<PAGE>

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

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

                                   FORM 10-K

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                    For the fiscal year ended June 30, 2001

                                      OR

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

                       Commission file number 000-23043

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

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

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

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

                                (512) 231-6000

             (Registrant's telephone number, including area code)

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

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

                         Common Stock, $.001 par value

                             (Title of each class)

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

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
                  (1)      Yes    X           No
                               -------           -------
                  (2)      Yes    X           No
                               -------           -------

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

   As of September 24, 2001 the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $23,421,000. Shares
of Common Stock held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

   As of September 24, 2001 there were 17,239,232 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 1, 2001.

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                            PERVASIVE SOFTWARE INC.
                            FORM 10-K ANNUAL REPORT
                           FOR THE FISCAL YEAR ENDED
                                 JUNE 30, 2001

                               TABLE OF CONTENTS

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


 PART II................................................................     22
    Item 5.  Market for Registrant's Common Equity and Related
              Stockholder Matters.......................................     22
    Item 6.  Selected Consolidated Financial Data.......................     23
    Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................     24
    Item 7a. Quantitative and Qualitative Disclosures About Market
              Risk......................................................     31
    Item 8.  Consolidated Financial Statements and Supplementary Data...     31
    Item 9.  Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure..................................     31


 PART III...............................................................     32
    Item 10. Directors and Executive Officers of the Registrant.........     32
    Item 11. Executive Compensation.....................................     32
    Item 12. Security Ownership of Certain Beneficial Owners and
              Management................................................     32
    Item 13. Certain Relationships and Related Transactions.............     32


 PART IV................................................................     33
    Item 14. Exhibits, Financial Statement Schedules and Reports on Form
              8-K.......................................................     33


 SIGNATURES.............................................................     34
</TABLE>

                                       i
<PAGE>

                                    PART I

ITEM 1. BUSINESS

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

Overview

   Pervasive Software is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Mid-size Enterprises
(SME). Our high-performance, flexible database, Pervasive.SQL, is widely
installed with more than 4 million server seats licensed to date.
Pervasive.SQL offers advanced data management technology combined with a very
low total cost of ownership (TCO), resulting in an average 7-to-1 improvement
over Microsoft's SQL Server 2000 TCO according to a September 2001 Aberdeen
Group study. With Pervasive.SQL, independent software vendors (ISVs) can
create sophisticated yet low-maintenance business applications that reach far
beyond the desktop to easily share information from workstations to the Web.
Our software is designed for integration by ISVs into Web or client/server
applications sold to SMEs, which typically have environments with little to no
IT infrastructure and require self-tuning, zero administration products. As a
result, end-users can concentrate on running their businesses instead of
managing the database underlying their applications, which is particularly
critical to this large market.

Industry Background

   Cahners In-Stat Group estimates mid-sized businesses (100-999 employees)
will spend approximately $13.3 billion on computer software in 2001, a modest
4% decline from last year's estimates and the first decline in 10 years.
Likewise, computer software spending by small businesses (5-99 employees) is
expected to show a slight increase of less than 1% in 2001 over last year,
reaching nearly $35 billion. Moving forward, In-Stat expects computer software
spending growth to rebound slowly in 2002, as the economy recovers and firms
retrench to compete in the digital frontier. SMEs are clearly under increasing
pressure to stretch their limited IT resources and improve productivity across
their firms. In-Stat believes the slowing economy in 2001 is not expected to
have a long-term effect for SMEs.

   This macroeconomic environment is expected to favor Pervasive, as it
heightens sensitivity to Pervasive's strengths of high-performance solutions
at a low cost. Projected reductions in the level of IT investment indicate
companies are likely to continue to delay major application conversions and
instead enhance and expand the lives of current applications, rather than seek
alternatives. Pervasive is well positioned to benefit from these extended
applications, as well as from new application development when companies look
to Pervasive as the TCO leader. On the other hand, Pervasive may be negatively
impacted by those SMEs who make brand-name decisions, rather than pure cost or
performance decisions, when given a choice of database for their application.
Overall, Pervasive expects continued demand for Pervasive.SQL upgrades and
licenses for the foreseeable future.

Pervasive Partner Model

   Pervasive has operations in Austin, Texas; Brussels; Frankfurt; Paris and
London, and sells its products worldwide in more than 80 countries through
direct and channel distribution.

   Many SME organizations with scarce IT resources rely on this channel of
software developers, value-added resellers, Web and systems integrators and
consultants to help them develop, deploy and maintain business-

                                       1
<PAGE>

critical applications. Our products and marketing approach are specifically
tailored to meet the needs of our channel partners and their customers. In
particular, we have designed sales, marketing, training, professional services
and licensing programs to encourage development of new Web and client/server
applications with Pervasive.SQL. We believe our sharp focus on our channel
partners and their customers provides us with multiple sales opportunities, a
cost-effective, value-added source of service and technical support and a
large, loyal and well-educated channel that develops and deploys applications
using our offerings.

The Pervasive Offering

   Pervasive.SQL combines the high performance associated with enterprise-
class databases with numerous low-maintenance features and is ideally suited
for Web and client/server applications deployed on a wide variety of operating
systems.

