investing in product
development, marketing and sales activities focused on enhancing and leveraging our integration product line through our well-developed, existing channel of ISVs, as well as new ISVs, Software-as-a-Service vendors and systems integrators. Given the
sales cycles for selling to an ISV with perhaps thousands of end user customers and given the development processes and schedules of our ISV customers, we see this as our longest-term investment in revenue opportunities associated with our
integration products solutions.



Our integration product
revenues are generated predominantly in North America. However, we continue to market our expanding integration product line to our customer base across Europe. Further, we have recently introduced our integration product line in China, Japan, Korea
and Southeast Asia through master distribution agreements with partners to cover the marketing, sales and support of our integration products. International sales have typically represented less than 10% of integration product revenues, compared to
45% for our embedded database business, and we are focused on opportunities in new and existing international markets in fiscal year 2008.



Pursue Growth through Innovation of Complementary Products and Services.    We will continue to invest in innovation by
allocating dedicated funds for research focused on new ways to serve our existing customers and attract new customers.



Our innovation efforts in fiscal year 2007 resulted in the introduction of three new product and service offerings:



| |  |  | Pervasive DataToolsdownloadable,
subscription-based, functional subsets of our Pervasive Data Integrator product,
| | - |  | --------------------------------------------------------------------------------------------------------------------



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| |  |  | Pervasive DataSolutionssubscription-based, integration as a service delivered initially on-premises and ultimately as a multi-tenant service hosted by Pervasive and potentially by our ISV customers, and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pervasive DataRushpresently in beta,
our development framework designed to enable software developers to capture the parallel processing capabilities of multi-core technologies for data-intensive applications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will continue to build our Pervasive DataTools, Pervasive DataSolutions
and Pervasive DataRush businesses in fiscal year 2008, as well as continue to invest in additional offerings to serve our existing customers and attract new customers.



Pursue Growth by Acquisition of Complementary Businesses.Where we are confident that we can
increase shareholder value, we will seek growth opportunities for our business via the acquisition of complementary companies and technologies. We consider complementary businesses to be those involved with data infrastructure software, with a value
orientation to their product offerings and with an existing partner channel or the capability of developing a partner channel. We would target the acquisition of relatively mature and stable small to mid-sized businesses through transactions with a
reasonable probability of being accretive to earnings within the first year of acquisition. Unlike certain of our competitors, we will not seek to acquire application providers, as doing so could cause us to be competitive with large portions of our
very important partner channel.



Remain Focused on
Profitability.Since March 2001, we have reported twenty-six consecutive quarters of profitability. Our past profitability is a result of our sharp focus on our core data management and data integration businesses and
prudent expense management. Our performance was achieved in the midst of a very difficult economic environment and structural change in the software industry. We remain focused on profitability through our management of expenses, increasing
marketing and sales productivity around the globe and as a result of our next-generation product releases and product line expansion anticipated in fiscal year 2008 and beyond.



Use of Cash.    We have meaningful cash resources relative to the size of our business and
have been successful in generating positive cash flow in recent years. Continued positive cash flow generation coupled with an absence of suitable acquisition targets would cause us to continue to be active with our Share Repurchase Program. In
fiscal year 2006 we acquired approximately 0.8 million shares of our stock on the open market at a total cost of approximately $3.2 million. In fiscal year 2007 we acquired approximately 2.7 million shares of our stock on the open market
at a total cost of approximately $10.8 million, and we began the new fiscal year with $9.2 million of authorized repurchase funds remaining under our recently Board-approved $10.0 million repurchase program.



Products



Our software products offer customers a proven, cost-effective way to better manage, integrate, secure and analyze their
data. Delivered both directly and through ISVs, VARs, systems integrators and other vendors, our products are designed to provide solid business value while reducing the time, complexity and cost associated with data infrastructure projects. Our
focus on easily embedded technology for solutions that provide low TCO reflects our belief in the strategic importance of this value proposition for our partners and customers, where high performance, flexibility for growth, and time to market are
paramount.



Data Management Product Line



We offer a wide range of products for secure data
management that deliver faster return on investment (ROI), greater business flexibility, enhanced revenue opportunities and proven accountability for data infrastructure investments at a lower TCO.



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Pervasive PSQL®, our core database product offering, combines the high performance associated with enterprise-class databases with numerous low-maintenance features and is ideally suited for client/server, standalone or hosted
applications deployed on a variety of the most popular operating systems and access methods (.NET, Java, C#, etc.)



Our offerings allow a broad range of customers to:



| |  |  | Build low-TCO applications for use in SME environments characterized by little to no IT infrastructure or in departments within large enterprises;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop, upgrade or migrate applications that support a broad range of operating systems, including Windows, Linux and NetWare; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Embed our database inside their commercial or internally developed application, permitting development of a tightly integrated application.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



Our most-recent version, Pervasive PSQL v9, was released in March 2005, and incorporates many of the most-requested customer features and benefits, as well as a boost in SQL performance, providing opportunities for
upgrades and competitive wins in the marketplace. Our next major release, Pervasive PSQL Summit v10, which is planned for release in early fiscal year 2008, will deliver, as always,
improved performance and increased simplicity of development, deployment and ease of use. In addition, this release will feature support for the Microsoft® Windows Vista desktop operating system and provide the foundation for a future update which will support the next Microsoft server operating system, Windows Server® 2008.



Pervasive DataExchangeReal-Time Backup Edition, our core replication offering, features targeted solutions to data movement and synchronization
problems like maintaining an off-site warm backup, driving transactional data into a data portal, and connecting remote databases. Pervasive DataExchange solutions feature a combination of product and services customized for the business problem to
be solved:



| |  |  | Data high availabilityprovides a real-time backup of data to a secondary local or remote server for reliable protection and availability of application data;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data continuityaugments end-of-day tape backups by maintaining an up-to-date warm standby at an off-site location; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Data portalbridges the gap between existing transactional systems and the Web portal or data warehouse, allowing system access for non-transactional
activities, such as query and analysis, without disrupting, modifying or taxing the performance of the transactional system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pervasive Backup Agentis
designed to complement existing, traditional weekly or nightly backup solutions. Pervasive Backup Agent helps provide improved integrity and reliability to traditional backups by allowing the Pervasive PSQL database to be in use and operational
while buffering all changes to the database while it is accessed by third-party backup software. This allows the backup software to complete a full Point-in-Time image of the database while avoiding file access issues associated with users
interacting with the system while files are being modified. When installed directly onto a server along with Pervasive PSQL, the product requires no configuration settings and no database administrator maintenance. Pervasive Backup Agent can be
integrated into existing backup processes and can run in conjunction with most complementary third-party backup products.



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Pervasive AuditMaster®, our core security product offering, monitors and reports activity occurring in a Pervasive PSQL database, leveraging deep-level capture, report and alert technology to enable monitoring of
mission-critical data without the high costs of application redevelopment and deployment, training, or ongoing maintenance. This technology is particularly relevant for users needing compliance, monitoring and notification of personal data or
information. Target markets include accounting and healthcare, both of which continue to deal with increased regulatory requirements brought about by the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA).
AuditMaster provides data access accountability by means of three modules:



| |  |  | CaptureThe Capture module is an easily installed database plug-in. It provides a real-time monitoring Capture agent that records every event in the database
in a detailed trail. It is installed at the database level, so when the database is running, AuditMaster captures and records to a secure log record of events in the database;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ReportOnce the Capture module establishes the audit trail, the Report module allows for the activity log to be queried enabling a security administrator to
perform audits on the activity within the application by verifying past activities or analyzing patterns and trends; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AlertWhile Reports are historical in nature, the Alert module offers proactive surveillance of future data activity. Once defined in AuditMaster, alert
triggers wait for specified events of interest based on the entire range of user actions, including creating, updating and deleting data, or even simply reading it. When a watched-for event occurs, AuditMaster immediately triggers an Alert, which
can take the form of an email to one or more recipients, a call to another application, or the start-up of a new application.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Data and Application Integration Product Line



Our integration and data quality analysis product line augments our low-TCO data management software offerings. Our data integration products have been
developed on a single, open integration platform designed to grow and scale for diverse integration projects, providing what we believe is the industrys best combination of performance, flexibility and TCO.



Our integration products reduce the complexity, costs and risks associated
with traditional labor-intensive integration methods by providing a versatile and configurable integration architecture for rapid implementation and ease of use. This flexibility enables mid-sized businesses and departments of large enterprises to
create and fine-tune their solutions for frequently changing business needs and requirements. Our integration products, which feature a comprehensive set of easy-to-use visual design tools to rapidly build and test integration processes, regardless
of size and complexity, across hundreds of data formats and applications within and outside of the enterprise, include:



Pervasive Data Integrator is
available in Universal, Professional, Standard and SaaS editions. Pervasive Data Integrator aggregates and integrates data quickly and cost-effectively for legacy migrations as well as high volume, continuous processing, targeting the needs in the
traditional Extract, Transform and Load, or ETL market as a feed for data warehouses and ultimately business intelligence tools. The product also is ideal for integrating multiple business applications within or across organizations for
real-time, event-driven integration closely aligned with key business processes. Pervasives technology and business model supports low-cost adoption by non-programmers for small data volumes all the way to complex, high-volume multi-processor
implementations that handle millions of transactions. Pervasive Data Integrator provides a range of connectivity to both data sources and targets, including all major databases, flat files and legacy formats as well as SaaS and on-premises
applications and formats including Salesforce, NetSuite, SAP, HIPAA, SWIFT, EDI, message queues (JMS and Websphere MQ) and enterprise service buses. The product is offered in both perpetual and monthly subscription-based licensing models.



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Pervasive Data Profiler reduces the complexities, risk, and expense associated with manually checking data, improving IT productivity, eliminating costly rework, and increasing ROI around applications and
business processes. It allows rapid assessment, profiling and validation of complete data sets rather than relying on sampling. Pervasive Data Profiler is fast and easy to deploy, and has an engine specifically designed for testing/auditing large
amounts of transactional data, creating positive effects on business processes, reducing expenses, and lessening risk to IT departments and their companies. Pervasive Data Profilers highly scalable, data-intensive throughput is built on the
Pervasive DataRush technology, designed to scale automatically to deliver parallel data processing on multi-core servers.



Data Profiler takes advantage of Pervasives data connectivity and integration capabilities, providing access for a variety of data source types,
including major databases, flat files, and legacy formats. Pervasive Data Profiler delivers actionable, at-a-glance charts backed by drill-down analysis with percentages of success rate and specific counts. This information enables our customers to
make faster, more accurate decisions.



Pervasive Integration Manageris a browser-based management console, providing single-point administration, performance monitoring, integration
engine deployment and job scheduling of integration processes running on remote integration engines. With the ability to remotely administer any number of integration points throughout the organization, customers can build out their integration
infrastructure as required, using a flexible and scalable architecture designed for easy manageability.



New Product Innovation



We are investing in innovation by allocating dedicated funds for research focused on new ways to serve our existing customers and attract new customers.
Innovation efforts are directed by our Chief Technology Officer and focused on the conceptual design and prototype development of extensions to existing products as well as new products and services. Our innovation efforts in fiscal year 2007
resulted in the introduction of three new product and service offerings: Pervasive DataTools, Pervasive DataSolutions and Pervasive DataRush.



Pervasive DataTools is our fast and powerful answer for all kinds of data challenges. Aggressively and conveniently priced via monthly subscriptions, these downloadable data tools put the power of 20+ years experience
directly in the hands of our customers. Pervasive DataTools represent specific functional and connector subsets of our Pervasive Data Integrator product, delivered via a fully automated website.



Pervasive
DataSolutions is our first step toward realizing the power of Integration-as-a-Service. We have formed a team focused on the delivery of highly targeted
application-specific solutions to provide customers and partners with data services-based integration that can be configured and deployed within hours. The first product delivered by this team is Pervasive DataSynch: Salesforce to QuickBooks Edition. Made available in June 2007 via salesforce.coms AppExchange website, Pervasive DataSynch QuickBooks Edition automatically synchronizes customer, product and order information
between Salesforce and QuickBooks. The QuickBooks edition of DataSynch is the first of many possible application-specific synchronization solutions to be provided by Pervasive and the first of many anticipated data services-based offerings, which
could range from data profiling to data auditing to any number of additional data services-based solutions from Pervasive.



Pervasive DataRush is our 100% Java development framework that allows software developers to quickly build highly parallel, data intensive applications that take full advantage of multicore, SMP platforms. Semiconductor
leaders such as Intel, AMD, Sun and IBM are delivering CPUs with an increasing number of cores on each chip. Today, consumers and businesses alike can purchase quad-core computers for what only a short time ago was the price of a single core
computer. However, for the full processing capacity of multi-core computers to be captured, software developers must change the way software applications are written. Pervasive DataRush is a development framework to allow software developers to help
close this hardwaresoftware technology gap. With Pervasive DataRush in beta, we are presently engaged with prospective lighthouse customers and partners to further define the full potential of this new product as well as the optimal
go-to-market strategies for execution in fiscal 2008.



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Please see Managements Discussion and Analysis of Financial Condition and Results of
OperationsResults of Operations elsewhere in this Report on Form 10-K for product line revenue information.



Sales and Marketing



Indirect Channel Sales and Channel Marketing



Many SME organizations with limited IT resources, as well as departments of larger enterprises, rely on our channel to help them develop, deploy, maintain
and integrate business-critical data and packaged and on-demand applications. Our products and marketing approach are specifically tailored to meet the needs of our channel partners and their customers. We believe our sharp focus on our customers
and their end-users 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.



Our channel sales and marketing organizations focus on our
worldwide channels by targeting software developers who build client/server, Web and mobile applications and the Web and systems integrators, consultants and value-added resellers (VARs) who sell to and implement the applications for end users. Our
product marketing organizations have primary responsibility for product direction and have developed a number of programs utilized by the sales organization to support our channel partners, such as our Original Equipment Manufacturer (OEM) program
for ISVs and partner programs for Web and systems integrators, consultants and VARs. These programs are worldwide in scope and capture leads from a variety of activities including direct response marketing and advertising, joint marketing and public
relations.



Our OEM program focuses on recruiting and retention
of independent software vendors worldwide who embed our products on an OEM basis. The OEM program is designed to build mutually beneficial strategic relationships between Pervasive and ISVs and generate 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 and
retain software developers and channel partners who develop applications that are designed to be deployed with shrink-wrap versions of our data management 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 client/server, Web and mobile applications based on our products. If the sales
volumes of these applications become sufficient, the sales group recruits these software developers into our OEM program.



Our international channel sales organizations utilize a channel of distribution partners and OEMs worldwide. The distribution partners implement sales and
marketing programs for a particular region, typically using our distributor or master distributor programs. In addition to managing these distributor relationships, the international sales groups recruit and support software developers and channel
partners with the same programs as the domestic sales groups. We currently have international offices located in Brussels, Frankfurt, London and Paris and a joint venture in Japan.



Direct Sales and Marketing



Unlike typical SME organizations, many mid-sized companies and larger enterprises have access to greater IT resources, and
therefore tend to rely less on third parties for packaged solutions. Our approach for reaching these prospective customers is based generally on a direct marketing and direct sales model.



Our direct marketing efforts are comprised largely of in-house direct email/mail campaigns, specifically targeting IT
departments and business managers as well as vertical marketing initiatives aimed at the Financial,



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Banking and Healthcare sectors. While our primary focus is on small to mid-sized enterprises and departments within larger businesses, our products often
scale to satisfy the needs of large enterprises resulting in direct sales to these organizations. The primary goal of these marketing campaigns is to direct potential customers back to our corporate Web site and have them download white papers,
strategic reports, and other general strategic marketing materials as well as trial versions of our software products, in particular, our integration products. Through our press and industry analyst relationships, the marketing team seeks industry
endorsements that drive target customer buying within the integration segment.



We employ a sales model that sells directly into enterprises at both the corporate and departmental level. Sales Executives are part of a well-defined and comprehensive sales process based upon a sales methodology
used by everyone in the sales organization that contains six stages from initial interest through evaluation and negotiation. The sales force is supported by customer relationship management system software (CRM) that supports the sales methodology,
combined with marketing automation and accounting software, as well as a staff of highly trained Sales Engineers who provide high-quality technical pre-sales support during the sales cycle.



Because of the small footprint of our software combined with its ease of use,
we enjoy the benefits of deploying a sales model that is primarily through a staff of Sales Executives. This model facilitates conducting the majority of our sales efforts via a telephone/Web-demonstration process composed of interviews with
potential customers to determine their interest level and needs, resulting in on-target product recommendations. As a result, a combination of customer-needs driven interactive demonstrations of our products using the Internet for presentation,
often with a specific problem from the customer, shown as a proof of concept, is produced. By using the Internet for delivering these proofs of concept and the interactive demonstrations, Pervasive is able to maintain a lower sales cost, which
ultimately translates into our ability to offer greater integration capabilities at an overall lower TCO.



Customer Service and Technical Support



We offer multiple levels of worldwide customer service, including technical support and product maintenance. First-level support responds to most customer inquiries that are routine in scope via telephone and email.
Second-level support responds to escalated technical issues and supports our large partners with dedicated technical expertise.



Our Customer Service and Support departments are committed to understanding the wide variety of business applications involving data management and
integration. In order to assist customers quickly and successfully, a great deal of domain knowledge must be acquired by each member of the team. Each technical support specialist must have a working knowledge of a broad range of databases,
applications, and development and operating environments, including UNIX, Linux, SQL queries, VB, Java, CRM and ERP interfaces, Web services and SOA, among many others. In addition, developer-level support ensures that developers can obtain
assistance from a team knowledgeable in the developers programming language and toolset of choice, resulting in a shortened time to market for the developers internal or commercial application.



Our Web site includes a comprehensive on-line support area that is monitored
and updated continually by the Customer Service department. With this extensive library of Web-based resources, customers have 24/7 access to the documentation, maintenance releases, FAQs, interactive tutorials and knowledge base they need to answer
their questions and resolve their problems quickly and easily. Customers may also submit an electronic support request form, via the Web site, to Customer Service inquiring about specific problems or requesting support for more detailed, particular
concerns.



Worldwide customer service is provided through our
corporate offices in Austin, Texas. International customer service is provided by our call center in Brussels, Belgium, and via our multi-lingual support Web site.



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Professional Services



The Professional Services Group (PSG) is focused primarily on accelerating and maximizing integration ROI for customers. This group, consisting of
Implementation Services and Training Services, has steadily built a record of success and fast deployment for clients.



In order to provide further evidence of the performance of our integration tools and applications, PSG can develop proofs of concept and benchmarks on a
sample of a customers integration project, or on other sample migration or integration processes. Through PSGs consultative experience, it can also suggest ways to improve and optimize throughput or system performance.



PSG works closely with clients to architect and build special applications
and/or functionality around the integration tools as needed to optimize project performance. PSG also works with clients to ensure that the integration tools are properly embedded and have full connectivity to other internal or external
applications.



The Implementation Services group in PSG is
available to assist customers, partners and sales prospects with benchmarking/proofs of concept, rapid, client-oriented deployment and implementation, or long-term consulting. Our team is composed of developers, product specialists, and business
analysts devoted to delivering customer and partner success.



The Training Services group in PSG provides multiple training options each month in Austin, Texas. These classes are open to all licensed users of the current version of our software. Users can take standard product training and follow-up
with focused workshop sessions. Additional consulting time can be scheduled after each session to augment course learning. The same courses and workshops are also available on-site at the customers location and via the Web.



PSG will also fulfill demand for fee-based consulting services from our
software developer customers and channel partners. These consulting services may include development services to migrate applications on competing databases to Pervasive PSQL, migrate existing applications to the Web, upgrade existing applications
to the latest Pervasive PSQL release, and optimize database functionality through performance testing, database schema design and review, and the delivery of services related to our DataExchange or AuditMaster offerings. 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.