   Sales of our most-recent version, Pervasive.SQL 2000i, climbed quickly
after its release in March 2001, representing the fastest adoption rate we
have experienced for a new product version. This is due, in large part, to
high product quality and our renewed effort to improve customer interaction
and feedback that successfully reconnected us with our database customers and
clarified the key requirements they needed from us to be more successful.

  Our offerings allow a broad range of software developers to:

  .  Build low total cost of ownership 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, NetWare and Linux,

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

  .  Extend their applications by leveraging the expertise of Pervasive's
     services team to customize, optimize or align databases within a complex
     environment.

The Pervasive Strategy

   Pervasive's goal is to be the leading, best-value source of low-maintenance
database and information management products & services for the SME market.
Our database and information management offerings are tailored to meet the
specific needs of ISVs and value-added resellers (VARs) who serve the SME
market, and we invest in partnering programs that create a sense of community
and communication between Pervasive, our partners and our customers. Key
elements of our strategy are:

   Focus On Our Existing Customers. Our low total cost of ownership database
is widely installed with more than 4 million server seats licensed since our
inception in 1994. Many of these seats are deployed in SME organizations that
have not yet adopted the latest generation of our database products. Hence, we
believe we have a significant opportunity in upgrading these seats to our
current or next-generation Web and client/server database products. We intend
to reach these customers through our loyal channel of ISVs, VARs, systems
integrators and consultants and continue to ask for their input to guide our
product development activities. We intend to conduct joint marketing programs
with our channel partners encouraging upgrades to recent versions of our
databases, upgrades of additional user counts, upgrades to new or additional
platforms, as well as upgrades of the ISVs' applications themselves.

   Our ongoing and past investments in training and educating our channel
partners worldwide, our long-term relationships with ISVs and VARs and our
success in encouraging them to embed our products into their applications have
created a competitive advantage in the marketplace. Our channel approach is
designed to further the integration of our products into Web and client/server
applications and to stimulate sales of the

                                       2
<PAGE>

applications themselves. We intend to continue to build partner 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
improved support programs.

   In addition, we are pursuing new ways to deliver additional value to SMEs
and are especially focused on opportunities that improve simplicity,
performance and usability as a means to further extend our leadership position
in lowest total cost of ownership.

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

  .  Market our technologies through and to our channel of ISVs who are
     developing business applications for new operating systems, such as
     Windows XP, NetWare 6 and Linux, as well as for the Web,

  .  Pursue opportunities to provide application development, database
     optimization and other consulting services to our channel of ISVs to
     speed time to market of their applications and services,

  .  Deliver extensions of our technologies, such as our replication
     solution, to serve emerging mobile workforce and distributed office
     needs, and

  .  Explore opportunities to partner with third-party tool vendors where the
     Pervasive data management solution is a natural and compelling migration
     path from their proprietary data management solution, and in cases where
     Pervasive's strengths of speed, low total cost of ownership and
     simplicity overshadow brand preferences.

   Remain Committed to Continued Profitability. In March 2001, we reported
that Pervasive had returned to profitability, as predicted, as a result of: 1)
our sharp focus on our core data management business; 2) sequential revenue
growth in both licenses and services; and 3) prudent expense management. This
improved performance was achieved in the midst of a very difficult economic
environment. We remain committed to profitability and believe it will continue
through our prudent management of expenses, increasing sales productivity
around the globe and as a result of our new joint-venture arrangement in
Japan.


                                       3
<PAGE>

Offerings

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

<TABLE>
<CAPTION>
  Product                                 Description                              Platforms

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


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

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

                                       4
<PAGE>

Product Characteristics

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

<TABLE>
<CAPTION>
  Product Characteristics              Description                          Benefits

  <S>                       <C>                                <C>
  Embeddable                Designed to be "hidden" inside an  Allows broad deployment of complex
                            application, permitting            distributed applications into
                            development of a tightly           environments with minimal or no
                            integrated application.            information technology
                                                               infrastructure.
-------------------------------------------------------------------------------------------------
  Small Memory              Internal memory requirements:      Maximizes resources available to
  Footprint                                                    the application and enables
                             Workstation/Workgroup     10 MB   operation on a wide range of
                             Server                    32 MB   hardware.
-------------------------------------------------------------------------------------------------
  Simplified Data           Pervasive.SQL automates            Requires low level of IT support
  Management                administrative functions, such as  making complex and cost effective
  Features                  disk space allocation, memory and  Web and client/server applications
                            index management, which            easily adaptable to meet ever-
                            significantly reduces the need     changing business demands.
                            for ongoing maintenance.
-------------------------------------------------------------------------------------------------
  Multi-platform            Pervasive.SQL supports a broad     Provides flexibility and leverages
  Deployment                range of operating systems         existing company standards and
                            including Windows                  infrastructures, decreasing
                            NT/2000/ME/98/95, and NetWare.     training time and increasing
                                                               productivity, while allowing the
                                                               user to use the best tools for the
                                                               job.
-------------------------------------------------------------------------------------------------
  Portability               Deployments of Pervasive.SQL can   Allows development and deployment
                            be easily migrated to any          to be done on the most optimal
                            supported platform.                platform that meets the business
                                                               and resource requirements.
-------------------------------------------------------------------------------------------------
  Replication Solution      A general-purpose service          Provides support for server
                            offering for replicating database  backup/disaster recovery, load
                            information across databases       distribution, multiple remote
                            backed by Pervasive.SQL servers    offices and mobile workforce.
                            (offered through professional
                            services engagements).
-------------------------------------------------------------------------------------------------
  Reliability               Pervasive.SQL is based on          Provides high degree of data
                            industry-proven technology.        integrity and stability to
                                                               business applications.
-------------------------------------------------------------------------------------------------
  Configurability           Pervasive.SQL can access local     Enables the storage and processing
                            and distributed data               of databases to be distributed
                            simultaneously.                    throughout the network.
-------------------------------------------------------------------------------------------------
  Application Scalability   Applications can run in any        Offers cost savings for developers
                            configuration from single-user     and end users because a single
                            workstation to supporting          application can be deployed in
                            hundreds of concurrent users in    multiple configurations without
                            client/server and Web              modification.
                            environments.
-------------------------------------------------------------------------------------------------
  Industry                  Industry standard interfaces       Allows ODBC, JDBC and OLE DB
  Standard Connectivity     enabling any application to        compliant applications to access
                            communicate with any database.     data stored in any Pervasive.SQL
                                                               database.
-------------------------------------------------------------------------------------------------
  Common MicroKernel        Transactional and relational       Allows developers to choose the
  Database Engine           applications can simultaneously    appropriate data access method:
                            share common databases.            transactional access for high
                                                               volume and relational access for
                                                               reporting, queries and decision
                                                               support.
</TABLE>


                                       5
<PAGE>

Sales and Marketing

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

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

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

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

Customer Service and Technical Support

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

   We also have a professional services team to fulfill demand for fee-based
consulting services from our developer customers and channel partners. These
consulting services include development services to migrate existing
applications to the Web, design and/or customize applications, upgrade
existing applications to the latest Pervasive.SQL release, and optimize
database functionality through performance testing, database schema design and
review, and replication services. End-user consulting opportunities may be
referred to our channel partners to strengthen channel loyalty, build the
channel's technical ability and increase the resource base available for
future growth.

   Our education resources train our channel partners in the use of our
products for optimal performance and feature utilization. In addition, we
offer channel partner certification and authorization programs to enhance the
technical expertise of our authorized channel partners.


                                       6
<PAGE>

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

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

Research and Development

   We have made substantial investments in research and development through
both internal development and technology acquisition. As of June 30, 2001, we
had 49 employees in research and development, and our research and development
expenditures for continuing operations for fiscal 1999, 2000 and 2001 were
$13.1 million, $13.7 million and $10.5 million, respectively. In July 2000, we
reduced our workforce by approximately 100 employees, the majority of whom
were in research and development and technical support relating to our
discontinued Tango product line. In June 2001, we reduced our workforce by
approximately 40 employees, some of whom were in research and development and
technical support relating to our Pervasive.SQL database products. We will
continue to invest heavily in focused research and development resources to
further our vision of software development environments that dramatically
simplify the development, deployment and maintenance of Web and client/server
applications.

   Our development efforts consist primarily of improving performance of
existing product features and adding new differentiating product features to
simplify the development and deployment of our products on multiple computer
and network operating systems. We continue to focus development activities on
enhancing Pervasive.SQL with performance, features and functionality required
by today's SME customers and the channel of ISVs, VARs and consultants who
serve them.

   We are also continuing to invest in data replication technology for
delivery as a service offering, for deployment into customer environments
where high availability of data is a critical need.

Technology

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

  .  Multi-platform functionality (Windows NT, NetWare, Linux), including
     complete database file compatibility between platforms;

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

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

  .  Row level locking for increased concurrency and scalability;

  .  History of compatibility with existing applications and data file
     formats to support our developer community;

  .  Enhanced automatic tuning designed to increase performance and decrease
     cost of ownership;

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

  .  Smart components for simplified installation and configuration;

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


                                       7
<PAGE>

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

  .  Built-in recovery capabilities.

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

   The database configurations available include the following:

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

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

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

Competition

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

Proprietary Rights

   Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights. We
also believe that factors, such as the technological and creative skills of
our personnel, new research and developments, frequent product enhancements,
name recognition and reliable product maintenance, are essential to
establishing and maintaining a technology leadership position. We license our
database software products primarily under "shrink wrap" licenses (i.e.,
licenses included as part of the product packaging). Shrink-wrap licenses are
not negotiated with or signed by individual licensees, and purport to take
effect upon the opening of the product package.

Employees

   As of June 30, 2001, we employed 161 full-time employees, including 44 in
sales and marketing, 49 in research and development, 29 in technical support,
10 in professional services and training and 29 in general and administrative.
We are not subject to any collective bargaining agreement, and we believe that
our relationships with our employees are good.