Research and Development



We have made substantial investments in research and development through both internal development and technology acquisition. As of June 30, 2007,
we had 47 employees in research and development, in addition to 21 contract developers with a third-party development partner in India, and our research and development expenditures for fiscal year 2007 were $9.8 million. We will continue to invest
heavily in focused research and development resources to further our vision of the future of embedded data infrastructure software, enabling businesses to capitalize on their data investments, while accelerating the inevitable transition from high
cost to high value.



Our development efforts consist primarily
of driving significant levels of innovation into new and current product lines with primary goals being continuous improvement of the performance of existing product features, the addition of new differentiating product features to simplify
development with our products, deployment and use of our products, and the on-going investment in emerging platform opportunities.



Our research and development investments in fiscal 2008 are focused on the following:



| |  |  | Embedded database technologyWe continue to commit significant development resources to enhancing Pervasive PSQL with performance, features and functionality
required by SME customers
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | today and the channel of ISVs, VARs and consultants who serve them. In addition, our database development resources are focused on the delivery of product
support for the Microsoft Vista desktop operating system and the Microsoft Windows Server 2008 operating system.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data replication technologyWe continue to invest in data replication technology for deployment into customer environments where high availability and security
of data is a critical need. Pervasive DataExchange offers targeted solutions to data movement and synchronization requirements like maintaining an offsite warm backup, driving transactional data into a data portal and connecting remote databases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SecurityWe continue to invest in Pervasive AuditMaster, our core security offering, which monitors and reports all activity occurring in a Pervasive PSQL
database, leveraging deep-level capture, report and alert technology to enable monitoring of mission critical data without the high costs of application redevelopment and deployment, training, or on-going maintenance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Connectivity expansionWe continue to invest in our integration products so that they can connect a growing range of on-premises and Web-based applications,
enabling us to partner with application vendors and participate in market segments that are experiencing rapid growth.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Platform expansionOur integration products are deployable on a wide variety of industry-standard platforms such as UNIX (Sun Solaris, IBM-AIX and HP-UX),
Linux and the various Microsoft Windows platforms. Our goal is to offer the most easily deployed, and most scalable, single integration solution available in the market and extend our appeal to a broader range of ISVs, SaaS vendors and systems
integrators.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Integration embeddabilityWe continue to invest development resources in the further enhancement of our embeddable integration technology so that our customers
can rapidly embed robust data services within both traditional and SOA-style environments. These capabilities are essential for ISVs worldwide to help them to pre-wire competitive advantage into their applications to better fit within customer
infrastructure, vastly improving data and application integration capabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Application-specific integration solutionsWe continue to invest in the creation of additional application-specific, service-based integration solutions to
leverage recent investments in our Pervasive DataSynch: Salesforce to QuickBooks Edition product offering.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data servicesWe continue to invest in data services offerings, delivering data services on-demand in a fast, easy and affordable manner. Future data services
offerings may take the form of data auditing, data profiling or other data services to complement our recently released subscription-based data synchronization service, Pervasive DataSynch.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Parallel processing for multi-coreWe continue to invest resources in the further development of our Pervasive DataRush product. Our goal is to offer the most
scalable and easy-to-use Java software development framework for software developers to utilize in their creation of data-intensive applications that take full advantage of the parallel processing capabilities of emerging multi-core chip
technologies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New products and servicesWe continue to invest resources in the development of extensions to our existing products as well as the discovery of new products
and services to serve our existing customers and attract new customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Competition



We
encounter competition for our embedded database products primarily from large, public companies, including Microsoft, Oracle, 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 product. And, because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging
companies providing database products based on existing, new or open-source technologies.



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Open-source software, which is an emerging trend in the software marketplace, may impact our business as
interest, demand and use increases in the database segment and poses a challenge to our business model. Private company MySQL AB in particular has increased awareness for its product in the database segment. Firms adopting the open-source software
model typically provide customers software produced by loosely associated groups of unpaid programmers, make licenses available to end users at nominal cost, and earn revenue on complementary services and products, without having to bear the full
costs of research and development for the open-source software. To the extent competing open-source software products gain increasing market acceptance, sales of our products may decline, we may have to reduce prices we charge for our products, and
our revenue and operating margins may decline. Broad adoption of open source databases in the SME market could have a material adverse impact on our database business.



Software-as-a-Service (SaaS) vendors may 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.



The market for our integration products is highly competitive and subject to rapidly changing technology. We principally compete against
ETL (extract, transform and load) software vendors and data warehousing and application integration software providers. Such competitors include Ascential/IBM, Business Objects, Embarcadero, Informatica, and Information Builders. In addition, we
compete or may compete against database vendors that currently offer, or may develop, products with functionalities that compete with our solutions. These products typically operate specifically with these competitors proprietary databases.
Such competitors include IBM, Microsoft, Sybase and Oracle. Competition also comes in the form of custom code, where potential customers have sufficient internal technical resources to develop solutions in-house without the aid of our products or
those of our competitors.



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. Therefore, our
efforts to protect our intellectual property may not be adequate. 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.
Unauthorized parties may attempt to copy aspects of our products or to obtain and use information 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, such as in India, where we use third-party service providers, with laws that do not protect our proprietary rights to the same extent as the laws of the
United States.



Employees



As of June 30, 2007, Pervasive employed 178 full-time employees,
including 69 in sales and marketing, 47 in research and development, 31 in professional services, customer service and technical support, and 31 in general and administrative. We are not subject to any collective bargaining agreement, and we believe
that our relationships with our employees are good.



Facilities



Our leased headquarters facility in Austin, Texas,
consists of approximately 91,000 square feet, approximately 14,000 of which has been subleased to a third party. The facility provides additional space and expansion options and is leased through October 2011. We currently lease international
offices in Brussels, Frankfurt, London and Paris.



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ITEM 1A.    RISK FACTORS



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 at times in the past and may continue to vary significantly from quarter to quarter in the future due to a variety of factors. Many of these factors are outside our control. These factors
include:



| |  |  | fluctuations in demand for our products, upgrades to our products, or our services;
| | - |  | -----------------------------------------------------------------------------------



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



| |  |  | fluctuations in demand for our products due to the potential deteriorating economic conditions on our customer base;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | seasonality of purchases and the timing of product sales and shipments;
| | - |  | -----------------------------------------------------------------------



| |  |  | unexpected delays in introducing new products and services or improvements to existing products and services;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | new product releases, licensing models or pricing policies by our competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | acquisitions or mergers involving us, our competitors or customers;
| | - |  | -------------------------------------------------------------------



| |  |  | impact of changes to our product distribution strategy and pricing policies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | lack of order backlog;
| | - |  | ----------------------



| |  |  | loss of significant customer or distributor;
| | - |  | --------------------------------------------



| |  |  | changes in purchasing and/or payment practices by our distributors or other customers;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | a reduction in the number of independent software vendors, or ISVs who embed our products or value-added resellers, or VARs, who sell and deploy our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the mix of domestic and international sales;
| | - |  | -------------------------------------------------------



| |  |  | impact of changes to our geographic investment levels and business models;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in the cost of routine business activities;
| | - |  | ---------------------------------------------------



| |  |  | gains or losses associated with discontinued operations;
| | - |  | --------------------------------------------------------



| |  |  | changes in our business plan or strategy;
| | - |  | -----------------------------------------



| |  |  | impact of severance charges associated with departing employees;
| | - |  | ----------------------------------------------------------------



| |  |  | write-downs of the recorded book value of assets;
| | - |  | -------------------------------------------------



| |  |  | changes in generally accepted accounting principles in the United States; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | costs associated with the compliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
| | - |  | ---------------------------------------------------------------------------------------------------



We derive a significant portion of our revenues from relatively large
transactions. The sales cycles for these transactions tend to be longer than the sales cycles on smaller orders. This longer sales cycle for large transactions 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 transactions. A reduction in large transactions during any quarter could materially impact our revenues.



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Our revenue and profitability depend on the overall demand for our products and services, which in turn
depends on general economic and business conditions. The nature and extent of the effect of the current economic climate on our ability to sell our products and services is uncertain. A softening of demand for our products and services caused by
weakening of the economy may result in decreased revenues. There can be no assurance that we will be able to effectively promote revenue growth rates in all economic conditions.



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, modify 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.



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 quarter ending September 30. We believe that this pattern may continue. In addition, 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 Generally 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.



Our Performance Depends on Market Acceptance of Pervasive.SQL



We derive a substantial portion of our revenues from the license of our Pervasive PSQL® products. Continued market acceptance of Pervasive PSQL may be influenced heavily by factors outside of our control such as new product offerings or promotions by competitors, mergers and
acquisitions of customers and competitors, the product development and deployment cycles of developers and resellers who embed or bundle our products into packaged software applications and demand for applications of the type built on our products.
Market acceptance of Pervasive PSQL v9 (released in March 2005) and future upgrades also may be influenced by factors in our control such as product quality, relative demand for feature and functionality upgrades and any future product announcements
or price changes.



Revenue from our embedded database product, Pervasive PSQL®, decreased in fiscal year 2007 relative to fiscal year 2006 and in fiscal year 2006, relative to
the fiscal year 2005. We believe these decreases were due to a variety of factors, including but not limited to, competition and what we believe to be the negative impact of general economic conditions on our ISV customers who build applications
utilizing our database software and reduced demand for the ISVs software applications themselves. In addition, the decreases in fiscal years 2007 and 2006 were due in part to reduced customer demand within our installed base of customers for
the latest version of our database product (Version 9 released in March 2005). A continued reduction in our embedded database business, or our inability to grow the integration products business we acquired as a result of our acquisition of Data
Junction Corporation in fiscal year 2004, could have a material adverse effect on our business, operating results and financial condition.



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



Brand awareness is important given competition in the market for data infrastructure software products. 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



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and variations of this name for competing goods and services. Competitors or others who use marks 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 Must Succeed in the Data Management
Software Market as Well as the Data Integration Software Market if We are to Realize the Expected Benefits of the Merger with Data Junction Corporation



Our long-term strategic plan depends upon the successful development and introduction of products and solutions that address the needs of the data
management software market as well as the data integration software market. In order for us to succeed in these markets, we must align strategies and objectives and focus a significant portion of our resources toward serving these markets.



In addition, our success in these markets will depend on
several factors, many of which are outside our control including:



| |  |  | growth of the data management infrastructure software market;
| | - |  | -------------------------------------------------------------



| |  |  | growth of the data integration software market;
| | - |  | -----------------------------------------------



| |  |  | deployment of our products by enterprises; and
| | - |  | ----------------------------------------------



| |  |  | emergence of substitute technologies and products.
| | - |  | --------------------------------------------------



If we are unable to succeed in these markets, we may not realize the anticipated benefits of our merger with Data Junction and our business may be harmed.



We May Face Problems in Connection With Past Acquisitions, Joint Ventures
or Licensing Arrangements



On December 8, 2003 we
announced the completion of our acquisition of privately held Data Junction Corporation, a pioneering data and application integration company based in Austin, Texas, for approximately $16.6 million in cash, net of $6.5 million of cash held by Data
Junction at the time of closing of the transaction, and 5 million shares of our common stock. We cannot be certain that we will realize the anticipated benefits of the acquisition. In particular we may not realize the strategic and operational
benefits we had anticipated, including greater revenue and market opportunities, maintaining industry leadership and consistent profitability.



In July 2001, we formed a business venture with AG-TECH Corporation, a company developing, selling and importing packaged software, to sell and support
our products in Japan. AG-TECH has been engaged in the sales and support of Btrieve (predecessor to Pervasive PSQL) and Pervasive PSQL products since 1986. In conjunction with the joint venture, AG-TECH launched a new operating division staffed with
specialists experienced in selling and supporting Pervasive PSQL to assume responsibility for OEM sales, packaged software sales, technical support and localization and translation of our products into Japanese. In connection with the new business
venture, we obtained a less than 20% ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of Directors. While this venture has been successful to date, we cannot be certain that this venture will continue to be
successful, which could result in our inability to successfully operate in Japan. In addition, as part of our venture, we executed a three year master distributor agreement with AG-TECH, the initial term of which expired June 30, 2004. This
agreement has been renewed twice, most recently for an additional five-year term which expires June 30, 2012. We cannot be certain that we will continue to be able to renew our agreement with AG-TECH on terms and conditions at least as
favorable to Pervasive as those contained in our present agreement. Further, we may be unable to maintain or increase Japanese market demand for our products.



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



In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture or licensing arrangements, that could complement, modify 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, reduce our cash and marketable securities, incur debt or contingent liabilities, amortize 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. In addition, market reactions to acquisitions are difficult to predict and if we do announce any future acquisitions, such market reactions may cause our stock price to fluctuate.



We May Face Problems in Connection With Product Line Expansion



In the future, we may acquire, license or develop additional products.
Future product line expansion may require us to modify or expand our business and expend significant time and resources. If we are unable to fully integrate new products with our existing operations, we may not receive the intended benefits of such
product line expansion and related expenditures.



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 potential 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 ISVs, VARs 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, 2007, one distributor (our joint venture partner in Japan, AG-TECH Corporation) accounted for an aggregate of approximately 11% of our revenues, as compared to 15% in the
fiscal year ended June 30, 2006. Additionally, we estimate that approximately 20% of our database revenues in the fiscal year ended June 30, 2007 were from sales related to accounting software applications. Furthermore, there is currently
consolidation taking place among our ISVs that could narrow the number of customers who sell our products. For example, one of our ISVs, The Sage Group plc, has acquired Timberline Software Corporation, Softline Limited and ACCPAC International
Inc., three of our ISVs. The Sage Group family of companies has, at various times, represented as much as 10% of our revenues. As a result, we expect we will continue to depend on a limited number of distributors, certain of our ISV customers and
sales related to accounting software applications for a significant portion of our revenues in future periods and the loss of a significant distributor or ISV customer could materially adversely affect our business, operating results and financial
condition. 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 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 derive a substantial portion of our revenues from indirect sales through a channel consisting of independent software vendors, value-added resellers, systems integrators,
consultants and distributors. Our sales channel could be adversely affected by a number of factors including:



| |  |  | the failure of independent software vendors to develop, and the failure of value-added resellers to sell, products based on emerging platforms supported by us;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | pressures placed on the sales channel to sell competing products;
| | - |  | -----------------------------------------------------------------



| |  |  | our failure to adequately support the sales channel;
| | - |  | ----------------------------------------------------



| |  |  | consolidation of certain of our indirect channel partners;
| | - |  | ----------------------------------------------------------



| |  |  | 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 we will be able to continue to attract additional
indirect channel partners or retain our current partners. In addition, we cannot be certain our competitors will not attempt to recruit certain of our current or future partners. For example, in December 2000, Microsoft (a competitor) acquired Great
Plains Software (a former OEM and channel partner). Any similar transactions may have an adverse effect on our ability to attract and retain 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. 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.



We Depend on Third-Party Technology in Our Products



We rely upon certain software that we license from third
parties, including software 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. Therefore, our efforts to protect our intellectual property may not be adequate. 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. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information 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, such as in India where we use third-party service providers, with laws that
do not protect our proprietary rights to the same extent as the laws of the United States.



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, divert management attention and resources, cause product shipment delays or the loss or deferral of sales
or require us to enter into royalty or licensing agreements. Such royalty or



17



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##### Index to Financial Statements

licensing agreements, if required, may not be available on terms acceptable to us, if at all. In the event of a successful claim of intellectual property
infringement against us, should we fail or be unable to either license the technology or similar technology or develop alternative technology on a timely basis, our business, operating results and financial condition could be materially adversely
affected.



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 in data and application integration solutions, and the
performance demanded by customers for data infrastructure software 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.
| | - |  | --------------------------------------------------------------------------



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, sometimes called bugs, particularly when first introduced or when new versions or enhancements are released. From time to time, we discover
software errors in certain of our new products after their introduction. Despite our testing, current versions, new versions or enhancements of our products may still have errors after commencement of commercial shipments. Product errors 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



18



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##### Index to Financial Statements

base of customers and substantially greater financial, distribution, marketing and technical resources than Pervasive. 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 continue to represent competitive pressure. 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. Microsoft currently licenses a
royalty-free limited version of its SQL Server database technology. We believe that Microsoft will also continue to enhance its SQL Server database technology and that Microsoft will continue to invest in various sales and marketing programs
involving certain of our channel partners.



In addition,
Microsoft continues to grow its presence in the software applications market. For example, they acquired Great Plains Software, a former channel partner of Pervasive, and Navision, both of which are accounting software vendors. Microsoft has also
entered the customer relationship management software market. We believe that Microsoft will continue to grow its presence in the software applications market and in doing so, may have a negative impact on the financial stability of other software
application vendors who use our products, or may influence other software application vendors to use Microsoft infrastructure software products instead of those available from Pervasive.



Many of our customers use Microsoft-based operating platforms. We may face considerable challenges from the release by
Microsoft of its Vista operating system and proposed future release of Windows Server 2008. If we fail to timely introduce high quality products that sufficiently support these new operating systems, current and prospective customers may elect to
use our competitors database products, which could have a material adverse effect on our business, operating results and financial condition.



We believe 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 embedded database products primarily from large, public companies, including Microsoft, Oracle, 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. And, because there are relatively low barriers to entry in the software market, we may encounter additional competition from other established or emerging companies
providing database products based on existing, new or open-source technologies.



Open-source software, which is an emerging trend in the software marketplace, may impact our business as interest, demand and use increases in the database segment and poses a challenge to our business model. Private
company MySQL AB in particular has increased awareness for its product in the database segment. Firms adopting the open-source software model typically provide customers software produced by loosely associated groups of unpaid programmers, make
licenses available to end users at nominal cost, and earn revenue on complementary services and products, without having to bear the full costs of research and development for the open-source software. To the extent competing open-source software
products gain increasing market acceptance, sale of our products may decline, we may have to reduce prices we charge for our products, and our revenue and operating margins may decline. Mass adoption of open source databases in the SME market could
have a material adverse impact on our database business.



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##### Index to Financial Statements

Software-as-a-Service (SaaS) vendors may 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.



The market for our integration products is highly competitive and subject to
rapidly changing technology. We principally compete against ETL (extract, transform and load) software vendors and data warehousing and application integration software providers. Such competitors include Ascential/IBM, Business Objects,
Embarcadero, Informatica, and Information Builders. In addition, we compete or may compete against database vendors that currently offer, or may develop, products with functionalities that compete with our solutions. These products typically operate
specifically with these competitors proprietary databases. Such competitors include IBM, Microsoft, Sybase and Oracle. Competition also comes in the form of custom code, where potential customers have sufficient internal technical resources to
develop solutions in-house without the aid of our products or those of our competitors.



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 a willingness to, or may willingly in the future, incur substantial losses as a result of deeply discounted product offerings or aggressive marketing campaigns. For example, Microsoft, Oracle, IBM and
Sybase all currently license royalty-free limited versions of their database technologies. 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, Sybase, IBM,
Progress, MySQL, Ascential/IBM, Business Objects, Embarcadero, Informatica, Information Builders 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, which may limit our ability to sell our
products through particular 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 we will be able to compete successfully against current and future competitors or that the competitive pressures 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 or Hosted Applications



We have derived
substantially all of our historical embedded database product revenues from the use of our products in client/server applications. We expect to rely on continued market demand for client/server applications indefinitely. However, we believe market
demand may shift from client/server applications to Web-based or hosted applications. If so, we cannot be certain that our existing client/server developers will migrate to Web-based or hosted applications and continue to use our products or that
other developers of Web-based or hosted applications would select our data management products. In addition, this shift could result in a change in revenue models from licensing of client/server applications to renting of Web-based or hosted
applications from Software-as-a-Service vendors. A decrease in client/server application sales coupled with an inability to derive revenues from the Web-based or hosted application market could have a material adverse effect on our business,
operating results and financial condition.



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##### Index to Financial Statements

We Depend on 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, 2007, we derived 37% of our revenues outside North America. Our international operations are generally subject to a number or risks. These risks include:



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | increased tax rates in certain foreign countries;
| | - |  | -------------------------------------------------



| |  |  | difficulties with financial reporting in foreign countries;
| | - |  | -----------------------------------------------------------



| |  |  | quality control of certain development, translation or localization activities; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------



We may expand or modify our operations internationally. Despite our efforts, we may not be able to expand or modify our 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 or
modify our international operations, we may be unable to maintain or increase international market demand for our product.



We expect our international operations will continue to place financial and administrative demands on us, 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.



We Use a Third-Party Service Provider in India and If We Are Unable to Use Such Provider Our Business Could Be Temporarily Adversely
Affected



We supplement the capabilities of our
organization by contracting with a third-party service provider located in India. We may continue to allocate development and IT resources to Indian third parties. Should we be unable to conduct operations in India in the future, we believe that our
business could be temporarily adversely affected.



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 and substantially all of our sales in Japan 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 those countries. To the extent our international operations expand or are
modified, our exposure to exchange rate fluctuations may increase. We have, on occasion, entered into limited hedging transactions to mitigate our



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##### Index to Financial Statements

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



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
past or any future workforce reductions. Our failure to attract and retain the highly trained technical personnel who 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 issue stock options and restricted stock as key components of our overall compensation. There is growing pressure on public companies from shareholders
generally and various organizations to reduce the rate at which companies issue stock options and restricted stock to employees, which may make it more difficult to obtain shareholder approval of equity compensation plans when required. In addition,
we believe expensing stock options and restricted stock will increase shareholder pressure to limit future grants and could make it more difficult for us to grant stock options and restricted stock to employees in the future. As a result, we may
lose top employees to non-public, start-up companies or may generally find it more difficult to attract, retain and motivate employees, either of which could materially and adversely affect our business, results of operations and financial
condition.



We Have Anti-Takeover Provisions



Our Restated Certificate of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals that a stockholder might consider favorable. It includes provisions to authorize the issuance of blank
check preferred stock, establish advance notice requirements for stockholder nominations for elections to the Board of Directors or for proposing matters that can be acted upon at stockholders meetings; eliminate the ability of
stockholders to act by written consent; require super-majority voting to approve certain amendments to the Restated Certificate of Incorporation; limit the persons who may call special meetings of stockholders; and provide for a Board of Directors
with staggered, three-year terms. In addition, certain provisions of Delaware law and our 1997 Stock Incentive Plan and our 2006 Equity Incentive Plan may also have the effect of discouraging, delaying or preventing a change in control or
unsolicited acquisition proposals.



Further, in October 2000,
our Board of Directors approved the adoption of a shareholder rights plan whereby one preferred share purchase right was distributed for each outstanding share of our common stock. The rights are designed to assure that all of our stockholders
receive fair and equal treatment in the event of any proposed takeover and to guard against partial tender offers, open market accumulations and other tactics designed to gain control without paying all stockholders a fair price. The rights were not
being distributed in response to any specific effort to acquire us.



The rights become exercisable if a person or group hereafter acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock. Such events, or if we are acquired in a merger or other business
combination transaction after a person acquires 15% or more of our common stock, would entitle the right holder to purchase, at an exercise price of $18.00, a number of shares of common stock having a market value at that time of twice the
rights exercise price. Rights held by the acquiring person would become void. The Board of Directors can choose to redeem the rights at one cent per right at any time before an acquiring person hereafter acquires 15% or more of the outstanding
common stock. The Rights Plan may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals.



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We May Elect to Raise Additional Capital Which Might Not Be Available or Which, if Available, May Be on Terms That Are
Not Favorable to Us



We may elect to raise additional
funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have
rights, preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or
privileges senior to those of existing holders of our common stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our product, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business, operating results and financial condition.



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



Our common stock is traded in the NASDAQ Global 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.



We May Be Exposed to Potential Risks if We Do Not Have an
Effective System of Disclosure Controls or Internal Controls or Fail on an On-going Basis to Properly Address and Implement Section 404 of Sarbanes-Oxley



We must comply, on an on-going basis, with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
(SOX), including those provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. If we fail to maintain an effective system of
disclosure controls or internal control over financial reporting, including satisfaction of the requirements of Section 404 of SOX, we may not be able to accurately or timely report on our financial results or adequately identify and reduce the
likelihood of fraud. Additionally, if we were to identify any material weakness over our internal control over financial reporting, we also cannot ensure that we could correct any such material weakness to allow our management to conclude that our
internal controls over financial reporting are effective in time to enable our independent registered public accounting firm to attest that such assessment will have been fairly stated in any report to be filed with the SEC or attest that we have
maintained effective internal control over financial reporting. As a result, the financial position of our business could be harmed; current and potential future shareholders could lose confidence in us and/or our reported financial results, which
may cause a negative effect on our trading price; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.



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##### Index to Financial Statements

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 1B.    UNRESOLVED STAFF COMMENTS



We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2007 fiscal year that remained unresolved.



|ITEM 2. | PROPERTIES
|------- | ----------



Our leased headquarters facility in Austin, Texas, consists of approximately 91,000 square feet, approximately 14,000 of which has been subleased to a
third party. The facility provides additional space and expansion options and is leased through October 2011. We currently lease international offices in Brussels, Frankfurt, London and Paris.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



The company is not a party to any material legal proceeding.



|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 fourth quarter of fiscal year ended June 30, 2007.



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##### Index to Financial Statements

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



The common stock of the Company is traded in the Nasdaq Global 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 for each quarterly period
during the two years ended June 30, 2007.



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|Fiscal 2006    |  | High |      | Low
|First Quarter  |  | $    | 4.91 |     | $ | 4.18
|Second Quarter |  | $    | 4.47 |     | $ | 3.99
|Third Quarter  |  | $    | 4.62 |     | $ | 4.07
|Fourth Quarter |  | $    | 4.25 |     | $ | 4.00
|               |  |     
|Fiscal 2007    |  | High |      | Low
|First Quarter  |  | $    | 4.11 |     | $ | 3.69
|Second Quarter |  | $    | 3.89 |     | $ | 3.40
|Third Quarter  |  | $    | 4.32 |     | $ | 3.60
|Fourth Quarter |  | $    | 5.98 |     | $ | 3.86



As of August 31,
2007, there were approximately 240 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 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.



PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS



|                                |  |                                   |  |                                  |      |                                                                                   |           |                                                                                          |   |          
|------------------------------- |  | --------------------------------- |  | -------------------------------- | ---- | --------------------------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------------- | - | ---------
|Period                          |  | (a) TotalNumber ofSharesPurchased |  | (b) Average Price Paid per Share |      | (c) Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs |           | (d) Approximate DollarValue of Shares thatMay Yet Be PurchasedUnder the Plans
orPrograms
|April 1, 2007 to April 30, 2007 |  | 9,097                             |  | $                                | 4.16 |                                                                                   | 3,938,887 |                                                                                          | $ | 2,817,000
|May 1, 2007 to May 31, 2007     |  | 519,986                           |  | $                                | 4.18 |                                                                                   | 4,458,873 |                                                                                          |   | 644,000  
|June 1, 2007 to June 30, 2007   |  | 325,296                           |  | $                                | 4.49 |                                                                                   | 4,784,169 |                                                                                          |   | 9,160,000
|                                |  |                                   |  |                                  |      |                                                                                   |           |                                                                                          |   |          
|Total                           |  | 854,379                           |  |                                  |      |                                                                                   |           |                                                                                          |   |          
|                                |  |                                   |  |                                  |      |                                                                                   |           |                                                                                          |   |          



In December 2006, the
Company announced the authorization of a $5.0 million stock repurchase plan which became effective upon expiration of the previous plan on December 14, 2006, and then upon expiration of this plan on June 11, 2007, the Company announced the
authorization of a new $10.0 million stock repurchase plan. During the fourth quarter of fiscal 2007, the Company repurchased 854,379 shares under these announced plans. The transactions occurred in open market purchases. The repurchase program may
be suspended or discontinued at any time without prior notice.



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##### Index to Financial Statements

|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 income data for the fiscal years ended June 30, 2005, 2006
and 2007 and the consolidated balance sheet data at June 30, 2006 and 2007 are derived from audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statements of income data for the periods ended
June 30, 2003 and 2004 and the consolidated balance sheet data at June 30, 2003, 2004 and 2005 are derived from audited consolidated financial statements not included herein.



|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|--------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - | ---- | - | ------- |  | - | ------ | -
|                                                          |  | Year Ended June 30,                   |       
|                                                          |  | 2003                                  |        |   | 2004 |   |        | 2005 |  |   | 2006   |   | 2007 |  
|                                                          |  | (in thousands, except per share data) |       
|Consolidated Statements of Income Data:                   |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Revenues:                                                 |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Product licenses                                          |  | $                                     | 35,373 |   |      | $ | 40,967 |      |  | $ | 36,978 |   |      | $ | 33,776  |  | $ | 28,851 |  
|Services and other                                        |  |                                       | 3,832  |   |      |   | 8,641  |      |  |   | 11,374 |   |      |   | 11,804  |  |   | 11,932 |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Total revenue                                             |  |                                       | 39,205 |   |      |   | 49,608 |      |  |   | 48,352 |   |      |   | 45,580  |  |   | 40,783 |  
|Costs and expenses:                                       |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Cost of product licenses                                  |  |                                       | 991    |   |      |   | 1,712  |      |  |   | 2,273  |   |      |   | 2,407   |  |   | 3,437  |  
|Cost of services and other                                |  |                                       | 4,907  |   |      |   | 5,519  |      |  |   | 5,213  |   |      |   | 5,602   |  |   | 4,439  |  
|Sales and marketing                                       |  |                                       | 13,673 |   |      |   | 18,311 |      |  |   | 21,313 |   |      |   | 18,712  |  |   | 15,349 |  
|Research and development                                  |  |                                       | 8,033  |   |      |   | 9,983  |      |  |   | 11,084 |   |      |   | 10,320  |  |   | 9,819  |  
|General and administrative                                |  |                                       | 4,866  |   |      |   | 5,228  |      |  |   | 4,753  |   |      |   | 6,588   |  |   | 5,539  |  
|Management restructuring charge                           |  |                                       |       |   |      |   |       |      |  |   |       |   |      |   | 771     |  |   |       |  
|Write-off of acquired in-process research and development |  |                                       |       |   |      |   | 1,084  |      |  |   |       |   |      |   |        |  |   |       |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Total costs and expenses                                  |  |                                       | 32,470 |   |      |   | 41,837 |      |  |   | 44,636 |   |      |   | 44,400  |  |   | 38,583 |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Operating income from continuing operations               |  |                                       | 6,735  |   |      |   | 7,771  |      |  |   | 3,716  |   |      |   | 1,180   |  |   | 2,200  |  
|Interest and other income, net                            |  |                                       | 534    |   |      |   | 293    |      |  |   | 561    |   |      |   | 1,446   |  |   | 2,269  |  
|Income tax benefit (provision)                            |  |                                       | (580   | ) |      |   | (750   | )    |  |   | (268   | ) |      |   | 2,150   |  |   | (432   | )
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Income from continuing operations                         |  |                                       | 6,689  |   |      |   | 7,314  |      |  |   | 4,009  |   |      |   | 4,776   |  |   | 4,037  |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Discontinued operations:                                  |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Gain on disposal                                          |  |                                       | 159    |   |      |   |       |      |  |   |       |   |      |   |        |  |   |       |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Gain from discontinued operations                         |  |                                       | 159    |   |      |   |       |      |  |   |       |   |      |   |        |  |   |       |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Net income                                                |  | $                                     | 6,848  |   |      | $ | 7,314  |      |  | $ | 4,009  |   |      | $ | 4,776   |  | $ | 4,037  |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Basic earnings per share:                                 |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Income from continuing operations                         |  | $                                     | 0.40   |   |      | $ | 0.37   |      |  | $ | 0.18   |   |      | $ | 0.21    |  | $ | 0.19   |  
|Gain from discontinued operations                         |  |                                       | 0.01   |   |      |   |       |      |  |   |       |   |      |   |        |  |   |       |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Net income                                                |  | $                                     | 0.41   |   |      | $ | 0.37   |      |  | $ | 0.18   |   |      | $ | 0.21    |  | $ | 0.19   |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Diluted earnings per share:                               |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Income from continuing operations                         |  | $                                     | 0.37   |   |      | $ | 0.33   |      |  | $ | 0.17   |   |      | $ | 0.21    |  | $ | 0.19   |  
|Gain from discontinued operations                         |  |                                       | 0.01   |   |      |   |       |      |  |   |       |   |      |   |        |  |   |       |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Net Income                                                |  | $                                     | 0.38   |   |      | $ | 0.33   |      |  | $ | 0.17   |   |      | $ | 0.21    |  | $ | 0.19   |  
|                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Shares used in computing basic earnings per share         |  |                                       | 16,663 |   |      |   | 19,801 |      |  |   | 22,341 |   |      |   | 22,468  |  |   | 21,475 |  
|Shares used in computing diluted earnings per share       |  |                                       | 17,917 |   |      |   | 21,951 |      |  |   | 23,352 |   |      |   | 22,687  |  |   | 21,744 |  
|                                                          | 
|                                                          |  | Year Ended June 30,                   |       
|                                                          |  | 2003                                  |        |   | 2004 |   |        | 2005 |  |   | 2006   |   | 2007 |  
|                                                          |  | (in thousands)                        |       
|Consolidated Balance Sheet Data:                          |  |                                       |        |   |      |   |        |      |  |   |        |   |      |   |         |  |   |        |  
|Working capital                                           |  | $                                     | 37,004 |   |      | $ | 30,729 |      |  | $ | 34,899 |   |      | $ | 43,121  |  | $ | 43,456 |  
|Total assets                                              |  |                                       | 50,592 |   |      |   | 93,868 |      |  |   | 94,205 |   |      |   | 100,638 |  |   | 97,740 |  
|Long-term liabilities, net of current portion             |  |                                       |       |   |      |   |       |      |  |   |       |   |      |   |        |  |   |       |  
|Total stockholders equity                                |  |                                       | 40,202 |   |      |   | 79,085 |      |  |   | 82,743 |   |      |   | 89,161  |  |   | 87,004 |  



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##### Index to Financial Statements

|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 (NASDAQ: PVSW) provides embeddable data management and integration software that helps companies grow and
extend the value of their data investments. Thousands of businesses worldwide rely on our solutions to help manage, integrate, analyze and secure their critical data. Our data management and integration product lines are designed specifically for
small to mid-sized businesses and departments of large enterprises where high performance, flexibility, rapid deployment and low total cost of ownership (TCO) are paramount. In addition, significant portions of our product line are embeddable into
commercial applications for sale predominantly to small to mid-sized enterprises (SMEs) through a well-developed channel of independent software vendors (ISVs), value-added resellers (VARs) and system integrators.



Our flagship Pervasive
PSQL®database, offering unparalleled data management technology combined with very low TCO, has millions of server seats
licensed since the inception of Pervasive Software Inc., in 1994. The full data management product line also includes specific solutions for data movement and synchronization, and addresses security challenges related to data integrity,
accountability, continuity and availability throughout the data life cycle. The product line is designed for integration by ISVs into client/server, Web and mobile applications which are sold predominantly to SMEs and other businesses having little
to no information technology (IT) infrastructure, and requiring self-tuning, low-administration products.



Our data and application integration solutions feature a comprehensive set of visual design tools to rapidly build and test integration processes,
regardless of size and complexity, across hundreds of data formats and applications within and outside of the enterprise. The Pervasive integration product line is designed to grow and scale for the diverse data and application integration needs of
small to mid-sized businesses and departments of large enterprises. Our focus on rapid implementation and ease of use helps reduce the complexity, costs and risks associated with traditional labor-intensive integration methods.



Our customer base is both large and diverse; we serve tens of thousands of
customers in virtually every industry and market around the world. We sell products in more than 150 countries through direct sales and channel distribution. Founded in 1994, Pervasive is headquartered in Austin, Texas, with international offices in
Brussels, Frankfurt, London, Paris and a joint venture in Japan.



In July 2001, we formed a business venture with AG-TECH Corporation, a company developing, selling and importing packaged software, to sell and support our products in Japan. AG-TECH has been engaged in the sales and support of Btrieve
(predecessor to Pervasive PSQL) and Pervasive PSQL products since 1986. In conjunction with the joint venture, AG-TECH launched a new operating division staffed with specialists experienced in selling and supporting Pervasive PSQL to assume
responsibility for OEM sales, packaged software sales, technical support and localization and translation of our products into Japanese. In connection with the new business venture, we obtained a less than 20% ownership interest in AG-TECH and the
ability to elect one director to the AG-TECH Board of Directors. We do not have the ability to significantly influence or control the operations of AG-TECH and therefore, account for our investment in AG-TECH on the cost method of accounting. In
addition, as part of our venture, we executed a three year master distributor agreement with AG-TECH, the initial term of which expired June 30, 2004. This agreement has been renewed twice, most recently for an additional five-year term which
expires on June 30, 2012. Pervasives revenues from Japan were $6.3 million, $6.8 million and $4.6 million for the fiscal years ended June 30, 2005, 2006 and 2007, respectively.



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##### Index to Financial Statements

Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these
estimates under different assumptions or conditions.



We
believe the following represent our critical accounting policies:



| |  |  | Revenue Recognition
| | - |  | -------------------



| |  |  | Sales Returns and Bad Debt Reserves
| | - |  | -----------------------------------



| |  |  | Goodwill and Other Intangible Assets
| | - |  | ------------------------------------



| |  |  | Stock-Based Compensation Expense
| | - |  | --------------------------------



| |  |  | Taxes
| | - |  | -----



Revenue RecognitionWe license our software through OEM license agreements with software developers, or ISVs and through shrink-wrap software
licenses, sold through ISVs, value-added resellers, or VARs, systems integrators and distributors, or direct to end users. Revenues are 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 collectability 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 us.
Revenue from post contract support and the right to receive unspecified upgrades is recognized ratably over the contract term. We generally provide 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. We accrue the cost of providing this support. Revenue from consulting services and training is recognized when the related services are performed. We enter into agreements with certain distributors
that provide for certain stock rotation and price protection rights. These rights allow the distributor to return product in a non-cash exchange for other products or for credits against future purchases. Revenue from shipping and handling is
recognized at the shipping date. Shipping and handling costs are included in costs of product license revenues in the Consolidated Statements of Operations.



Where software licenses are sold with maintenance or other services, we allocate the total fee to the various elements based on the fair values of the
elements. We determine the fair value of each element in the arrangement based on vendor-specific objective evidence (VSOE) of fair value. VSOE of fair value is based upon the normal pricing and discounting practices for those products
and services when sold separately and, for support services, is additionally measured by the renewal rate. If we do not have VSOE for one of the delivered elements of an arrangement, but do have VSOE for all undelivered elements, we use the residual
method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the remaining arrangement fee, including any discount, is allocated to the delivered
element. If the residual method is not used, discounts, if any, are applied proportionately to each element included in the arrangement based on each elements fair value without regard to the discount.



Sales Returns and Bad Debt ReservesWe reserve the cost of
estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. We evaluate quarterly the adequacy



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##### Index to Financial Statements

of the reserve for sales returns, stock rotation and price protection. Because these reserves are based on our judgments and estimates, our reserves may not
be adequate to cover actual sales returns and other allowances. If our reserves are not adequate, our net sales could be adversely affected.