                                       8
<PAGE>

Facilities

   Our leased headquarters facility in Austin, Texas, consists of
approximately 91,000 square feet. The facility provides additional space and
expansion options and is leased through September 2008. We currently lease
international offices in Frankfurt, Paris, Brussels and London. We continue to
be obligated under a lease for office space in Toronto, which we currently
have subleased to third parties.

                                       9
<PAGE>

                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Our Financial Results May Vary Significantly from Quarter to Quarter

   Our operating results have varied significantly from quarter to quarter 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 of our control. These factors include:

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

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

  .  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 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 a significant customer or distributor;

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

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

  .  Losses associated with discontinued operations;

  .  Changes in our business plan or strategy; and

  .  Changes in generally accepted accounting principles.

   Our revenues in fiscal year 2001 decreased from the previous fiscal year
due to a combination of factors, including: lower sales pipelines, our past
focus of resources and management attention on our discontinued Tango product
line, competitive forces and what we believe to be a general softening in the
packaged client/server applications market contributing to decreased orders
for our Pervasive.SQL products embedded in these applications. Although our
revenues have grown sequentially in each quarter of fiscal 2001, we believe
certain of these factors could continue to negatively affect sales of our
Pervasive.SQL product in the future. 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

                                      10
<PAGE>

competitive pressures or pursue new market opportunities. Any one of these
activities may further limit our ability to adjust spending in response to
revenue fluctuations.

   In July 2000, we announced a restructuring to focus on our core database
business. As part of the restructuring, we recorded in the fourth fiscal
quarter of fiscal 2000, a charge of $17 million or $1.08 per share for
discontinued operations related to our Tango product line. We continued to
support our Tango customers until we completed the sale of the Tango
technology in June 2001. The sale, along with an ongoing assessment of future
liabilities of the discontinued Tango operations, resulted in a gain from
discontinued operations of $1.7 million for the quarter ended June 30, 2001.
Our operating results have fluctuated in the past due to charges relating to
the discontinued Tango operations and may continue to fluctuate in future
quarters depending upon the timing and nature of final disposition of
remaining liabilities of the discontinued Tango product line. Our operating
results could also be harmed in the event that additional liabilities related
to the discontinued Tango product line arise.

   In June 2001, we reduced our workforce by approximately 40 employees, or
20% of our worldwide workforce, to further improve profitability going forward
and as a precautionary measure in light of the continued uncertain economic
environment. The reduction resulted in a non-recurring charge in the fourth
quarter of fiscal year 2001 of $2.5 million, including a charge for the
workforce reduction and related charges for idle leased facilities and certain
intangible assets. Our operating results have fluctuated in the past due to
these charges.

   In July 2001, we formed a new 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.SQL) and Pervasive.SQL products
since 1986. In conjunction with the joint venture, AG-TECH launched a new
operating division staffed with specialists experienced in selling and
supporting Btrieve/Pervasive.SQL to assume responsibility for OEM sales,
packaged software sales, technical support and localization and translation of
our products into Japanese. We cannot be certain that this venture will be
successful which could result in our inability to successfully operate in
Japan. Even if we successfully implement this new venture, we may be unable to
maintain or increase Japanese market demand for our products.

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

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

   Our revenue growth 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 or lower growth rates. There can be
no assurance that we will be able to effectively promote revenue growth rates
in all economic conditions.

We Must Successfully Manage Our Reductions in Workforce

   In July 2000, we reduced our workforce by approximately 100 employees or
approximately 28% of our worldwide workforce. The workforce reduction was
primarily related to the discontinuance of the Tango product line; however, we
also reduced a portion of our Pervasive.SQL related workforce, primarily in
our development

                                      11
<PAGE>

organization. In June 2001, we reduced our workforce by approximately 40
employees, or 20% of our worldwide workforce, to further improve profitability
going forward and as a precautionary measure in light of the continued
uncertain economic environment. Any failure to manage the impact of the
Pervasive.SQL workforce reduction on our Pervasive.SQL product development
schedules, to manage any future workforce reductions, to retain our remaining
Pervasive.SQL employees and to recruit new employees in the future could have
a material adverse effect on our business, operating results and financial
condition.

Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results

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

We Currently Operate Without a Backlog

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

Our Performance Depends on Market Acceptance of Pervasive.SQL

   We derive substantially all of our revenues from the license of our
Pervasive.SQL products. In particular, we are becoming increasingly dependent
on market acceptance of our Pervasive.SQL 2000 product introduced in June 1999
and related upgrades, as revenues from our older database products, Btrieve
and Pervasive.SQL 7, have declined and are expected to continue to decline in
subsequent quarters. Market acceptance of Pervasive.SQL 2000 may be influenced
heavily by factors outside of our control such as new product offerings or
promotions by competitors, 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 what we believe is a softening in the market for client/server
applications of the type built on Pervasive.SQL 2000. Market acceptance of
Pervasive.SQL 2000 and future upgrades also may be influenced by factors in
our control such as product quality, relative demand for feature and
functionality upgrades and the recent and any future price increases.