Goodwill and Other Intangible AssetsWe assess whether goodwill and indefinite-lived intangibles are impaired on an annual basis. Upon
determining the existence of goodwill and/or indefinite-lived intangibles impairment, we measure that impairment based on the amount by which the book value of goodwill and/or indefinite-lived intangibles exceeds its fair value. The fair value of an
asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstance that would
indicate that, more likely than not, the book value of goodwill and/or indefinite-lived intangibles has been impaired.



Stock-Based Compensation ExpenseWe account for employee share-based compensation costs, to include stock options and restricted stock, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R) and Staff Accounting Bulletin No. 107, Share-Based Payment. We utilize the
Black-Scholes option pricing model to estimate the fair value of employee stock option compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical
volatility was used in estimating the fair value of our share-based awards rather than implied volatility, while the expected life was estimated to be four years based on historical trends since our initial public offering. Further, as required
under SFAS 123R, we now estimate forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. The estimated fair
value is charged to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having
no vesting restrictions and being fully transferable. Accordingly, our estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While our estimate of fair value and the associated charge to earnings
materially impacts our results of operations, it has no impact on our cash position.



TaxesUnder the 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.



We estimate our income taxes in each of the jurisdictions in which we operate
as part of the process of preparing our consolidated financial statements. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes and net operating loss and tax credit carryforwards. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our net deferred tax assets will be recovered from future taxable income and
to the extent we believe that recovery is not more likely than not, we establish a valuation allowance. Prior to fiscal year 2006, we had concluded that a valuation allowance was required for all periods presented to the extent that we do not
anticipate the ability to utilize a portion of the deferred tax assets. In fiscal years 2006 and 2007, we again considered future taxable income in assessing the need for the valuation allowance, and we were able to determine that we expect to
realize a portion of our deferred tax assets in the future in excess of the net recorded amount, resulting in an adjustment to the deferred tax asset valuation allowance in the cumulative amount of $2.8 million. Further, our net operating loss and
tax credit carryforwards are subject to potential expiration if not utilized by certain dates in the future.



We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the



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##### Index to Financial Statements

ultimate tax determination is uncertain. We are frequently under audit by tax authorities in various jurisdictions. Accruals for tax contingencies are
provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies. Although we believe we have appropriate support for the positions taken on our tax returns, we have recorded a liability for our best estimate
of the probable loss on certain of these positions. We believe that our accruals for tax liabilities are adequate for all open years, based on our assessment of many factors including past experience and interpretations of tax law applied to the
facts of each matter, which matters result primarily from intercompany transfer pricing. Although we believe our recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently
uncertain; therefore our assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although we believe that the estimates and assumptions supporting our assessments are reasonable,
the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a
material effect on our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. Due to the complexity involved, we are not able to estimate the range of reasonably possible losses in
excess of amounts recorded.



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 income.



|                                 |  |                    |   |  |      |   |  |      |  
|-------------------------------- |  | ------------------ | - |  | ---- | - |  | ---- | -
|                                 |  | Year EndedJune 30, |  
|                                 |  | 2005               |   |  | 2006 |   |  | 2007 |  
|Revenues:                        |  |                    |   |  |      |   |  |      |  
|Product licenses                 |  | 76                 | % |  | 74   | % |  | 71   | %
|Services and others              |  | 24                 |   |  | 26   |   |  | 29   |  
|                                 |  |                    |   |  |      |   |  |      |  
|Total revenues                   |  | 100                | % |  | 100  | % |  | 100  | %
|Costs and expenses:              |  |                    |   |  |      |   |  |      |  
|Cost of product licenses         |  | 5                  |   |  | 5    |   |  | 8    |  
|Cost of services and other       |  | 10                 |   |  | 12   |   |  | 11   |  
|Sales and marketing              |  | 44                 |   |  | 41   |   |  | 38   |  
|Research and development         |  | 23                 |   |  | 23   |   |  | 24   |  
|General and administrative       |  | 10                 |   |  | 14   |   |  | 14   |  
|Management restructuring charges |  |                   |   |  | 2    |   |  |     |  
|                                 |  |                    |   |  |      |   |  |      |  
|Total costs and expenses         |  | 92                 |   |  | 97   |   |  | 95   |  
|Operating income                 |  | 8                  |   |  | 3    |   |  | 5    |  
|Interest and other income, net   |  | 1                  |   |  | 3    |   |  | 6    |  
|Income tax provision             |  | (1                 | ) |  | 4    |   |  | (1   | )
|                                 |  |                    |   |  |      |   |  |      |  
|Net income                       |  | 8                  | % |  | 10   | % |  | 10   | %
|                                 |  |                    |   |  |      |   |  |      |  



Revenues



Revenue from our embedded database product, Pervasive PSQL, decreased in
fiscal year 2007, relative to the fiscal year 2006 and in fiscal year 2006, relative to fiscal year 2005. We believe these decreases were due to a variety of factors, including but not limited to, competition and what we believe to be the negative
impact of general economic conditions on our ISV customers who build applications utilizing our database software and reduced demand for the ISVs software applications themselves. In addition, the decreases in fiscal years 2007 and 2006 were
due in part to reduced customer demand within our installed base of customers for the latest version of our database product (version 9 released March 2005). Our embedded database and related products represented approximately 67% of our revenue in
fiscal year 2007. In addition, we believe the integration



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##### Index to Financial Statements

products we acquired in fiscal year 2004 as a result of our acquisition of Data Junction Corporation represent a growth opportunity as we invest in revenue
synergies and opportunities presented by the acquired business, combined with our historical database business and channels. Our integration products represented approximately 33% of our revenue in fiscal year 2007. A continued reduction in our
embedded database business, or our inability to grow our integration products business, could have a material adverse effect on our business, operating results and financial condition.



We generated total revenue of $48.3 million, $45.6 million and $40.8 million for the fiscal years ended June 30, 2005,
2006 and 2007, respectively, which represents a decrease of 6% from fiscal 2005 to 2006, and a decrease of 11% from fiscal 2006 to 2007. Our product license revenues were $37.0 million, $33.8 million and $28.9 million for the fiscal years ended
June 30, 2005, 2006 and 2007, respectively, which represents a decrease of 9% from fiscal 2005 to 2006, and a decrease of 14% from fiscal 2006 to 2007. Our service and other revenues were $11.4 million, $11.8 million and $11.9 million for the
fiscal years ended June 30, 2005, 2006 and 2007, respectively, which represents an increase of 4% from fiscal 2005 to 2006, and an increase of 1% from fiscal 2006 to 2007.



International revenues, consisting of all revenue from customers located outside of North America, were $18.3 million, $16.8
million and $14.9 million in fiscal 2005, 2006 and 2007, representing 38%, 37% and 37% of total revenue, respectively. The decrease in international revenue in fiscal year 2006 is primarily attributed to a decline in our embedded database revenue in
Europe. The decrease in international revenue in fiscal year 2007 is primarily attributed to a decline in our embedded database revenue in Japan. We expect that international revenue will continue to account for a significant portion of our revenue
in the future.



Costs and Expenses



Cost of Product Licenses Revenues.Cost of
product licenses revenues consists primarily of the cost to manufacture and fulfill orders for our shrink-wrap software products, payment of license fees for third-party technologies embedded in our products and amortization of purchased technology.
Cost of product licenses revenues was $2.3 million, $2.4 million and $3.4 million in fiscal 2005, 2006 and 2007, representing 5%, 5% and 8% of total revenues respectively. Cost of product licenses revenue in fiscal year 2006 was consistent with
fiscal year 2005. The increase in cost of product licenses revenue in fiscal year 2007 is primarily the result of the write off of various purchased technologies during the year in the amount of $1.1 million. We anticipate that cost of product
licenses revenue in fiscal year 2008 will be consistent with fiscal year 2007, excluding the write-offs of purchased technologies.



Cost of Services and Other Revenues.    Cost of services and other revenues consists primarily of the cost to provide technical
support, primarily telephone support, which is typically provided within 30 days of purchase, and the costs to deliver professional services and training services to others. Cost of services and other revenues was $5.2 million, $5.6 million and $4.4
million in fiscal 2005, 2006 and 2007, representing 10%, 12% and 11% of total revenues, respectively. Cost of services and other revenues increased in fiscal year 2006 as compared to fiscal year 2005 primarily as a result of the requirement to
record stock-based compensation expense under FAS 123(R) beginning on July 1, 2005. Cost of services and other revenues decreased in fiscal year 2007 as compared to fiscal year 2006 primarily as a result of a reduction in costs related to
support and professional service personnel. We anticipate that cost of services and other revenues in fiscal year 2008 will be consistent with fiscal year 2007.



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 were $21.3 million, $18.7 million and $15.3 million in fiscal 2005, 2006 and 2007,
representing 44%, 41% and 38% of total revenues, respectively. Sales and marketing expenses decreased in fiscal 2006 primarily due to a reduction in costs related to sales and marketing personnel, offset partially by stock-based compensation expense
related to the requirement to record



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##### Index to Financial Statements

stock-based compensation expense under FAS 123(R) beginning on July 1, 2005. Sales and marketing expenses decreased in fiscal 2007 primarily due to a
reduction in costs related to sales and marketing personnel and a reduction in marketing program costs. We anticipate that sales and marketing expenses will increase during fiscal year 2008 as we increase our sales and marketing personnel and invest
in marketing programs in support of new and upgraded product releases.



Research and Development.    Research and development expenses consist primarily of personnel and related costs. Research and development expenses were $11.1 million, $10.3 million and $9.8 million in fiscal 2005,
2006 and 2007, representing 23%, 23% and 24% of total revenues, respectively. Research and development expenses decreased in fiscal year 2006 primarily due to our initial shift of engineering resources to our offshore entity, offset partially by
stock-based compensation expense related to the requirement to record stock-based compensation expense under FAS 123(R) beginning on July 1, 2005. Research and development expenses decreased in fiscal year 2007 primarily due to the closing of
our India subsidiary at the end of fiscal 2006. We anticipate our research and development spending to increase in fiscal year 2008 as we increase our investment in innovation of extensions to existing products as well as new products and services.



General and
Administrative.General and administrative expenses consist primarily of personnel salaries and other costs of our finance, human resources and administrative departments. General and administrative expenses were $4.8
million, $6.5 million and $5.5 million in fiscal year 2005, 2006 and 2007, representing 10%, 14% and 14% of total revenues, respectively. General and administrative expenses increased in dollar amount in fiscal year 2006 primarily as a result of the
requirement to record stock-based compensation expense under FAS 123(R) beginning on July 1, 2005. General and administrative expenses decreased in dollar amount in fiscal year 2007 primarily as a result of a reduction in costs associated
with executive management personnel and a corresponding reduction in FAS 123R stock option expense. We believe our general and administrative expenses will continue to decrease in fiscal year 2008 due to the full-year effect of reductions of
executive management personnel during fiscal year 2007.



Management Restructuring Charges.We announced certain senior management changes effective January 24, 2006, including the replacement of our former President and Chief Executive Officer, David Sikora,
with John Farr, who previously served as our Chief Financial Officer. Our Vice President of Corporate Development and Vice President of Marketing also left the company during the quarter. We incurred severance and legal expenses associated with
these changes during the quarter ending March 31, 2006 in the amount of $0.8 million.



Interest and Other Income.Interest and other income consists primarily of interest earned on various investments and was
approximately $0.5 million, $1.4 million and $2.3 million in fiscal years 2005, 2006 and 2007, respectively. The increase in interest and other income in fiscal year 2006 as compared to fiscal year 2005 and in fiscal 2007 as compared to fiscal 2006
resulted from higher cash balances and higher yields on invested funds in both fiscal years.



Provision for Income Taxes.Provision for income taxes related to operations was approximately $0.3 million and $0.4 million in fiscal 2005 and 2007, respectively. Income tax benefit
was approximately $2.2 million in fiscal 2006. The provision for income taxes in fiscal 2005 consists primarily of income taxes related to foreign operations. The income tax benefit in fiscal 2006 consists primarily of the effect of a change in
our valuation allowance related to our deferred tax asset in the amount of $2.3 million, offset partially by provision for income taxes related to foreign operations. The provision for income taxes in fiscal year 2007 consists of income taxes
related to both our foreign and domestic operations, offset partially by a change in our valuation allowance.



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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 all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated
below. We also believe this information presents fairly the results of each period when read in conjunction with the audited consolidated financial statements and notes.



|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | ------------ | ------ | - | ----------- | - | ----- | ----------- |  | - | ----------- | - |  | - | ------ | - |  | - | ------ | -
|                                 |  | Quarter Ended                         |       
|                                 |  | Sept. 302005                          |        |   | Dec. 312005 |   |        | Mar. 312006 |  |   | June 302006 |   |  | Sept. 302006 |        |   | Dec. 312006 |   |       | Mar. 312007 |  |   | June 302007 |  
|                                 |  | (in thousands, except per share data) |       
|Revenues:                        |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Product licenses                 |  | $                                     | 8,856  |   |             | $ | 8,287  |             |  | $ | 8,470       |   |  | $            | 8,163  |   |             | $ | 6,981 |             |  | $ | 7,268       |   |  | $ | 7,468  |   |  | $ | 7,134  |  
|Services and other               |  |                                       | 2,834  |   |             |   | 2,989  |             |  |   | 2,931       |   |  |              | 3,050  |   |             |   | 2,986 |             |  |   | 2,808       |   |  |   | 2,976  |   |  |   | 3,162  |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Total revenues                   |  |                                       | 11,690 |   |             |   | 11,276 |             |  |   | 11,401      |   |  |              | 11,213 |   |             |   | 9,967 |             |  |   | 10,076      |   |  |   | 10,444 |   |  |   | 10,296 |  
|Costs and expenses:              |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Cost of product licenses         |  |                                       | 573    |   |             |   | 615    |             |  |   | 619         |   |  |              | 600    |   |             |   | 1,041 |             |  |   | 908         |   |  |   | 910    |   |  |   | 578    |  
|Cost of services and other       |  |                                       | 1,451  |   |             |   | 1,324  |             |  |   | 1,403       |   |  |              | 1,424  |   |             |   | 1,147 |             |  |   | 1,078       |   |  |   | 1,102  |   |  |   | 1,112  |  
|Sales and marketing              |  |                                       | 5,041  |   |             |   | 4,911  |             |  |   | 4,537       |   |  |              | 4,223  |   |             |   | 3,716 |             |  |   | 3,693       |   |  |   | 3,851  |   |  |   | 4,089  |  
|Research and development         |  |                                       | 2,877  |   |             |   | 2,509  |             |  |   | 2,399       |   |  |              | 2,535  |   |             |   | 2,249 |             |  |   | 2,506       |   |  |   | 2,575  |   |  |   | 2,489  |  
|General and administrative       |  |                                       | 1,625  |   |             |   | 1,692  |             |  |   | 1,721       |   |  |              | 1,550  |   |             |   | 1,517 |             |  |   | 1,405       |   |  |   | 1,365  |   |  |   | 1,252  |  
|Management restructuring charges |  |                                       |       |   |             |   |       |             |  |   | 771         |   |  |              |       |   |             |   |      |             |  |   |            |   |  |   |       |   |  |   |       |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Total costs and expenses         |  |                                       | 11,567 |   |             |   | 11,051 |             |  |   | 11,450      |   |  |              | 10,332 |   |             |   | 9,670 |             |  |   | 9,590       |   |  |   | 9,803  |   |  |   | 9,520  |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Operating income                 |  |                                       | 123    |   |             |   | 225    |             |  |   | (49         | ) |  |              | 881    |   |             |   | 297   |             |  |   | 486         |   |  |   | 641    |   |  |   | 776    |  
|Interest and other income, net   |  |                                       | 259    |   |             |   | 324    |             |  |   | 403         |   |  |              | 460    |   |             |   | 519   |             |  |   | 563         |   |  |   | 593    |   |  |   | 594    |  
|Income tax benefit (provision)   |  |                                       | (50    | ) |             |   | (50    | )           |  |   |            |   |  |              | 2,250  |   |             |   | (86   | )           |  |   | (488        | ) |  |   | (375   | ) |  |   | 517    |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Net income                       |  | $                                     | 332    |   |             | $ | 499    |             |  | $ | 354         |   |  | $            | 3,591  |   |             | $ | 730   |             |  | $ | 561         |   |  | $ | 859    |   |  | $ | 1,887  |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Basic earnings per share         |  | $                                     | 0.01   |   |             | $ | 0.02   |             |  | $ | 0.02        |   |  | $            | 0.16   |   |             | $ | 0.03  |             |  | $ | 0.03        |   |  | $ | 0.04   |   |  | $ | 0.09   |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Diluted earnings per share:      |  | $                                     | 0.01   |   |             | $ | 0.02   |             |  | $ | 0.02        |   |  | $            | 0.16   |   |             | $ | 0.03  |             |  | $ | 0.03        |   |  | $ | 0.04   |   |  | $ | 0.09   |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|As a Percentage of Revenues:     |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Revenues:                        |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Product licenses                 |  |                                       | 76     | % |             |   | 73     | %           |  |   | 74          | % |  |              | 73     | % |             |   | 70    | %           |  |   | 72          | % |  |   | 72     | % |  |   | 69     | %
|Services and other               |  |                                       | 24     |   |             |   | 27     |             |  |   | 26          |   |  |              | 27     |   |             |   | 30    |             |  |   | 28          |   |  |   | 28     |   |  |   | 31     |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Total revenues                   |  |                                       | 100    |   |             |   | 100    |             |  |   | 100         |   |  |              | 100    |   |             |   | 100   |             |  |   | 100         |   |  |   | 100    |   |  |   | 100    |  
|Costs and expenses:              |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Cost of product licenses         |  |                                       | 5      |   |             |   | 5      |             |  |   | 5           |   |  |              | 5      |   |             |   | 10    |             |  |   | 9           |   |  |   | 9      |   |  |   | 6      |  
|Cost of services and other       |  |                                       | 12     |   |             |   | 12     |             |  |   | 12          |   |  |              | 13     |   |             |   | 12    |             |  |   | 11          |   |  |   | 10     |   |  |   | 11     |  
|Sales and marketing              |  |                                       | 43     |   |             |   | 44     |             |  |   | 40          |   |  |              | 38     |   |             |   | 37    |             |  |   | 36          |   |  |   | 37     |   |  |   | 40     |  
|Research and development         |  |                                       | 25     |   |             |   | 22     |             |  |   | 21          |   |  |              | 22     |   |             |   | 23    |             |  |   | 25          |   |  |   | 25     |   |  |   | 24     |  
|General and administrative       |  |                                       | 14     |   |             |   | 15     |             |  |   | 15          |   |  |              | 14     |   |             |   | 15    |             |  |   | 14          |   |  |   | 13     |   |  |   | 12     |  
|Management restructuring charges |  |                                       |       |   |             |   |       |             |  |   | 7           |   |  |              |       |   |             |   |      |             |  |   |            |   |  |   |       |   |  |   |       |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Total costs and expenses         |  |                                       | 99     |   |             |   | 98     |             |  |   | 100         |   |  |              | 92     |   |             |   | 97    |             |  |   | 95          |   |  |   | 94     |   |  |   | 93     |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Operating income                 |  |                                       | 1      |   |             |   | 2      |             |  |   |            |   |  |              | 8      |   |             |   | 3     |             |  |   | 5           |   |  |   | 6      |   |  |   | 7      |  
|Interest and other income, net   |  |                                       | 2      |   |             |   | 3      |             |  |   | 3           |   |  |              | 4      |   |             |   | 5     |             |  |   | 6           |   |  |   | 6      |   |  |   | 6      |  
|Income tax benefit (provision)   |  |                                       |       |   |             |   | (1     | )           |  |   |            |   |  |              | 20     |   |             |   | (1    | )           |  |   | (5          | ) |  |   | (4     | ) |  |   | 5      |  
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  
|Net income                       |  |                                       | 3      | % |             |   | 4      | %           |  |   | 3           | % |  |              | 32     | % |             |   | 7     | %           |  |   | 6           | % |  |   | 8      | % |  |   | 18     | %
|                                 |  |                                       |        |   |             |   |        |             |  |   |             |   |  |              |        |   |             |   |       |             |  |   |             |   |  |   |        |   |  |   |        |  



Our operating results
have varied significantly from quarter to quarter in the past and may continue to vary significantly from quarter to quarter in the future due to a variety of factors. Such fluctuations may result in volatility in the price of our common stock. We
establish our expenditure levels based on expectations as to



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##### Index to Financial Statements

future revenue, and, if revenue levels are below expectations, expenses can be disproportionately high. As a result, a drop in near term demand for our
products could significantly affect both revenues and profits in any quarter. In the future, our operating results may fluctuate for this reason or as a result of a number of other factors, including increased expenses, timing of product releases,
increased competition, variations in the mix of sales, announcements of new products by us or our competitors and capital spending patterns of our customers. As a result of these factors, there can be no assurance we will be able to maintain
profitability on a quarterly basis. See Risk Factors That May Affect Future Results.



Liquidity and Capital Resources



Cash provided by operations was $5.3 million, $8.2 million and $11.9 million for fiscal 2005, 2006 and 2007, respectively. Cash provided by operations increased in fiscal 2006 as compared to fiscal year 2005 primarily due to increased net
income, an increase in non-cash amortization of acquisition related intangible assets and an increase in non-cash stock-based compensation expense, partially offset by an increase in current assets primarily related to an increase in deferred tax
assets. Cash provided by operations increased in fiscal 2007 as compared to fiscal year 2006 primarily due to an increase in income before taxes, non-cash amortization and write-offs of purchased technology intangible assets, a decrease in trade
accounts receivable and an increase in deferred revenue. We anticipate that positive cash flow from operations will decrease in fiscal year 2008 relative to fiscal year 2007, as our trade receivables return to more normalized levels compared to
revenues and as our income tax expenses increasingly result in cash payments to taxing jurisdictions.



We received net proceeds of $6.6 million from the sale or maturity of marketable securities in fiscal 2005. We invested, net, $9.1 million and $2.4
million in marketable securities in fiscal 2006 and 2007, respectively. In addition, we purchased property and equipment totaling approximately $1.2 million, $0.6 million and $0.7 million in fiscal 2005, 2006 and 2007, respectively. This
property consisted primarily of computer hardware and software for general upgrade requirements in fiscal 2005, 2006 and 2007 as well as an upgrade to the front office system in 2005.



During fiscal years 2005, 2006 and 2007, we repurchased 359,700 shares, 763,700 shares and 2,697,531 shares, respectively,
of common stock at a cost of approximately $1.8 million, $3.2 million and $10.8 million, respectively. In June 2007, we announced the authorization of a new $10.0 million stock repurchase plan which became effective on June 11, 2007. Depending
on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.



During fiscal years ended June 30, 2005, 2006 and 2007, we received approximately $1.6 million, $1.8 million and $2.6 million, respectively, in
proceeds from the exercise of stock options and our employee stock purchase plan resulting in the issuance of shares of our common stock of approximately 491,000, 658,000 and 861,000 for the fiscal years ending June 30, 2005, 2006 and 2007,
respectively. We terminated our employee stock purchase plan effective May 2005 and have received no proceeds from the purchase of shares under that plan since that time.



On September 24, 2004, we entered into a Lease Agreement with Carr Texas OP, LP (the Landlord) pursuant to which we lease
approximately 91,000 square feet for use as our principal headquarters, of which approximately 14,000 square feet is subleased to a third party. The Lease Agreement replaced our prior lease with the Landlord which was terminated on
September 24, 2004. We paid the Landlord $2.3 million in satisfaction of our obligations under the original lease. The cancellation fee was previously accrued and is reflected in the Companys consolidated balance sheet as of June 30,
2004.



We routinely explore new opportunities to build, license
or acquire products and services for introduction to and through our expansive worldwide channel. Any such transaction could cause us to issue dilutive equity securities, reduce our cash and marketable securities, or incur debt or contingent
liabilities.



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##### Index to Financial Statements

On June 30, 2007, we had $43.5 million in working capital including $46.4 million in cash, cash
equivalents and marketable securities.



Summary Disclosures About
Contractual Obligations



The following table summarizes
our operating lease obligations, net of subtenant offsets, at June 30, 2007, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:



|           |  |                              |       |                                                   |   |                                   |  |   |      
|---------- |  | ---------------------------- | ----- | ------------------------------------------------- | - | --------------------------------- |  | - | -----
|           |  | FutureMinimum Lease Payments |       | Subtenant Offset to Future Minimum Lease Payments |   | Net Future Minimum Lease Payments
|2008       |  | $                            | 1,251 |                                                   | $ | 271                               |  | $ | 980  
|2009       |  |                              | 1,364 |                                                   |   | 278                               |  |   | 1,086
|2010       |  |                              | 1,430 |                                                   |   | 285                               |  |   | 1,145
|2011       |  |                              | 1,396 |                                                   |   | 119                               |  |   | 1,277
|2012       |  |                              | 465   |                                                   |   |                                  |  |   | 465  
|Thereafter |  |                              |      |                                                   |   |                                  |  |   |     
|           |  |                              |       |                                                   |   |                                   |  |   |      
|           |  | $                            | 5,906 |                                                   | $ | 953                               |  | $ | 4,953
|           |  |                              |       |                                                   |   |                                   |  |   |      



Recently Issued Accounting
Standards



In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement of Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes. This interpretation defines the minimum recognition threshold a tax position is required to meet before being
recognized for the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are continuing to evaluate the adoption of FIN 48 and currently do not expect for it to have a material impact on our
results of operations or financial position.



In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. We are currently evaluating the effect that the adoption of SFAS No. 157 will have on our financial position and results of operations. We will adopt SFAS No. 157 on July 1, 2008.



In February 2007, the FASB issued SFAS No. 159,The Fair Value Option
for Financial Assets and Financial Liabilities. The standard permits but does not require entities to measure many financial instruments and certain other items at fair value. Once an entity has elected the fair value option for designated
financial instruments and other items, changes in fair value must be recognized in the statement of operations. The election is irrevocable once made. SFAS No. 159 is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the accounting permitted by the standard and has not determined if the fair value option will be elected for eligible financial instruments or other items.



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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The majority of our operations are based in the United States and, accordingly, the majority of our transactions are denominated in U.S. dollars. However,
we do 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, we have operations in Belgium, Germany, France
and England and a joint venture in Japan, and conduct transactions in the local currency of each location. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2005, the result would have been a decrease in revenue and
operating income of less than $0.1 million. If the U.S. dollar to Japanese yen rate had remained unchanged throughout fiscal 2006, the result would have been an increase in revenue and operating income of approximately $0.3 million. If the U.S.
dollar to Japanese yen rate had remained unchanged throughout fiscal 2007, the result would have been an increase in revenue and operating income of approximately $0.1 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal
2005, the result would have been an increase in operating income of approximately $0.3 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2006, the result would have been an increase in operating income of less than
$0.1 million. If the U.S. dollar to euro rate had remained unchanged throughout fiscal 2007, the result would have been an increase in operating income of approximately $0.1 million. The impact of fluctuations in the relative value of all other
currencies for fiscal 2005, 2006 and 2007 was not material.



We
monitor our foreign currency exposure and, from time to time, will attempt to reduce exposure through hedging. Gains and losses on foreign currency hedging were not material to the consolidated financial statements for fiscal years ended
June 30, 2005, 2006, and 2007 as such hedging activities were minimal.



We are subject to interest rate risk on our cash and marketable securities investments; however, this risk is limited as our investment policy requires us 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 15(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.



ITEM 9A.    CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Our management, under supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, the disclosure controls and
procedures were effective to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commissions
rules and forms.



Managements Report On Internal
Control Over Financial Reporting



Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial



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reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.



All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable
assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate
because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.



Management assessed the effectiveness of the Companys internal control over financial reporting as of June 30, 2007. In making the assessment,
management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, management concluded that, as of June 30, 2007, the
Companys internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.



Changes in Internal
Control Over Financial Reporting



There have been no
changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



ITEM 9B.    OTHER INFORMATION



Not applicable.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------



The information regarding directors, executive officers and corporate governance 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 13, 2007. The Proxy Statement is anticipated to be filed within 120 days after the end of the registrants fiscal year ended June 30, 2007.



EXECUTIVE OFFICERS OF THE COMPANY



The executive officers of the Company, and their ages as of August 31,
2007, and biographical summaries are as follows:



|                   |  |     |  |                                                
|------------------ |  | --- |  | -----------------------------------------------
|Name               |  | Age |  | Position                                       
|John E. Farr       |  | 47  |  | President, Chief Executive Officer and Director
|Randall G. Jonkers |  | 50  |  | Chief Financial Officer                        
|Michael Hoskins    |  | 53  |  | Chief Technology Officer and Director          
|Stephen Padgett    |  | 47  |  | Vice President, Information Technology         



John E. Farr
has served as our President, Chief Executive Officer and Director since January 2006. Previously, Mr. Farr served as our Chief Financial Officer from July 2001 to January 2006, as Vice President, Finance, from October 1998 to July 2001, 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 an auditor and in audit management for KPMG LLP, an international accounting firm, from 1982
to 1994. Mr. Farr received a B.B.A. in Accounting from Southwestern University.



Randall G. Jonkers has served as our Chief Financial Officer since January 2006 and as Vice President, Finance since October 2005. Prior to joining Pervasive, Mr. Jonkers served in various capacities as
CFO, Executive Vice President, interim CEO and Board Member of WSNet, a privately owned satellite broadcasting and equipment reseller from 1998 to 2005. Mr. Jonkers also served as CFO for Healthway Communications International Inc., a privately
owned high-technology company, from 1995 to 1998; in various corporate accounting and reporting roles for Dell Computer Corporation from 1989 to 1995; as an auditor for Coopers & Lybrand from 1987 to 1989; as well as a ten-year career with
the U.S. Army as a Material Management Officer and Chief Logistics Officer. Mr. Jonkers received a B.B.A. in Accounting from the University of Texas at Austin.



Michael Hoskinshas served as our Chief Technology Officer since June 2004 and as General Manager of Integration
Products since October 2006 (and previously from December 2003 to June 2004). Mr. Hoskins has also served as a Director since December 2003. Prior to joining Pervasive, Mr. Hoskins served as President and Director of Data Junction
Corporation for 15 years. Mr. Hoskins joined Data Junction in 1988 as Vice President of Sales. Mr. Hoskins graduated from the Bowling Green State University with a bachelor of business administration and a major in finance.



Stephen Padgetthas served as our Vice President, Information
Technology since May 2006. Prior to joining Pervasive, Mr. Padgett was CTO and Executive Vice President, Customer Acquisitions for Supportkids, Inc., a private child support collections company, where he oversaw the development of technology
and customer management from 1998 to 2003. Mr. Padgett led technology infrastructure development at Tivoli Systems, Inc., a provider of enterprise system management solutions, from 1994 to 1998. He was a senior Manager at Dell Computer
Corporation from 1989 to 1994 and a Manager for Price Waterhouse, an international accounting firm, from 1984 to 1989. Mr. Padgett received an MBA in Information Systems Management and a BBA in Communications from the University of Texas at
Austin.



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|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 AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



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, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



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.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



Information concerning principal accountant fees and services appears in the Proxy Statement under the heading Audit and Non-Audit Fees and is
incorporated herein by reference.



39



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##### Index to Financial Statements

PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES



(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



|                                                                                                                         |  |    
|------------------------------------------------------------------------------------------------------------------------ |  | ---
|Reports of Independent Registered Public Accounting Firms                                                                |  | F-2
|Consolidated Balance Sheets at June 30, 2006 and 2007                                                                    |  | F-5
|Consolidated Statements of Income for each of the three years in the period ended June 30, 2007                          |  | F-6
|Consolidated Statements of Changes in Stockholders Equity for each of the three years in the period ended June 30, 2007 |  | F-7
|Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2007                      |  | F-8
|Notes to the Consolidated Financial Statements                                                                           |  | F-9



(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.



(c)    Exhibits



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|2.1+     |  | Merger Agreement dated as of August 8, 2003 among Pervasive Software Inc., Ramal Acquisition Corp, Data Junction Corporation, Michael E. Hoskins, The Hoskins 2003 Charitable Remainder
Unitrust with Makeup, Darrell G. Blandford, The Blandford 2003 Charitable Remainder Trust with Makeup, Gregory E. Grosh, The Gregory E. Grosh Charitable Remainder Unitrust (Gregory E. Grosh Trustee), Ron S. Dougherty and Computershare Trust Company,
Inc., as escrow agent
|         | 
|3.1*     |  | Restated Certificate of Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | 
|3.2*     |  | Bylaws of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         | 
|3.3****  |  | Amended and Restated Bylaws of the Company                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | 
|4.1*     |  | Reference is made to Exhibits 3.1 and 3.2                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | 
|4.2*     |  | Specimen Common Stock certificate                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | 
|4.3***   |  | Rights Agreement dated October 20, 2000, between the Company and Computershare Trust Company, Inc. as Rights Agent                                                                                                                                                                                                                                                                                                                                                     
|         | 
|10.1*    |  | Form of Indemnification Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | 
|10.2++++ |  | 2006 Equity Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | 
|10.3*    |  | 1997 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         | 
|10.4*    |  | First Amended and Restated 1994 Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | 
|10.5++   |  | Lease agreement dated September 24, 2004 between the Company and Carr Texas Op, LP T/A Riata Corporate Park                                                                                                                                                                                                                                                                                                                                                            
|         | 
|10.6**   |  | Form of Restricted Stock Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                     



40



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##### Index to Financial Statements

|             |  |                                                                                                                                                                                                                                              
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7+++      |  | Separation Agreement and Release dated January 23, 2006 between the Company and David Sikora                                                                                                                                                 
|             | 
|10.8+++      |  | Separation Agreement and Release dated January 24, 2006 between the Company and Jeff Seiden                                                                                                                                                  
|             | 
|10.9+++++    |  | Separation Agreement and Release dated February 16, 2007 between the Company and Michele B. Thompson                                                                                                                                         
|             | 
|10.10++++++  |  | Form of Stock Option Award Agreement for the Pervasive Software Inc. 2006 Equity Incentive Plan                                                                                                                                              
|             | 
|10.11+++++++ |  | Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 2006 Equity Incentive Plan                                                                                                                                          
|             | 
|10.12+++++++ |  | Form of Notice of Grant of Restricted Stock Units for the Pervasive Software Inc. 2006 Equity Incentive Plan                                                                                                                                 
|             | 
|10.13+++++++ |  | Form of Notice of Restricted Stock Award for the Pervasive Software Inc. 1997 Stock Incentive Plan                                                                                                                                           
|             | 
|21.1         |  | Subsidiaries of the Company                                                                                                                                                                                                                  
|             | 
|23.1         |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                     
|             | 
|23.2         |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                     
|             | 
|31.1         |  | Rule 13a-14(a)/15d-a4(a) Certification executed by John Farr, Chief Executive Officer                                                                                                                                                        
|             | 
|31.2         |  | Rule 13a-14(a)/15d-a4(a) Certification executed by Randall Jonkers, Chief Financial Officer                                                                                                                                                  
|             | 
|32.1         |  | Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) executed by John Farr, Chief Executive
Officer and Randall Jonkers, Chief Financial Officer

---

|+ |  | Incorporated by reference to the Companys Current Report on Form 8-K filed August 13, 2003.
|- |  | --------------------------------------------------------------------------------------------

|* |  | Incorporated by reference to the Companys Registration Statement on Form S-1 (File No. 333-32199).
|- |  | ---------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to the Companys Current report on Form 8-K filed January 24, 2006.
|-- |  | ---------------------------------------------------------------------------------------------

|*** |  | Incorporated by reference to the Companys Registration Statement on Form 8-A filed on October 24, 2000 (File No. 000-23043).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated by reference to the Companys Current report on Form 8-K filed September 6, 2007.
|---- |  | ----------------------------------------------------------------------------------------------

|++ |  | Incorporated by reference to the Companys Current Report on Form 8-K filed September 24, 2004.
|-- |  | -----------------------------------------------------------------------------------------------

|+++ |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed February 9, 2006.
|--- |  | ------------------------------------------------------------------------------------------------

|++++ |  | Incorporated by reference
to the Companys Quarterly Report on Form 10-Q filed February 5, 2007.
|---- |  | ------------------------------------------------------------------------------------------------

|+++++ |  | Incorporated by reference
to the Companys Quarterly Report on Form 10-Q filed May 9, 2007.
|----- |  | -------------------------------------------------------------------------------------------

|++++++ |  | Incorporated by reference to the Companys Current Report on Form 8-K filed February 22, 2007.
|------ |  | ----------------------------------------------------------------------------------------------

|+++++++ |  | Incorporated by reference to the Companys Current Report on Form 8-K filed July 17, 2007.
|------- |  | ------------------------------------------------------------------------------------------



41



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##### Index to Financial Statements

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)By:

/S/    JOHN E.
FARRJohn E. Farr President and Chief Executive OfficerSeptember 13, 2007Date




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.



|                                                   |  |                                                                                 |  |                   
|-------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------
|                                                   |  |                                                                                
|/s/    JOHN E. FARR John E. Farr                   |  | President and Chief Executive Officer and Director(Principal Executive Officer) |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    RANDALL G.
JONKERS Randall G. Jonkers       |  | Chief Financial Officer(Principal Financial and Accounting Officer)             |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    SHELBY H. CARTER,
JR. Shelby H. Carter, Jr. |  | Director and Chairman of the Board                                              |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    NANCY R.
WOODWARD Nancy R. Woodward         |  | Director                                                                        |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    DAVID A.
BOUCHER David A. Boucher           |  | Director                                                                        |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    DAVID R.
BRADFORD David R. Bradford         |  | Director                                                                        |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    JEFFREY S.
HAWN Jeffrey S. Hawn             |  | Director                                                                        |  | September 13, 2007
|                                                   |  |                                                                                
|/s/    MICHAEL E.
HOSKINS Michael E. Hoskins       |  | Director                                                                        |  | September 13, 2007



42



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##### Index to Financial Statements

SCHEDULE II



PERVASIVE SOFTWARE INC.