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

   In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement,
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
goodwill and other intangibles, or write-

                                      12
<PAGE>

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.

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 independent software
vendors, value-added resellers and end users place their orders through
distributors. A relatively small number of distributors have accounted for a
significant percentage of our revenues. In the fiscal year ended June 30,
2001, three distributors combined accounted for an aggregate of approximately
12% of our revenues, as compared to the fiscal year ended June 30, 2000, where
three distributors accounted for an aggregate of approximately 20% of our
revenues. Additionally, we estimate that approximately 20% of our revenues in
the fiscal year ended June 30, 2001 were from sales related to accounting
software applications. We expect we will continue to depend on a limited
number of distributors and sales related to accounting software applications
for a significant portion of our revenues in future periods. Moreover, we
expect that such distributors and sales related to accounting software
applications will vary from period to period. Our distributors have not agreed
to any minimum order requirements. Although we forecast demand and plan
accordingly, if a distributor purchases excess product, we may be obligated to
accept the return of some products.

We Depend on Our Indirect Sales Channel

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

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

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

  .  Our failure to adequately support the sales channel;

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

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

   We cannot be certain 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 (an ISV that embeds our product
into certain of its products and also a channel partner). This will likely
have, and 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

                                      13
<PAGE>

with other companies in areas such as product development, marketing,
distribution and implementation. Maintaining these and other relationships is
a meaningful part of our business strategy. However, many of our current and
potential strategic partners are either actual or potential competitors with
us. In addition, many of our current relationships are informal or, if
written, terminable with little or no notice.

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.
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 with
laws that do not protect our proprietary rights to the same extent as the laws
of the United States.

   Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, we may be subjected to claims of
intellectual property infringement by third parties as the number of products
and competitors in our industry segment continues to grow and the
functionality of products in different industry segments increasingly
overlaps. Any infringement claims, with or without merit, could be time-
consuming, result in costly litigation, 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
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. In the event of a successful claim of product infringement
against us, should we fail or be unable to either license the infringed or
similar technology or develop alternative technology on a timely basis, our
business, operating results and financial condition could be materially
adversely affected.

We Must Adapt to Rapid Technological Change

   Our future success will depend upon our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and new industry standards and
satisfy increasingly sophisticated customer requirements. Rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards
characterize the market for our products. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. As a result of the
complexities inherent in client/server and Web computing environments and the
performance demanded by customers for data management products, new products
and product enhancements can require long development and testing periods. As
a result, significant delays in the general availability of such new releases
or significant problems in the installation or implementation of such new
releases could have

                                      14
<PAGE>

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 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 substantially increase competitive pressures.
We believe that Microsoft will continue to incorporate SQL Server database
technology into its operating system software and certain of its server
software offerings, possibly at no additional cost to its users. We believe
that Microsoft will also continue to enhance its SQL Server database
technology.

   Further, in December 2000, Microsoft acquired Great Plains Software, a
channel partner for Pervasive. This, and any similar transactions may have an
adverse effect on our ability to compete effectively.

   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 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.

                                      15
<PAGE>

In addition, 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.

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

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

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

We 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, 2001, we derived 45% of our revenues outside North America. Our
international operations are generally subject to a number of risks. These
risks include:

  .  Foreign laws and business practices favoring local competition;

  .  Dependence on local channel partners;

                                      16
<PAGE>

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

   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.

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

   To date, the majority of our transactions have been denominated in U.S.
dollars. The majority of our international operating expenses, substantially
all of our sales in Japan and certain other international sales have been
denominated in currencies other than the U.S. dollar. Therefore, our operating
results may be adversely affected by changes in the value of the U.S. dollar.
Certain of our international sales are denominated in U.S. dollars, especially
in Europe. Any strengthening of the U.S. dollar against the currencies of
countries where we sell products denominated in U.S. dollars will increase the
relative cost of our products and could negatively impact our sales in 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 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.

                                      17
<PAGE>

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 1997 Stock
Incentive Plan (the "1997 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.

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

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

                                      18
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

ITEM 2. PROPERTIES

   Our leased headquarters facility in Austin, Texas, consists of
approximately 91,000 square feet. The facility provides additional space and
expansion options and is leased through September 2008. We currently lease
international offices in Frankfurt, Paris, Brussels and London. We continue to
be obligated under a lease for office space in Toronto, which we currently
have subleased to third parties.

ITEM 3. LEGAL PROCEEDINGS

   Complaints were filed in November and December 1999 in the U.S. District
Court for the Western District of Texas against the Company and certain of its
officers and directors. The cases were consolidated in a class action suit
filed in January 2000. The class action complaint alleged that the Company and
certain of its officers and directors violated federal securities laws,
including Rule 10b-5 under the Securities Exchange Act of 1934, by making
false statements and failing to disclose material information to artificially
inflate the price of the Company's common stock during the Class Period of
July 15, 1999 to October 21, 1999. The Company and other defendants filed
motions to dismiss the suit on February 7, 2000. On October 19, 2000, the U.S.
District Court entered its order dismissing plaintiffs' claims against the
Company and the other defendants. The case was dismissed with prejudice.