VALUATION AND QUALIFYING ACCOUNTS



(in thousands)



|                                             |  |                               |  |                                      |  |                                          |  |                |  |                       
|-------------------------------------------- |  | ----------------------------- |  | ------------------------------------ |  | ---------------------------------------- |  | -------------- |  | ----------------------
|Description                                  |  | Balance atBeginning of Period |  | AdditionsCharged toCosts andExpenses |  | Deductions/Write-offsCharged toAllowance |  | OtherAdditions |  | Balance atEnd ofPeriod
|Allowance for Doubtful Accounts:             |  |                               |  |                                      |  |                                          |  |                |  |                       
|Year ended June 30, 2005                     |  | 478                           |  | 70                                   |  | 70                                       |  |               |  | 478                   
|Year ended June 30, 2006                     |  | 478                           |  | 300                                  |  | 309                                      |  |               |  | 469                   
|Year ended June 30, 2007                     |  | 469                           |  | 135                                  |  | 299                                      |  |               |  | 305                   
|                                             |  |                               |  |                                      | 
|Valuation Allowance for Deferred Tax Assets: |  |                               |  |                                      |  |                                          |  |                |  |                       
|Year ended June 30, 2005                     |  | 11,879                        |  |                                     |  | 2,132                                    |  |               |  | 9,747                 
|Year ended June 30, 2006                     |  | 9,747                         |  |                                     |  | 4,083                                    |  |               |  | 5,664                 
|Year ended June 30, 2007                     |  | 5,664                         |  |                                     |  | 1,908                                    |  |               |  | 3,756                 



S-1



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                         |  |     
|------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                         |  | Page
|Reports of Independent Registered Public Accounting Firms                                                                |  | F-2 
|Consolidated Balance Sheets at June 30, 2006 and 2007                                                                    |  | F-5 
|Consolidated Statements of Income for each of the three years in the period ended June 30, 2007                          |  | F-6 
|Consolidated Statements of Changes in Stockholders Equity for each of the three years in the period ended June 30, 2007 |  | F-7 
|Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2007                      |  | F-8 
|Notes to Consolidated Financial Statements                                                                               |  | F-9 



F-1



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##### Index to Financial Statements

R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders

Pervasive Software Inc:



We have audited Pervasive Software Inc. and subsidiaries (the Company) internal control over financial reporting
as of June 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of June 30, 2007 and 2006 and the related consolidated statements of income, changes in stockholders equity and cash flows for the two
years in the period ended June 30, 2007, and our report dated September 11, 2007 expressed an unqualified opinion on those financial statements.



/s/ Grant Thornton LLP



Dallas, Texas

September 11, 2007



F-2



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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,
2007 and 2006, and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the two years in the period ended June 30, 2007. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial position of Pervasive Software, Inc. as of June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the two years in the period ended
June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-based Payment, effective July 1, 2005.



Our
audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The related financial statement Schedule II is presented for purposes of additional analysis and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements
taken as a whole.



We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 11, 2007, expressed an unqualified opinion on the effectiveness of Pervasive Software, Inc. and subsidiaries
internal control over financial reporting.



/s/ Grant Thornton LLP



Dallas, Texas

September 11, 2007



F-3



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders

Pervasive Software Inc:



We have audited the accompanying consolidated statements of income, stockholders equity, and cash flows of Pervasive Software Inc. for the year
ended June 30, 2005. Our audit also included the financial statement schedule for the year ended June 30, 2005 listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for
our opinion.



In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated results of the Companys operations and its cash flows for the year ended June 30, 2005, in conformity with U.S. generally accepted accounting principles. 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

September 8, 2005



F-4



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##### Table of Contents

##### Index to Financial Statements

P
ERVASIVE SOFTWARE INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                                                                                                                                  |  | June 30                          |        
|                                                                                                                                                                                                                  |  | 2006                             |         |   | 2007 |  
|                                                                                                                                                                                                                  |  | (in thousands, exceptshare data) |        
|ASSETS                                                                                                                                                                                                            |  |                                  |         |   |      |   |        |  
|Current assets:                                                                                                                                                                                                   |  |                                  |         |   |      |   |        |  
|Cash and cash equivalents, including interest-bearing investments of $28,354 in 2006 and $30,743 in 2007                                                                                                          |  | $                                | 31,137  |   |      | $ | 31,563 |  
|Marketable securities                                                                                                                                                                                             |  |                                  | 12,405  |   |      |   | 14,788 |  
|Trade accounts receivable, net of allowance for doubtful accounts of $469 in 2006 and $305 in 2007                                                                                                                |  |                                  | 7,383   |   |      |   | 5,563  |  
|Deferred income tax assets                                                                                                                                                                                        |  |                                  | 1,900   |   |      |   | 771    |  
|Prepaid expenses and other current assets                                                                                                                                                                         |  |                                  | 1,773   |   |      |   | 1,507  |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Total current assets                                                                                                                                                                                              |  |                                  | 54,598  |   |      |   | 54,192 |  
|Property and equipment, net                                                                                                                                                                                       |  |                                  | 1,724   |   |      |   | 1,574  |  
|Purchased technology, net                                                                                                                                                                                         |  |                                  | 4,663   |   |      |   | 2,126  |  
|Goodwill                                                                                                                                                                                                          |  |                                  | 38,953  |   |      |   | 38,508 |  
|Deferred income tax assets                                                                                                                                                                                        |  |                                  | 400     |   |      |   | 1,071  |  
|Other assets                                                                                                                                                                                                      |  |                                  | 300     |   |      |   | 269    |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Total assets                                                                                                                                                                                                      |  | $                                | 100,638 |   |      | $ | 97,740 |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|                                                                                                                                                                                                                  |  |                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                              |  |                                  |         |   |      |   |        |  
|Current liabilities:                                                                                                                                                                                              |  |                                  |         |   |      |   |        |  
|Trade accounts payable                                                                                                                                                                                            |  | $                                | 708     |   |      | $ | 335    |  
|Accrued payroll and payroll related costs                                                                                                                                                                         |  |                                  | 1,174   |   |      |   | 1,247  |  
|Deferred rent and lease related accruals                                                                                                                                                                          |  |                                  | 1,428   |   |      |   | 1,425  |  
|Other accrued expenses                                                                                                                                                                                            |  |                                  | 2,575   |   |      |   | 1,687  |  
|Deferred revenue                                                                                                                                                                                                  |  |                                  | 5,592   |   |      |   | 6,042  |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Total current liabilities                                                                                                                                                                                         |  |                                  | 11,477  |   |      |   | 10,736 |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Commitments and contingencies                                                                                                                                                                                     |  |                                  |         |   |      |   |        |  
|Stockholders equity:                                                                                                                                                                                             |  |                                  |         |   |      |   |        |  
|Common stock, $0.001 par value; Authorized75,000,000 shares; issued 25,177,605 and 26,032,855 shares in 2006 and 2007, respectively;
outstanding22,923,306 and 21,081,025 shares in 2006 and 2007, respectively |  |                                  | 91,727  |   |      |   | 85,501 |  
|Accumulated other comprehensive loss                                                                                                                                                                              |  |                                  | (1,397  | ) |      |   | (1,365 | )
|Retained earnings (deficit)                                                                                                                                                                                       |  |                                  | (1,169  | ) |      |   | 2,868  |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Total stockholders equity                                                                                                                                                                                        |  |                                  | 89,161  |   |      |   | 87,004 |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  
|Total liabilities and stockholders equity                                                                                                                                                                        |  | $                                | 100,638 |   |      | $ | 97,740 |  
|                                                                                                                                                                                                                  |  |                                  |         |   |      |   |        |  



See accompanying
notes.



F-5



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##### Index to Financial Statements

P
ERVASIVE SOFTWARE INC.



CONSOLIDATED STATEMENTS OF INCOME



|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                                              |  | Year ended June 30,                   |       
|                                                              |  | 2005                                  |        |   | 2006 |   | 2007   | 
|                                                              |  | (in thousands, except per share data) |       
|Revenues:                                                     |  |                                       |        |   |      |   |        |  |   |        |  
|Product licenses                                              |  | $                                     | 36,978 |   |      | $ | 33,776 |  | $ | 28,851 |  
|Services and other                                            |  |                                       | 11,374 |   |      |   | 11,804 |  |   | 11,932 |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Total revenues                                                |  |                                       | 48,352 |   |      |   | 45,580 |  |   | 40,783 |  
|Costs and expenses:                                           |  |                                       |        |   |      |   |        |  |   |        |  
|Cost of product licenses                                      |  |                                       | 2,273  |   |      |   | 2,407  |  |   | 3,437  |  
|Cost of services and other                                    |  |                                       | 5,213  |   |      |   | 5,602  |  |   | 4,439  |  
|Sales and marketing                                           |  |                                       | 21,313 |   |      |   | 18,712 |  |   | 15,349 |  
|Research and development                                      |  |                                       | 11,084 |   |      |   | 10,320 |  |   | 9,819  |  
|General and administrative                                    |  |                                       | 4,753  |   |      |   | 6,588  |  |   | 5,539  |  
|Management restructuring charges                              |  |                                       |       |   |      |   | 771    |  |   |       |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Total costs and expenses                                      |  |                                       | 44,636 |   |      |   | 44,400 |  |   | 38,583 |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Operating income                                              |  |                                       | 3,716  |   |      |   | 1,180  |  |   | 2,200  |  
|Interest and other income                                     |  |                                       | 561    |   |      |   | 1,446  |  |   | 2,269  |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Income before income taxes                                    |  |                                       | 4,277  |   |      |   | 2,626  |  |   | 4,469  |  
|Income tax benefit (provision)                                |  |                                       | (268   | ) |      |   | 2,150  |  |   | (432   | )
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Net income                                                    |  | $                                     | 4,009  |   |      | $ | 4,776  |  | $ | 4,037  |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Basic earnings per share                                      |  | $                                     | 0.18   |   |      | $ | 0.21   |  | $ | 0.19   |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Diluted earnings per share                                    |  | $                                     | 0.17   |   |      | $ | 0.21   |  | $ | 0.19   |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Includes share-based payment compensation expense as follows: |  |                                       |        |   |      |   |        |  |   |        |  
|Cost of service and other revenues                            |  | $                                     |       |   |      | $ | 113    |  | $ | 70     |  
|Sales and marketing                                           |  |                                       |       |   |      |   | 946    |  |   | 594    |  
|Research and development                                      |  |                                       |       |   |      |   | 549    |  |   | 240    |  
|General and administrative                                    |  |                                       |       |   |      |   | 1,435  |  |   | 1,192  |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  
|Total                                                         |  | $                                     |       |   |      | $ | 3,043  |  | $ | 2,096  |  
|                                                              |  |                                       |        |   |      |   |        |  |   |        |  



See accompanying
notes.



F-6



---

##### Table of Contents

##### Index to Financial Statements

P
ERVASIVE SOFTWARE INC.



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY



|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | ------ | ------------------------- |  | - | ------------------------ | - |  | - | ------- | -
|                                                                                                                       |  | CommonStock                       |         |   | AccumulatedOtherComprehensiveLoss |   |        | RetainedEarnings(Deficit) |  |   | TotalStockholdersEquity |  
|                                                                                                                       |  | (in thousands, except share data) |        
|Balances at June 30, 2004                                                                                              |  | $                                 | 90,184  |   |                                   | $ | (1,145 | )                         |  | $ | (9,954                   | ) |  | $ | 79,085  |  
|Acquisition of 359,700 treasury shares, cumulative treasury shares of 1,490,599 and cost of $4,319 at June 30, 2005    |  |                                   | (1,848  | ) |                                   |   |       |                           |  |   |                         |   |  |   | (1,848  | )
|Issuance of common stock pursuant to the exercise of stock options                                                     |  |                                   | 1,413   |   |                                   |   |       |                           |  |   |                         |   |  |   | 1,413   |  
|Issuance of 60,342 shares of common stock pursuant to the employee stock purchase plan                                 |  |                                   | 200     |   |                                   |   |       |                           |  |   |                         |   |  |   | 200     |  
|Unrealized loss on investments                                                                                         |  |                                   |        |   |                                   |   | (9     | )                         |  |   |                         |   |  |   | (9      | )
|Foreign currency translation adjustment                                                                                |  |                                   |        |   |                                   |   | (107   | )                         |  |   |                         |   |  |   | (107    | )
|Net income                                                                                                             |  |                                   |        |   |                                   |   |       |                           |  |   | 4,009                    |   |  |   | 4,009   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Total comprehensive income                                                                                             |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   | 3,893   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Balances at June 30, 2005                                                                                              |  |                                   | 89,949  |   |                                   |   | (1,261 | )                         |  |   | (5,945                   | ) |  |   | 82,743  |  
|Acquisition of 763,700 treasury shares, cumulative treasury shares of 2,254,299 and cost of $7,470 at June 30, 2006    |  |                                   | (3,151  | ) |                                   |   |       |                           |  |   |                         |   |  |   | (3,151  | )
|Issuance of common stock pursuant to the exercise of stock options and restricted stock awards                         |  |                                   | 1,886   |   |                                   |   |       |                           |  |   |                         |   |  |   | 1,886   |  
|Stock-based compensation expense                                                                                       |  |                                   | 3,043   |   |                                   |   |       |                           |  |   |                         |   |  |   | 3,043   |  
|Unrealized loss on investments                                                                                         |  |                                   |        |   |                                   |   | (36    | )                         |  |   |                         |   |  |   | (36     | )
|Foreign currency translation adjustment                                                                                |  |                                   |        |   |                                   |   | (100   | )                         |  |   |                         |   |  |   | (100    | )
|Net income                                                                                                             |  |                                   |        |   |                                   |   |       |                           |  |   | 4,776                    |   |  |   | 4,776   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Total comprehensive income                                                                                             |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   | 4,640   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Balances at June 30, 2006                                                                                              |  |                                   | 91,727  |   |                                   |   | (1,397 | )                         |  |   | (1,169                   | ) |  |   | 89,161  |  
|Acquisition of 2,697,531 treasury shares, cumulative treasury shares of 4,951,830 and cost of $18,310 at June 30, 2007 |  |                                   | (10,840 | ) |                                   |   |       |                           |  |   |                         |   |  |   | (10,840 | )
|Issuance of common stock pursuant to the exercise of stock options and restricted stock awards.                        |  |                                   | 2,518   |   |                                   |   |       |                           |  |   |                         |   |  |   | 2,518   |  
|Stock-based compensation expense                                                                                       |  |                                   | 2,096   |   |                                   |   |       |                           |  |   |                         |   |  |   | 2,096   |  
|Unrealized gain on investments                                                                                         |  |                                   |        |   |                                   |   | 31     |                           |  |   |                         |   |  |   | 31      |  
|Foreign currency translation adjustment                                                                                |  |                                   |        |   |                                   |   | 1      |                           |  |   |                         |   |  |   | 1       |  
|Net income                                                                                                             |  |                                   |        |   |                                   |   |       |                           |  |   | 4,037                    |   |  |   | 4,037   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Total comprehensive income                                                                                             |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   | 4,069   |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  
|Balances at June 30, 2007                                                                                              |  | $                                 | 85,501  |   |                                   | $ | (1,365 | )                         |  | $ | 2,868                    |   |  | $ | 87,004  |  
|                                                                                                                       |  |                                   |         |   |                                   |   |        |                           |  |   |                          |   |  |   |         |  



See accompanying
notes.



F-7



---

##### Table of Contents

##### Index to Financial Statements

P
ERVASIVE SOFTWARE INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                         |  | Year ended June 30, |       
|                                                                         |  | 2005                |        |   | 2006 |   |         | 2007 | 
|                                                                         |  | (in thousands)      |       
|Cash from operations                                                     |  |                     |        |   |      |   |         |      |  |   |         |  
|Income from operations                                                   |  | $                   | 4,009  |   |      | $ | 4,776   |      |  | $ | 4,037   |  
|Adjustments to reconcile net income to net cash provided by operations:  |  |                     |        |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                            |  |                     | 2,523  |   |      |   | 2,870   |      |  |   | 2,419   |  
|Write-off of purchased technology                                        |  |                     |       |   |      |   |        |      |  |   | 1,072   |  
|Non cash compensation expense pursuant to employee stock purchase plan   |  |                     | 109    |   |      |   |        |      |  |   |        |  
|Deferred income tax expense (benefit)                                    |  |                     |       |   |      |   | (2,300  | )    |  |   | 904     |  
|Non-cash stock-based compensation expense                                |  |                     |       |   |      |   | 3,043   |      |  |   | 2,096   |  
|Other non cash items                                                     |  |                     | 125    |   |      |   |        |      |  |   |        |  
|Change in operating assets and liabilities:                              |  |                     |        |   |      |   |         |      |  |   |         |  
|(Increase) decrease in current assets                                    |  |                     | 1,846  |   |      |   | (228    | )    |  |   | 1,559   |  
|Increase (decrease) in accounts payable and accrued liabilities          |  |                     | (3,837 | ) |      |   | 108     |      |  |   | (653    | )
|Increase (decrease) in deferred revenue                                  |  |                     | 500    |   |      |   | (90     | )    |  |   | 418     |  
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|Net cash provided by operations                                          |  |                     | 5,275  |   |      |   | 8,179   |      |  |   | 11,852  |  
|Cash from investing activities                                           |  |                     |        |   |      |   |         |      |  |   |         |  
|Purchase of property and equipment                                       |  |                     | (1,218 | ) |      |   | (635    | )    |  |   | (705    | )
|Purchase of marketable securities                                        |  |                     | (4,622 | ) |      |   | (12,239 | )    |  |   | (15,048 | )
|Proceeds from sale or maturity of marketable securities                  |  |                     | 11,222 |   |      |   | 3,139   |      |  |   | 12,665  |  
|Purchase of technology rights                                            |  |                     | (895   | ) |      |   |        |      |  |   |        |  
|Increase in other assets and other                                       |  |                     | (17    | ) |      |   | (45     | )    |  |   | (33     | )
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                      |  |                     | 4,470  |   |      |   | (9,780  | )    |  |   | (3,121  | )
|Cash from financing activities                                           |  |                     |        |   |      |   |         |      |  |   |         |  
|Purchase of treasury stock                                               |  |                     | (1,848 | ) |      |   | (3,151  | )    |  |   | (10,840 | )
|Proceeds from exercise of stock options and employee stock purchase plan |  |                     | 1,614  |   |      |   | 1,849   |      |  |   | 2,518   |  
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                    |  |                     | (234   | ) |      |   | (1,302  | )    |  |   | (8,322  | )
|Effect of exchange rate changes on cash and cash equivalents             |  |                     | (130   | ) |      |   | (46     | )    |  |   | 17      |  
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|Change in cash and cash equivalents                                      |  |                     | 9,381  |   |      |   | (2,949  | )    |  |   | 426     |  
|Cash and cash equivalents at beginning of year                           |  |                     | 24,705 |   |      |   | 34,086  |      |  |   | 31,137  |  
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                 |  | $                   | 34,086 |   |      | $ | 31,137  |      |  | $ | 31,563  |  
|                                                                         |  |                     |        |   |      |   |         |      |  |   |         |  



See accompanying
notes.



F-8



---

##### Table of Contents

##### Index to Financial Statements

P
ERVASIVE SOFTWARE INC.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



June 30, 2007



1.    The Company



Pervasive Software Inc. (the Company) is a global value leader in
data infrastructure software. Thousands of businesses worldwide rely on the Companys award winning solutions to help manage, integrate, analyze and secure their critical data. The Companys data management and integration product lines
are designed specifically for small to mid-sized businesses and departments of large enterprises where high performance, flexibility, rapid deployment and low total cost of ownership (TCO) are paramount. In addition, significant portions
of the Companys product line are embeddable into commercial applications for sale predominantly to small to mid-size enterprises (SMEs) through a well-developed channel of independent software vendors (ISVs),
value-added resellers (VARs) and systems integrators.



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 and London and a joint venture in Japan. 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 original equipment manufacturer
(OEM) license agreements with software developers, or ISVs and through shrink-wrap software licenses, sold through ISVs, VARs, systems integrators and distributors, or direct to end users. Revenues are 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 collectability is probable. Revenues related to OEM license agreements involving
nonrefundable fixed minimum license fees are 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. Revenue from post contract support and the right to receive unspecified upgrades is recognized ratably over the contract term. 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 consulting services and 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. The Company reserves for the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on experience. Revenue from shipping and
handling is recognized in product license revenue at the shipping date. Shipping and handling costs are included in Costs of product licenses in the Consolidated Statements of Income.



Where software licenses are sold with maintenance or other services, the Company allocates the total fee to the various
elements based on the fair values of the elements. The Company determines the fair value of each element in the arrangement based on vendor-specific objective evidence (VSOE) of fair value. VSOE of fair value is based upon the normal
pricing and discounting practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If the Company does not have VSOE for one of the delivered elements of an arrangement,
but does have VSOE for all undelivered elements, the Company uses the residual method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the remaining
arrangement fee,



F-9



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



including any discount, is allocated to the delivered element. If the residual method is not used, discounts, if any, are applied proportionately to each
element included in the arrangement based on each elements fair value without regard to the discount.



Sales Returns and Bad Debt Reserves



The Company reserves the cost of estimated sales returns, stock rotation and price protection rights as well as uncollectible accounts based on
experience. The Company evaluates quarterly the adequacy of the reserve for sales returns, stock rotation and price protection. Because these reserves are based on judgments and estimates, actual results could differ from the estimates.



Software Development Costs



The Company expenses software development costs as incurred until
technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the establishment of technological feasibility of its products has coincided with the
general release of such software. As a result, the Company has not capitalized any such costs other than those recorded in connection with its acquisitions.



Advertising Costs



The company expenses costs of producing advertising-related 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 in 2005, 2006 and 2007 were approximately $3.0 million, $2.1 million and $1.7 million, respectively.



Income Taxes



Under the 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.



The Company estimates its income taxes in each of the jurisdictions in which
it operates as part of the process of preparing the consolidated financial statements. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes and net operating loss and tax credit carryforwards. These differences result in deferred tax assets and liabilities. The Company then assesses the likelihood that net deferred tax assets will be recovered from future taxable
income and to the extent the Company believes that recovery is not more likely than not, it establishes a valuation allowance. The Company concluded that a valuation allowance was required for all periods presented. The Company considered future
taxable income in assessing the need for the valuation allowance, and was able to determine that it would be able to realize a portion of deferred tax assets in the future in excess of its net recorded amount, resulting in an adjustment to the
deferred tax asset valuation allowance in the amount of $2.3 million in fiscal year 2006 and $0.5 million in fiscal year 2007. Pursuant to the Internal Revenue Code, the amounts of and benefits from net operating loss and tax credit carryforwards
may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses and tax credits that the Company may utilize include, but are not limited to, a cumulative change of more than



F-10



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



50% ownership of the Company, as defined, over a three year period, and changes in the relative mix of foreign source taxable income versus domestic
taxable income. Further, the Companys net operating loss and tax credit carryforwards are subject to potential expiration if not utilized by certain dates in the future.



The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is
required in determining the worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain.
The Company is frequently under audit by tax authorities in various jurisdictions. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies.Although the Company
believes it has appropriate support for the positions taken on its tax returns, the Company has recorded a liability for its best estimate of the probable loss on certain of these positions. The Company believes that its accruals for tax liabilities
are adequate for all open years, based on its assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result primarily from intercompany transfer pricing. Although the
Company believes its recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore assessments can involve both a series of complex judgments about future events
and rely heavily on estimates and assumptions. Although the Company believes that the estimates and assumptions supporting our assessments are reasonable, the final determination of tax audits and any related litigation could be materially different
than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the period or periods
for which that determination is made could result. Due to the complexity involved, the Company is not able to estimate the range of reasonably possible losses in excess of amounts recorded.



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.



The majority of
the Companys marketable securities mature on or before June 30, 2008. All are stated at fair market value as of June 30, 2006 and 2007, and consist of the following (in thousands):



|                         |  |          |        |      |   |       
|------------------------ |  | -------- | ------ | ---- | - | ------
|                         |  | June 30,
|                         |  | 2006     |        | 2007
|Marketable securities    |  |          |        |      |   |       
|U.S. Government Agencies |  | $        | 12,230 |      | $ | 14,612
|Certificates of Deposit  |  |          | 175    |      |   | 176   
|                         |  |          |        |      |   |       
|Total                    |  | $        | 12,405 |      | $ | 14,788
|                         |  |          |        |      |   |       



F-11



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Property and Equipment



Property and equipment are stated at cost and are being depreciated over their estimated useful lives (3 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.



Long-Lived Assets



The Company periodically reviews the carrying amounts of long-lived assets, to determine whether current events or circumstances warrant adjustment to
such carrying amounts. In reviewing the carrying amounts of long-lived assets, the Company considers, among other factors, 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.



Goodwill and Other Intangible Assets



The
Company assesses whether goodwill and indefinite-lived intangibles are impaired on an annual basis. Upon determining the existence of goodwill and/or indefinite-lived intangibles impairment, the Company measures that impairment based on the amount
by which the book value of goodwill and/or indefinite-lived intangibles exceeds its fair value. The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties. Additional
impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstance that would indicate that, more likely than not, the book value of goodwill and/or indefinite-lived intangibles has been impaired.



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 significant in 2005, 2006 or 2007.



Financial instruments, principally forward pricing contracts, are used by the
Company from time to time in the management of its foreign currency exposures. The fair value associated with these forward pricing contracts at June 30, 2006 and 2007 is not significant. 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, marketable securities, 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.



F-12



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In July 2001, we formed a business venture with AG-TECH Corporation, a company developing, selling
and importing packaged software, to sell and support our products in Japan. In connection with the new business venture, we obtained a less than 20% ownership interest in AG-TECH and the ability to elect one director to the AG-TECH Board of
Directors. We do not have the ability to significantly influence or control the operations of AG-TECH and therefore, account for our investment in AG-TECH on the cost method of accounting. AG-TECH Corporation is one of the Companys
distribution partners in Japan and accounted for approximately 13%, 15% and 11% of the Companys revenue during the years ended June 30, 2005, 2006 and 2007 respectively. The AG-TECH distribution agreement has been renewed twice, most
recently for an additional five-year term which expires on June 30, 2012.



Use of Estimates



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



Stock-Based Compensation



The Company accounts
for employee share-based compensation costs, which include stock options and restricted stock, in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R)
and Staff Accounting Bulletin No. 107, Share-Based Payment, using the modified prospective application method. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock option
compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical volatility was used in estimating the fair value of share-based awards rather than implied
volatility, while the expected life was estimated to be four years based on historical trends since the Companys initial public offering. Further, as required under SFAS 123R, the Company now estimates forfeitures for options granted, which
are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. The estimated fair value is charged to earnings on a straight-line basis over the vesting
period of the underlying awards, which is generally four years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. Accordingly, the
estimate of fair value may not represent the value assigned by a third-party in an arms-length transaction. While the estimate of fair value and the associated charge to earnings materially impacts the Companys results of operations, it has no
impact on its cash position.



The Company has elected the
alternative transition method described in FASB Staff Position No. FAS 123R-3 for purposes of calculating the pool of excess tax benefits (APIC pool) available to absorb tax deficiencies recognized subsequent to the adoption of
Statement 123R for employee awards.



Cash received from option
exercises under all share-based payment arrangements for the years ended June 30, 2005, 2006 and 2007, was $1.6 million, $1.8 million and $2.5 million, respectively. The estimated net tax benefit realized for the tax deductions from option
exercises of the share-based payment arrangements was approximately $0.0 million for the year ended June 30, 2005, $0.1 million for the year ended June 30, 2006 and $0.3 million for the year ended June 30, 2007.



F-13



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table illustrates the pro forma effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation in fiscal year 2005 (in thousands, except per share data):



|                                                                                                                                |  |                        |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | -
|                                                                                                                                |  | Year EndedJune 30,2005 |       
|Net income                                                                                                                      |  | $                      | 4,009  |  
|Deduct stock-bases compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                        | (3,389 | )
|                                                                                                                                |  |                        |        |  
|Pro forma net income                                                                                                            |  | $                      | 620    |  
|                                                                                                                                |  |                        |        |  
|                                                                                                                                | 
|Earnings per share, basic:                                                                                                      |  |                        |        |  
|As reported                                                                                                                     |  | $                      | 0.18   |  
|Pro forma                                                                                                                       |  | $                      | 0.03   |  
|                                                                                                                                | 
|Earnings per share, diluted:                                                                                                    |  |                        |        |  
|As reported                                                                                                                     |  | $                      | 0.17   |  
|Pro forma                                                                                                                       |  | $                      | 0.03   |  



Total compensation
cost recognized in income for stock-based employee compensation awards was approximately $3.0 million and $2.1 million for the fiscal years ending June 30, 2006 and 2007, respectively and the total recognized tax benefit related thereto was
approximately $0.2 million and $0.0 million, respectively.



During fiscal 2005, 2006 and 2007, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, assuming no dividends and the following weighted average assumptions:



|                                                     |  |                        |   |  |                               |   |  |      |   |  |      |  
|---------------------------------------------------- |  | ---------------------- | - |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                                                     |  | Employee Stock Options |   |  | Employee Stock  Purchase Plan |  
|                                                     |  | 2005                   |   |  | 2006                          |   |  | 2007 |   |  | 2005 |  
|Risk free interest rate                              |  | 3.58                   | % |  | 4.42                          | % |  | 4.58 | % |  | 2.72 | %
|Volatility factor                                    |  | 1.22                   |   |  | .92                           |   |  | .71  |   |  | 1.22 |  
|Weighted average expected life of options (in years) |  | 4                      |   |  | 4                             |   |  | 4    |   |  | 0.5  |  



The weighted average
estimated grant date fair value, as defined by SFAS 123R, for options granted under the Companys stock option plan during the years ended June 30, 2006 and 2007 was $2.83 and $2.14 per share, respectively. For the year ended June 30,
2005, the weighted average estimated grant date fair value for options granted under the Companys stock option plan was $3.27 per share.



During fiscal year 2006 and 2007 the Company issued 600,000 shares and 195,000 shares, respectively, of restricted stock with a weighted average fair
value of $4.23 and $4.21 per share, respectively. During fiscal year 2007, the Company issued 5,000 restricted stock units. The shares and units are being expensed over their expected terms of three to four years.



As of June 30, 2007, $1.7 million, $1.0 million, $0.4 million and $0.1
million of unrecognized compensation cost related to non-vested awards is expected to be recognized in fiscal years 2008, 2009, 2010 and 2011, respectively.



F-14



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net Income Per Share



Basic earnings 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 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 and restricted shares
using the treasury method, unless such additional shares are anti-dilutive.



Segments



In accordance
with Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information,the Company considers its business activities to be a single
segment.



Recently Issued Accounting Standards



In June 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements
in accordance with FASB Statement of Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes. This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in
the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is continuing to evaluate the adoption of FIN 48 and currently does not expect for it to have a material impact on its
results of operations or financial position.



In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its financial position and results of operations. The Company will adopt SFAS No. 157 on July 1, 2008.



In February 2007, the FASB issued SFAS No. 159,The
Fair Value Option for Financial Assets and Financial Liabilities. The standard permits but does not require entities to measure many financial instruments and certain other items at fair value. Once an entity has elected the fair value option
for designated financial instruments and other items, changes in fair value must be recognized in the statement of operations. The election is irrevocable once made. SFAS No. 159 is effective as of the beginning of the fiscal year that begins
after November 15, 2007. The Company is currently evaluating the accounting permitted by the standard and has not determined if the fair value option will be elected for eligible financial instruments or other items.



F-15



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3.    Property and Equipment



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



|                                               |  |          |         |   |      |   |        |  
|---------------------------------------------- |  | -------- | ------- | - | ---- | - | ------ | -
|                                               |  | June 30, |        
|                                               |  | 2006     |         |   | 2007 |  
|Computer equipment and purchased software      |  | $        | 8,050   |   |      | $ | 6,205  |  
|Office equipment, furniture and fixtures       |  |          | 3,396   |   |      |   | 1,972  |  
|Leasehold improvements                         |  |          | 1,293   |   |      |   | 1,379  |  
|                                               |  |          |         |   |      |   |        |  
|                                               |  |          | 12,739  |   |      |   | 9,556  |  
|Less accumulated depreciation and amortization |  |          | (11,015 | ) |      |   | (7,982 | )
|                                               |  |          |         |   |      |   |        |  
|                                               |  | $        | 1,724   |   |      | $ | 1,574  |  
|                                               |  |          |         |   |      |   |        |  



Depreciation expense
was approximately $1.1 million, $1.3 million and $0.9 million for fiscal years ending June 30, 2005, 2006 and 2007, respectively.



4.    Income Taxes



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



|                                           |  |                    |       |      |   |       |  |   |      
|------------------------------------------ |  | ------------------ | ----- | ---- | - | ----- |  | - | -----
|                                           |  | Year ended June 30
|                                           |  | 2005               |       | 2006 |   | 2007 
|Domestic income                            |  | $                  | 3,861 |      | $ | 2,070 |  | $ | 4,337
|Foreign income                             |  |                    | 416   |      |   | 556   |  |   | 132  
|                                           |  |                    |       |      |   |       |  |   |      
|Income from operations before income taxes |  | $                  | 4,277 |      | $ | 2,626 |  | $ | 4,469
|                                           |  |                    |       |      |   |       |  |   |      



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



|                                |  |                    |     |      |   |        |      |  |   |       |  
|------------------------------- |  | ------------------ | --- | ---- | - | ------ | ---- |  | - | ----- | -
|                                |  | Year ended June 30 |    
|                                |  | 2005               |     | 2006 |   |        | 2007 | 
|Income tax provision (benefit): |  |                    |     |      |   |        |      |  |   |       |  
|Current                         |  |                    |     |      |   |        |      |  |   |       |  
|Federal                         |  | $                  | 122 |      | $ |       |      |  | $ |      |  
|State                           |  |                    |    |      |   | 51     |      |  |   | 55    |  
|Foreign                         |  |                    | 146 |      |   | 99     |      |  |   | (527  | )
|                                |  |                    |     |      |   |        |      |  |   |       |  
|Total current                   |  |                    | 268 |      |   | 150    |      |  |   | (472  | )
|                                |  |                    |     |      |   |        |      |  |   |       |  
|Deferred:                       |  |                    |     |      |   |        |      |  |   |       |  
|Federal                         |  |                    |    |      |   | (2,300 | )    |  |   | 1,207 |  
|State                           |  |                    |    |      |   |       |      |  |   | (303  | )
|Foreign                         |  |                    |    |      |   |       |      |  |   |      |  
|                                |  |                    |     |      |   |        |      |  |   |       |  
|Total deferred                  |  |                    |    |      |   | (2,300 | )    |  |   | 904   |  
|                                |  |                    |     |      |   |        |      |  |   |       |  
|                                |  | $                  | 268 |      | $ | (2,150 | )    |  | $ | 432   |  
|                                |  |                    |     |      |   |        |      |  |   |       |  



F-16



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##### Table of Contents

##### Index to Financial Statements

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 for 2005, 2006 and 2007 as a result of the following (in thousands):



|                                                                                                                   |  |                    |        |   |      |   |        |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                                                   |  | Year ended June 30 |       
|                                                                                                                   |  | 2005               |        |   | 2006 |   |        | 2007 | 
|Computed at statutory rate of 34%                                                                                  |  | $                  | 1,454  |   |      | $ | 893    |      |  | $ | 1,519 |  
|State income taxes, net of federal benefit                                                                         |  |                    |       |   |      |   |       |      |  |   | 175   |  
|Effect of foreign operations                                                                                       |  |                    | 5      |   |      |   | (82    | )    |  |   | 41    |  
|Stock option compensation                                                                                          |  |                    | (251   | ) |      |   | 711    |      |  |   | 228   |  
|Deemed foreign dividends                                                                                           |  |                    | 58     |   |      |   | 28     |      |  |   | 147   |  
|Change in valuation allowance associated with expected realization of deferred tax assets not previously benefited |  |                    |       |   |      |   | (2,300 | )    |  |   | (504  | )
|Benefit of deferred tax assets not previously recognized related to foreign tax credit carryforward                |  |                    | (1,151 | ) |      |   | (1,320 | )    |  |   |      |  
|Benefit of deferred tax asset not previously recognized related to net operating loss carryforward                 |  |                    | (314   | ) |      |   |       |      |  |   |      |  
|Benefit of deferred tax asset not previously recognized related to temporary difference                            |  |                    | 373    |   |      |   | (131   | )    |  |   |      |  
|Federal, foreign and state tax credits generated                                                                   |  |                    |       |   |      |   |       |      |  |   | (500  | )
|Non-deductible charges                                                                                             |  |                    | 32     |   |      |   | 19     |      |  |   | 7     |  
|Reduction of FAS 5 income tax contingencies                                                                        |  |                    |       |   |      |   |       |      |  |   | (613  | )
|Other                                                                                                              |  |                    | 62     |   |      |   | 32     |      |  |   | (68   | )
|                                                                                                                   |  |                    |        |   |      |   |        |      |  |   |       |  
|                                                                                                                   |  | $                  | 268    |   |      | $ | (2,150 | )    |  | $ | 432   |  
|                                                                                                                   |  |                    |        |   |      |   |        |      |  |   |       |  



The components of
deferred income taxes at June 30, 2006 and 2007 are as follows (in thousands):



|                                                      |  |          |        |   |      |   |        |  
|----------------------------------------------------- |  | -------- | ------ | - | ---- | - | ------ | -
|                                                      |  | June 30, |       
|                                                      |  | 2006     |        |   | 2007 |  
|Deferred tax assets:                                  |  |          |        |   |      |   |        |  
|Domestic tax credit carryforwards                     |  | $        | 2,485  |   |      | $ | 622    |  
|Domestic alternative minimum tax credit carryforwards |  |          | 321    |   |      |   | 341    |  
|Canadian net operating loss carryforwards             |  |          | 4,910  |   |      |   | 3,505  |  
|Accrued expenses and reserves                         |  |          | 1,181  |   |      |   | 1,044  |  
|Depreciable assets                                    |  |          | 315    |   |      |   | 390    |  
|Stock-based compensation                              |  |          | 136    |   |      |   | 409    |  
|                                                      |  |          |        |   |      |   |        |  
|Total deferred tax assets                             |  |          | 9,348  |   |      |   | 6,311  |  
|                                                      |  |          |        |   |      |   |        |  
|Deferred tax liabilities:                             |  |          |        |   |      |   |        |  
|Prepaid expenses                                      |  |          | (220   | ) |      |   | (273   | )
|Purchased technology, net                             |  |          | (1,164 | ) |      |   | (440   | )
|                                                      |  |          |        |   |      |   |        |  
|Total deferred tax liabilities                        |  |          | (1,384 | ) |      |   | (713   | )
|Valuation allowance for deferred tax assets           |  |          | (5,664 | ) |      |   | (3,756 | )
|                                                      |  |          |        |   |      |   |        |  
|Net deferred tax assets                               |  | $        | 2,300  |   |      | $ | 1,842  |  
|                                                      |  |          |        |   |      |   |        |  



As of June 30,
2007, the Company expects that upon filing of its domestic tax return for fiscal year 2007 it will have remaining federal research and development credit carryforwards of approximately $0.1 million, state



F-17



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



research and development credit carryforwards of approximately $0.6 million and a state temporary credit carryforward of approximately $0.2 million. These
carryforwards will begin to expire in fiscal 2027, 2021 and 2027, respectively, if not utilized. In addition, the Company expects it will have an Alternative Minimum Tax Credit carryforward, which does not expire, of approximately $0.3 million. The
Company also has Canadian net operating loss carryforwards of $10.9 million, a portion of which expires on an annual basis.



The valuation allowance decreased by approximately $1.9 million during the year ended June 30, 2007, $0.5 million of which relates to the
expected tax benefit associated with the Companys present assessment of the realizability of deferred tax assets not previously benefited and $1.4 million of which relates to the expiration of Canadian net operating loss carryovers not
previously benefited. At June 30, 2007, the Company has a valuation allowance of $3.8 million, which is primarily related to the Canadian net operating loss carryforwards and the determination that these assets will not be able to be utilized
due to the uncertainty of generating sufficient taxable income in the near future.