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, 2001.


                                      19
<PAGE>

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

   Set forth below are the biographical summaries of the executive officers of
the Company as of September 28, 2001:

   The executive officers of the Company, and their ages as of September 28,
2001, and biographical summaries are as follows:

<TABLE>
<CAPTION>
         Name          Age                       Position
         ----          --- ----------------------------------------------------
<S>                    <C> <C>
Ron R. Harris.........  48 President, Chief Executive Officer and Director
John E. Farr..........  41 Chief Financial Officer and Corporate Secretary
David R. Dunnigan.....  40 Senior Vice President, Worldwide Customer Operations
Bruce N. Flory........  50 Vice President, Marketing
Gary G. Allison.......  35 Vice President, Engineering
Gilbert Van Cutsem....  38 Vice President, EMEAA Sales and Marketing
Toni R. McIntosh......  40 Vice President, Human Resources
Kenneth E. Jacobson...  44 Vice President, Business Development
</TABLE>

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

   John E. Farr has served as our Chief Financial Officer since July 2001.
Previously, Mr. Farr served as our 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 a Senior Audit Manager for KPMG LLP, an international
accounting firm. Mr. Farr received a B.B.A. in Accounting from Southwestern
University.

   David R. Dunnigan has served as our Senior Vice President, Worldwide
Customer Operations, since July 2001. Mr. Dunnigan previously served as our
Senior Vice President, Worldwide Sales and Marketing, from March 2000 to July
2001, and as Vice President, Worldwide Sales, from November 1999 to March
2000. Prior to joining Pervasive, Mr. Dunnigan served as Vice President, Sales
and Marketing, for Novient, Inc., a worldwide provider of professional
services automation software for the consulting and systems integration
industry, from September 1998 to November 1999. Prior to Novient, Mr. Dunnigan
served as General Manager, Front Office VAR Division for Aurum Software, a
Baan company, from March 1995 to September 1998. Mr. Dunnigan received a B.S.
in Industrial Distribution from Clarkson University.

   Bruce N. Flory has served as our Vice President, Marketing, since November
2000. Prior to joining Pervasive, Mr. Flory held various marketing and
management positions with Intel, Harte-Hanks Communications, Sterling Software
and BMC Software and most recently served as Vice President of Marketing for
ObjectSpace, Inc. Mr. Flory holds a B.A. degree in Marketing and an M.B.A.
degree in Business Administration from St. Edward's University in Austin,
Texas.

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


                                      20
<PAGE>

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

   Toni R. McIntosh has served as our Vice President, Human Resources, since
December 2000. Previously, Ms. McIntosh served as Director of Human Resources
from June 1998 to December 2000. Prior to joining Pervasive, Ms. McIntosh
served as Director of Human Resources at Crystal Semiconductor and prior to
that was Director of Human Resources at CompuAdd Computer Corp.

   Kenneth E. Jacobson has served as our Vice President, Business Development,
since July 2001. Prior to joining Pervasive, Mr. Jacobson served as a
Principal at Charles River Associates, Boston, and most recently as Vice
President, Marketing, at PolyOne Corporation. Mr. Jacobson received a
bachelor's degree from Drexel University and an M.B.A. degree from Fairleigh
Dickinson University.


                                      21
<PAGE>

                                    PART II

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

   The common stock of the Company is traded in the Nasdaq National Market
under the symbol PVSW. The Company completed its initial public offering and
commenced trading on September 26, 1997. The following tables set forth the
high and low closing sales prices of the Company's common stock for each
quarterly period during the three years ended June 30, 2001.

<TABLE>
<CAPTION>
   Fiscal 1999                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. $12.75 $ 7.50
   Second Quarter................................................. $19.25 $ 7.13
   Third Quarter.................................................. $21.00 $16.00
   Fourth Quarter................................................. $24.88 $13.31
<CAPTION>
   Fiscal 2000                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. $34.50 $18.63
   Second Quarter................................................. $36.31 $ 9.06
   Third Quarter.................................................. $17.00 $10.69
   Fourth Quarter................................................. $14.00 $ 4.13
<CAPTION>
   Fiscal 2001                                                      High   Low
   -----------                                                     ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. $ 5.69 $ 2.06
   Second Quarter................................................. $ 3.13 $ 1.06
   Third Quarter.................................................. $ 2.50 $ 1.03
   Fourth Quarter................................................. $ 1.93 $ 1.00
</TABLE>

   As of September 25, 2001, there were approximately 270 stockholders of
record (which number does not include the number of stockholders whose shares
are held by a brokerage house or clearing agency, but does include such
brokerage house or clearing agency as one record holder). The Company believes
it has in excess of 10,000 beneficial owners of its common stock.

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

                                      22
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the fiscal years ended June 30,
1999, 2000 and 2001 and the consolidated balance sheet data at June 30, 2000
and 2001 are derived from audited consolidated financial statements included
elsewhere in this Form 10-K. The consolidated statements of operations data
for the periods ended June 30, 1997 and 1998 and the consolidated balance
sheet data at June 30, 1997, 1998 and 1999 are derived from audited
consolidated financial statements not included herein.

<TABLE>
<CAPTION>
                                            Year Ended June 30,
                                  --------------------------------------------
                                   1997     1998     1999      2000     2001
                                  -------  -------  -------  --------  -------
                                   (in thousands, except per share data)
<S>                               <C>      <C>      <C>      <C>       <C>
Consolidated Statements of
 Operations Data:
Revenues........................  $24,481  $36,700  $58,038  $ 52,078  $42,158
Costs and expenses:
 Cost of revenues and technical
  support.......................    3,310    5,292    8,027     8,890    9,660
 Sales and marketing............   10,034   15,438   18,154    19,402   18,357
 Research and development.......    5,996    9,556   13,063    13,720   10,545
 General and administrative.....    2,886    3,070    4,798     5,755    6,025
 Business restructuring charge..       --       --       --        --    2,472
                                  -------  -------  -------  --------  -------
Total costs and expenses........   22,226   33,356   44,042    47,767   47,059
                                  -------  -------  -------  --------  -------
Operating income (loss) from
 continuing operations..........    2,255    3,344   13,996     4,311   (4,901)
 Interest and other income,
  net...........................       55      573      825     1,602    1,253
 Income tax provision...........     (593)  (1,101)  (4,452)   (1,774)    (500)
 Minority interest in earnings
  of subsidiary, net of income
  taxes.........................     (127)     (94)     (36)      (19)      --
                                  -------  -------  -------  --------  -------
Income (loss) from continuing
 operations.....................    1,590    2,722   10,333     4,120   (4,148)
                                  -------  -------  -------  --------  -------
Discontinued operations:
 Charge for purchased research
  and development...............       --       --   (1,800)       --       --
 Loss from operations...........       --       --   (6,986)  (17,146)      --
 Income tax benefit.............       --       --    2,031     1,094       --
 Gain (loss) on disposal........       --       --       --   (16,963)   1,692
                                  -------  -------  -------  --------  -------
Gain (loss) from discontinued
 operations.....................       --       --   (6,755)  (33,015)   1,692
                                  -------  -------  -------  --------  -------
Net income (loss)...............  $ 1,590    2,722  $ 3,578  $(28,895) $(2,456)
                                  =======  =======  =======  ========  =======
Basic earnings (loss) per share:
 Income (loss) from continuing
  operations....................  $  1.90  $  0.26  $  0.74  $   0.26  $ (0.26)
 Gain (loss) from discontinued
  operations....................       --       --    (0.48)    (2.11)    0.11
                                  -------  -------  -------  --------  -------
 Net income (loss)..............  $  1.90  $  0.26  $  0.26  $  (1.85) $ (0.16)
                                  =======  =======  =======  ========  =======
Diluted earnings (loss) per
 share:
 Income (loss) from continuing
  operations....................  $  0.12  $  0.18  $  0.65  $   0.23  $ (0.26)
 Gain (loss) from discontinued
  operations....................       --       --    (0.42)    (1.87)    0.11
                                  -------  -------  -------  --------  -------
 Net income (loss)..............  $  0.12  $  0.18  $  0.22  $  (1.64) $ (0.16)
                                  =======  =======  =======  ========  =======
Shares used in computing basic
 earnings (loss) per share......      835   10,468   13,960    15,648   15,830
Shares used in computing diluted
 earnings (loss) per share......   13,080   14,741   15,998    17,622   15,830
<CAPTION>
                                                  June 30,
                                  --------------------------------------------
                                   1997     1998     1999      2000     2001
                                  -------  -------  -------  --------  -------
                                               (in thousands)
<S>                               <C>      <C>      <C>      <C>       <C>
Consolidated Balance Sheet Data:
Working capital.................  $ 1,560  $19,815  $40,461  $ 22,365  $23,565
Total assets....................   10,445   32,643   72,873    47,248   40,468
Long-term liabilities, net of
 current portion................       --       --      565        --       --
Redeemable convertible preferred
 stock..........................    4,026       --       --        --       --
Total stockholders' equity
 (deficit)......................     (394)  23,979   59,086    32,644   29,679
</TABLE>

                                      23
<PAGE>

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

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

Overview

   Pervasive Software is a leading worldwide provider of data management
solutions and services which dramatically simplify the development, deployment
and management of business applications for Small and Mid-size Enterprises
(SME). Our high-performance, flexible database, Pervasive.SQL, is widely
installed with more than 4 million server seats licensed to date. With
Pervasive.SQL, independent software vendors (ISVs) can create sophisticated
yet low-maintenance business applications that reach far beyond the desktop to
easily share information from workstations to the Web. Our software is
designed for integration by ISVs into Web or client/server applications sold
to SMEs, which typically have environments with little to no IT infrastructure
and require self-tuning, zero administration products. As a result, end-users
can concentrate on running their businesses instead of managing the database
underlying their applications, which is particularly critical to this large
market.