Deferred tax assets include approximately $0.4 million of federal research and development and Alternative Minimum Tax Credit carryforwards that were generated as a result of filing amended returns during fiscal year
2007 related to Data Junction, which was acquired by the Company in fiscal year 2004. Since the credits relate to periods prior to the Companys acquisition of Data Junction, the benefit of these credit carryforwards was recorded to goodwill.



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 $35,000 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 July 1, 2007, such maximum annual exposure for the policy year ending June 30, 2008 is approximately $1.8 million. 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, 2005, 2006 and 2007 were approximately $1.1 million, $0.8 million, and $0.8 million, 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, 2005, 2006 or 2007. In fiscal years 2005, 2006 and 2007, the Company funded a matching contribution of 10% of participant
contributions made during calendar years 2004, 2005 and 2006 for all participants employed by the Company on December 31, 2004, 2005 and 2006. The amount of the match was approximately $91,000, $94,000 and $79,000 for the fiscal years ended
June 30, 2005, 2006 and 2007, respectively.



6.    Common Stock and Stock Options



The Companys 2006 Equity Incentive Plan as amended (the 2006 Plan) was adopted by the Board of Directors on September 21, 2006, and approved by the stockholders on November 14, 2006, as the successor
to the 1997 Stock Incentive Plan (the 1997 Plan). Outstanding options under the 1997 Plan have been incorporated into the 2006 Plan and no further option grants will be made under the 1997 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 2006 Plan to those options.



F-18



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 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 vesting period for stock options is generally a four-year period. Options are generally exercisable by
the holder only for the vested portion of each grant. The Company may also award Restricted Stock and Stock Appreciation Rights subject to provisions in the 2006 Plan.



During fiscal year 2006 and 2007 the Company issued 600,000 shares and 195,000 shares, respectively, of restricted stock with a weighted
average fair value of $4.23 and $4.21 per share, respectively.



|                                          |  |          |   |  |                                        |      |                                                    |      |                           |   |           |  
|----------------------------------------- |  | -------- | - |  | -------------------------------------- | ---- | -------------------------------------------------- | ---- | ------------------------- | - | --------- | -
|Restricted Stock Awards                   |  | Shares   |   |  | Weighted Average Grant Date Fair
Value |      | Weighted AverageRemainingVesting Period (in years) |      | Grant DateIntrinsic Value |  
|Outstanding and unvested as June 30, 2006 |  | 600,000  |   |  | $                                      | 4.23 |                                                    | 2.59 |                           | $ | 2,538,000 |  
|Granted                                   |  | 195,000  |   |  | $                                      | 4.21 |                                                    | 3.05 |                           | $ | 821,000   |  
|Vested                                    |  |         |   |  |                                        |     |                                                    |     |                           |   |          |  
|Forfeited                                 |  | (200,000 | ) |  | $                                      | 4.25 |                                                    |     |                           | $ | (850,000  | )
|                                          |  |          |   |  |                                        |      |                                                    |      |                           |   |           |  
|Outstanding and unvested as June 30, 2007 |  | 595,000  |   |  | $                                      | 4.24 |                                                    | 2.08 |                           | $ | 2,509,000 |  
|                                          |  |          |   |  |                                        |      |                                                    |      |                           |   |           |  



A summary of changes
in common stock options during the year ended June 30, 2005, 2006 and 2007 is as follows:



|                                   |  |            |   |  |                          |             |                              |   |     
|---------------------------------- |  | ---------- | - |  | ------------------------ | ----------- | ---------------------------- | - | ----
|                                   |  | Shares     |   |  | Range of Exercise Prices |             | WeightedAverageExercisePrice
|Options outstanding, June 30, 2004 |  | 4,948,762  |   |  | $                        | 0.1316.81  |                              | $ | 4.67
|Granted                            |  | 1,224,500  |   |  | $                        | 3.92  6.00 |                              | $ | 4.13
|Exercised                          |  | (430,525   | ) |  | $                        | 1.18  5.65 |                              | $ | 3.00
|Surrendered                        |  | (687,887   | ) |  | $                        | 1.40  9.88 |                              | $ | 5.48
|                                   |  |            |   |  |                          |             |                              |   |     
|Options outstanding, June 30, 2005 |  | 5,054,850  |   |  | $                        | 0.1316.81  |                              | $ | 4.57
|Granted                            |  | 445,500    |   |  | $                        | 4.05  4.45 |                              | $ | 4.20
|Exercised                          |  | (657,875   | ) |  | $                        | 0.13  4.10 |                              | $ | 2.91
|Surrendered                        |  | (1,045,750 | ) |  | $                        | 3.0116.81  |                              | $ | 5.25
|                                   |  |            |   |  |                          |             |                              |   |     
|Options outstanding, June 30, 2006 |  | 3,796,725  |   |  | $                        | 0.9016.81  |                              | $ | 4.62
|Granted                            |  | 375,500    |   |  | $                        | 3.72  4.40 |                              | $ | 3.81
|Exercised                          |  | (860,725   | ) |  | $                        | 0.90  4.35 |                              | $ | 2.89
|Surrendered                        |  | (794,312   | ) |  | $                        | 1.1816.75  |                              | $ | 5.53
|                                   |  |            |   |  |                          |             |                              |   |     
|Options outstanding, June 30, 2007 |  | 2,517,188  |   |  | $                        | 1.0616.81  |                              | $ | 4.81
|                                   |  |            |   |  |                          |             |                              |   |     



F-19



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is additional information relating to options outstanding at June 30, 2007:



|                        |  |                     |  |                                                     |  |                              |       |                  |           |                                 |   |      
|----------------------- |  | ------------------- |  | --------------------------------------------------- |  | ---------------------------- | ----- | ---------------- | --------- | ------------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                                
|Range of Exercise Price |  | Number ofOptions    |  | Weighted-AverageRemainingContractual LifeOf Options |  | WeightedAverageExercisePrice |       | Number ofOptions |           | Weighted Average Exercise Price
|$ 1.06 to $ 2.00        |  | 193,175             |  | 3.74                                                |  | $                            | 1.39  |                  | 193,175   |                                 | $ | 1.39 
|$ 2.31 to $ 4.00        |  | 1,035,413           |  | 6.99                                                |  | $                            | 3.71  |                  | 551,912   |                                 | $ | 3.61 
|$ 4.03 to $ 6.00        |  | 769,000             |  | 7.40                                                |  | $                            | 4.85  |                  | 443,938   |                                 | $ | 5.16 
|$ 6.90 to $ 9.88        |  | 445,100             |  | 5.66                                                |  | $                            | 7.35  |                  | 353,975   |                                 | $ | 7.39 
|$10.00 to $16.81        |  | 74,500              |  | 2.19                                                |  | $                            | 13.26 |                  | 74,500    |                                 | $ | 13.26
|                        |  |                     |  |                                                     |  |                              |       |                  |           |                                 |   |      
|$ 1.06 to $16.81        |  | 2,517,188           |  | 6.49                                                |  | $                            | 4.81  |                  | 1,617,500 |                                 | $ | 5.04 
|                        |  |                     |  |                                                     |  |                              |       |                  |           |                                 |   |      



The aggregate
intrinsic value (the amount by which market price exceeds the option exercise price) for options as of June 30, 2007 is as follow:



|                                   |  |                                                           |      
|---------------------------------- |  | --------------------------------------------------------- | -----
|                                   |  | Year EndedJune 30, 2007Aggregate IntrinsicValue (in 000s)
|Options outstanding at end of year |  | $                                                         | 1,719
|Options exercisable at end of year |  | $                                                         | 1,237



At June 30, 2007,
4,835,461 shares of common stock were reserved for future exercise of stock options and restricted stock awards. As part of the 2006 Plan, shareholders approved a share reserve of 5,396,725 for future exercise of stock options and restricted stock
awards. The share reserve includes 4,396,725 shares that were subject to outstanding awards under the 1997 Plan (determined as of June 30, 2006) and which, if forfeited, cancelled or otherwise terminated are returned to the 2006 Plan share
reserve and made available for subsequent issuance.



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 have 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. 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. Through June 30, 2005, 598,700 shares of common stock were issued under the 1997 Purchase Plan. The Company terminated the 1997
Purchase Plan effective May 1, 2005, immediately following the April 2005 purchase.



F-20



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7.    Earnings Per Share



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



|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                    |  | Year ended June 30 |       
|                                                                                                    |  | 2005               |        | 2006 |   |        | 2007 | 
|Numerator:                                                                                          |  |                    |        |      |   |        |      |  |   |        |  
|Net income                                                                                          |  | $                  | 4,009  |      | $ | 4,776  |      |  | $ | 4,037  |  
|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  
|Denominator:                                                                                        |  |                    |        |      |   |        |      |  |   |        |  
|Denominator for basic earnings per shareweighted average shares                                    |  |                    | 22,341 |      |   | 22,468 |      |  |   | 21,475 |  
|Effect of dilutive securitiesEmployee stock options and restricted stock                           |  |                    | 1,011  |      |   | 911    |      |  |   | 837    |  
|Effect of dilutive securitiesUnrecognized compensation cost, net of tax                            |  |                    |       |      |   | (692   | )    |  |   | (568   | )
|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  
|Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions |  |                    | 23,352 |      |   | 22,687 |      |  |   | 21,744 |  
|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  
|Basic earnings per share                                                                            |  | $                  | 0.18   |      | $ | 0.21   |      |  | $ | 0.19   |  
|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  
|Diluted earnings per share                                                                          |  | $                  | 0.17   |      | $ | 0.21   |      |  | $ | 0.19   |  
|                                                                                                    |  |                    |        |      |   |        |      |  |   |        |  



At June 30, 2005,
2006 and 2007 approximately 1,866,000, 1,469,000 and 1,534,000 shares, respectively, were not included in the diluted earnings per share calculation since the shares are anti-dilutive.



8.    Management Restructuring Charges



The Company announced certain senior management changes effective January 24, 2006, including the replacement of the
former President and Chief Executive Officer, David Sikora, with John Farr, who previously served as the Companys Chief Financial Officer. The Vice President of Corporate Development and Vice President of Marketing also left the company during
the quarter. The Company incurred severance and legal expenses associated with these changes during the quarter ending March 31, 2006 in the amount of $0.8 million.



9.    Goodwill and Other Intangible Assets



As of June 30, 2007, Pervasive had goodwill in the amount of $38.5 million associated with the acquisition of Data
Junction. The Company previously determined, in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets, that it would assess the impairment of goodwill and other intangible assets with
indefinite lives annually in the fourth quarter, or more frequently if other indicators of impairment arise. Other intangible assets, classified as Purchased Technology on the balance sheet, amounted to $2.1 million (net of accumulated
amortization of $5.3 million) as of June 30, 2007. These intangible assets consist of developed technology, including the $6.3 million value assigned to amortizable intangible assets related to developed technology in connection with the
acquisition of Data Junction during the second quarter of fiscal 2004. During fiscal year 2007, the Company filed amended tax returns related to Data Junction that resulted in approximately $0.4 million of federal research and development and
Alternative Minimum Tax Credit carryforwards. Since the credits relate to periods prior to the Companys acquisition of Data Junction, the benefit of these credit carryforwards was recorded to goodwill.



F-21



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company is amortizing the intangible assets on a straight-line basis over their estimated useful
lives, generally five years. Amortization expense for the years ended June 30, 2005, 2006 and 2007 was approximately $1.4 million, $1.6 million and $1.5 million, respectively. During fiscal year 2007, the Company determined that various
purchased technologies were not likely to provide significant future economic benefit and therefore the remaining assets were written off in the amount of $1.1 million. Amortization expense for intangible assets is anticipated to be approximately
$1.4 million for the year ended June 30, 2008 and approximately $0.7 million for the year ended June 30, 2009.



Purchased technology consists of the following (in thousands):



|                         |  |          |        |   |      |   |        |  
|------------------------ |  | -------- | ------ | - | ---- | - | ------ | -
|                         |  | June 30, |       
|                         |  | 2006     |        |   | 2007 |  
|Purchased technology     |  | $        | 8,502  |   |      | $ | 7,450  |  
|Accumulated amortization |  |          | (3,839 | ) |      |   | (5,324 | )
|                         |  |          |        |   |      |   |        |  
|                         |  | $        | 4,663  |   |      | $ | 2,126  |  
|                         |  |          |        |   |      |   |        |  



10.    Commitments and Contingencies



The Company leases its headquarters and international office space and, in some cases, is obligated for its proportionate share of utilities and other defined operating expenses of the related building. The Company
has executed a $175,000 letter of credit as required under the headquarters office lease. Office rent expense for the Companys domestic and international offices for the years ended June 30, 2005, 2006 and 2007, was approximately $2.0
million, $2.2 million, and $2.2 million, respectively.



On
September 24, 2004, the Company entered into a Lease Agreement with Carr Texas OP, LP (the Landlord) pursuant to which the Company leases approximately 91,000 square feet for use as its principal headquarters, of which 14,000 square
feet has been subleased to a third party. The Lease Agreement replaced the Companys prior lease with the Landlord which was terminated on September 24, 2004. The Company paid the Landlord $2,290,000 in satisfaction of the Companys
obligations under the original lease. The cancellation fee was previously accrued by the Company and is reflected in the Companys consolidated balance sheet as of June 30, 2004.



Future minimum lease payments, net of subtenant offsets, at June 30,
2007 under the operating leases for worldwide office space are as follows (in thousands):



|           |  |                             |       |                                                 |   |                                 |  |   |      
|---------- |  | --------------------------- | ----- | ----------------------------------------------- | - | ------------------------------- |  | - | -----
|           |  | FutureMinimum LeasePayments |       | Subtenant Offset toFuture MinimumLease Payments |   | Net FutureMinimum LeasePayments
|2008       |  | $                           | 1,251 |                                                 | $ | 271                             |  | $ | 980  
|2009       |  |                             | 1,364 |                                                 |   | 278                             |  |   | 1,086
|2010       |  |                             | 1,430 |                                                 |   | 285                             |  |   | 1,145
|2011       |  |                             | 1,396 |                                                 |   | 119                             |  |   | 1,277
|2012       |  |                             | 465   |                                                 |   |                                |  |   | 465  
|Thereafter |  |                             |      |                                                 |   |                                |  |   |     
|           |  |                             |       |                                                 |   |                                 |  |   |      
|           |  | $                           | 5,906 |                                                 | $ | 953                             |  | $ | 4,953
|           |  |                             |       |                                                 |   |                                 |  |   |      



The Company is
involved in various legal proceedings which arise from time to time in the normal course of business. While the ultimate results of such matters generally cannot be predicted with certainty, management does not expect any such matters to have a
material adverse effect on the consolidated financial position and results of operations as of June 30, 2007.



F-22



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11.    Segments of Business and Geographic Area Information



The Company is engaged in the design, development and marketing of data
infrastructure software. 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):



|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|--------------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                    |  | Year ended June 30, |       
|                                                    |  | 2005                |        |   | 2006 |   |         | 2007 | 
|Revenue:                                            |  |                     |        |   |      |   |         |      |  |   |        |  
|North America                                       |  | $                   | 30,016 |   |      | $ | 28,782  |      |  | $ | 25,847 |  
|Europe (majority originating from U.S)              |  |                     | 11,321 |   |      |   | 9,429   |      |  |   | 9,645  |  
|Japan                                               |  |                     | 6,336  |   |      |   | 6,776   |      |  |   | 4,556  |  
|Rest of World (all originating from U.S.)           |  |                     | 679    |   |      |   | 593     |      |  |   | 735    |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|Total                                               |  | $                   | 48,352 |   |      | $ | 45,580  |      |  | $ | 40,783 |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|Operating income (loss) (A):                        |  |                     |        |   |      |   |         |      |  |   |        |  
|North America                                       |  | $                   | (5,835 | ) |      | $ | (7,333  | )    |  |   | (7,273 | )
|Europe (inclusive of revenue originating from U.S.) |  |                     | 4,104  |   |      |   | 3,715   |      |  |   | 5,037  |  
|India                                               |  |                     | (879   | ) |      |   | (1,960  | )    |  |   | (111   | )
|Japan                                               |  |                     | 6,326  |   |      |   | 6,758   |      |  |   | 4,547  |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|Total                                               |  | $                   | 3,716  |   |      | $ | 1,180   |      |  | $ | 2,200  |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|Identifiable assets:                                |  |                     |        |   |      |   |         |      |  |   |        |  
|North America                                       |  | $                   | 92,107 |   |      | $ | 98,884  |      |  |   | 96,673 |  
|Europe                                              |  |                     | 1,099  |   |      |   | 978     |      |  |   | 556    |  
|India                                               |  |                     | 485    |   |      |   | 297     |      |  |   | 68     |  
|Japan                                               |  |                     | 514    |   |      |   | 479     |      |  |   | 443    |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  
|Total                                               |  | $                   | 94,205 |   |      | $ | 100,638 |      |  | $ | 97,740 |  
|                                                    |  |                     |        |   |      |   |         |      |  |   |        |  



|(A) |  | Operating income for Europe, India and Japan do not include any allocation of marketing, product development, technical support and administrative costs incurred in the United
States.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12.    Statements of Cash Flows



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



|                                                      |  |                     |       |   |      |   |      |      |  |   |       |  
|----------------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ---- | ---- |  | - | ----- | -
|                                                      |  | Year ended June 30, |      
|                                                      |  | 2005                |       |   | 2006 |   |      | 2007 | 
|Decrease in trade accounts receivable                 |  | $                   | 1,943 |   |      | $ | 13   |      |  | $ | 1,845 |  
|Increase in prepaid expenses and other current assets |  |                     | (97   | ) |      |   | (241 | )    |  |   | (286  | )
|                                                      |  |                     |       |   |      |   |      |      |  |   |       |  
|                                                      |  | $                   | 1,846 |   |      | $ | (228 | )    |  | $ | 1,559 |  
|                                                      |  |                     |       |   |      |   |      |      |  |   |       |  



F-23



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##### Table of Contents

##### Index to Financial Statements

PERVASIVE SOFTWARE INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  
|---------------------------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                 |  | Year ended June 30, |       
|                                                                 |  | 2005                |        |   | 2006 |   |      | 2007 | 
|Increase (decrease) in trade accounts payable                    |  | $                   | (789   | ) |      | $ | 212  |      |  | $ | (386 | )
|Increase (decrease) in accrued payroll and payroll related costs |  |                     | (1,174 | ) |      |   | (127 | )    |  |   | 73   |  
|Increase (decrease) in deferred rent and lease related accruals  |  |                     | (1,262 | ) |      |   | 400  |      |  |   | (3   | )
|Decrease in other accrued expenses                               |  |                     | (612   | ) |      |   | (377 | )    |  |   | (337 | )
|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  
|                                                                 |  | $                   | (3,837 | ) |      | $ | 108  |      |  | $ | (653 | )
|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  
|Supplemental disclosures:                                        |  |                     |        |   |      |   |      |      |  |   |      |  
|Income taxes paid (refunds received) during the year:            |  |                     |        |   |      |   |      |      |  |   |      |  
|Domestic                                                         |  | $                   | 125    |   |      | $ | (73  | )    |  | $ | (581 | )
|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  
|Foreign                                                          |  | $                   | 193    |   |      | $ | 163  |      |  | $ | 85   |  
|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  
|Non-cash activities:                                             |  |                     |        |   |      |   |      |      |  |   |      |  
|Issuance of common stock under employee stock purchase plan      |  | $                   | 200    |   |      | $ |     |      |  | $ |     |  
|                                                                 |  |                     |        |   |      |   |      |      |  |   |      |  



F-24