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

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

   Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
data management-related development, marketing and technical support resources
behind our current Pervasive.SQL products. Accordingly, revenue from the
license of Pervasive.SQL accounts for substantially all of our data
management-related revenues in fiscal 2000 and 2001. In addition, we released
Pervasive.SQL 2000i in late March 2001 and announced a related price increase
effective April 2001. Our future operating results will depend upon continued
market acceptance of Pervasive.SQL, which it may not achieve. Any decrease in
demand or market acceptance for our Pervasive.SQL product would have a
damaging effect on our business, operating results and financial condition.

   In July 2000, we announced a restructuring to focus on our core data
management business, including the discontinuation of our Tango product line.
The operating results of the Tango product line did not achieve expected
results, and thus we ceased marketing the Tango product. In June 2001, we
completed the sale of the

                                      24
<PAGE>

Tango technology. We recorded Tango as a discontinued operation in the
accompanying financial statements; therefore, the following discussion and
analysis refer only to continuing operations.

   As part of the July 2000 restructuring, we reduced our workforce by
approximately 100 employees, or approximately 28% of our worldwide workforce.
The majority of the reductions occurred in our Toronto office and our Austin
headquarters. The workforce reduction was primarily related to the
discontinuance of the Tango product line; however, we also reduced a portion
of our Pervasive.SQL related workforce, mostly in our Pervasive.SQL
development organization.

   In June 2001, we reduced our workforce by approximately 40 employees, or
approximately 20% of our worldwide workforce, to further improve profitability
going forward and as a precautionary measure in light of the continued
uncertain economic environment. The reduction resulted in a non-recurring
charge in the fourth quarter of fiscal year 2001 of $2.5 million, including a
charge for the workforce reduction and related charges for idle leased
facilities and certain intangible assets.

   In July 2001, we formed a new 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.SQL) and Pervasive.SQL products
since 1986. In conjunction with the joint venture, AG-TECH launched a new
operating division staffed with specialists experienced in selling and
supporting Btrieve/Pervasive.SQL to assume responsibility for OEM sales,
packaged software sales, technical support and localization and translation of
our products into Japanese. We expect the new business venture to result in
improved profitability on sales in Japan as the arrangement allows us to
significantly reduce our costs in Japan.

Results of Operations

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

<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                                   -------------------------
                                                    1999     2000      2001
                                                   ------   ------    ------
   <S>                                             <C>      <C>       <C>
   Revenues.......................................    100%     100%      100%
   Costs and expenses:
     Cost of revenues and technical support.......     14       17        23
     Sales and marketing..........................     31       38        44
     Research and development.....................     23       26        25
     General and administrative...................      8       11        14
     Business restructuring charge................     --       --         6
                                                   ------   ------    ------
   Total costs and expenses.......................     76       92       112
                                                   ------   ------    ------
   Operating income (loss) from continuing
    operations....................................     24        8       (12)
     Interest and other income, net...............      1        3         3
     Income tax provision.........................     (8)      (3)       (1)
                                                   ------   ------    ------
   Income (loss) from continuing operations.......     17        8       (10)
                                                   ------   ------    ------
   Discontinued operations:
     Charge for purchased research and
      development.................................     (3)      --        --
     Loss from operations.........................    (12)     (33)       --
     Income tax benefit...........................      4        2        --
     Gain (loss) on disposal......................     --      (32)        4
                                                   ------   ------    ------
   Gain (loss) from discontinued operations.......    (11)     (63)        4
                                                   ------   ------    ------
   Net income (loss) .............................      6%     (55)%      (6)%
                                                   ======   ======    ======
</TABLE>


                                      25
<PAGE>

 Revenues

   We generated revenues from continuing operations of $58.0 million, $52.1
million and $42.2 million for the fiscal years ended June 30, 1999, 2000 and
2001, respectively, which represents a decrease of 10% from fiscal 1999 to
2000, and a decrease of 19% from fiscal 2000 to 2001. The decrease in revenues
from continuing operations in both fiscal years 2000 and 2001 can be
attributed to competitive pressures and what we believe to be a general
softening in the packaged client/server applications market, contributing to
decreased orders for our Pervasive.SQL products embedded in these
applications. We believe each of the above factors could continue to
negatively affect license revenues for Pervasive.SQL in the future.

   Licenses of our software operating on Windows NT or other Microsoft
operating systems continue to represent approximately 70% of our revenues. We
expect that the percentages of our revenues attributable to licenses of our
software operating on particular platforms will continue to change from time
to time. We cannot be certain that our revenues attributable to licenses of
our software operating on Windows NT, or any other operating system platform,
will grow in the future.

   International revenues, consisting of all revenues from continuing
operations from customers located outside of North America, were $25.5
million, $25.6 million and $18.1 million in fiscal 1999, 2000 and 2001,
representing 43%, 49% and 45% of total revenues, respectively. We attribute
the decrease in international revenue from fiscal year 2000 to 2001 to
competitive pressures and what we believe to be a general softening in the
packaged client/server applications market, contributing to decreased orders
for our Pervasive.SQL products embedded in these applications. We believe each
of the above factors could continue to negatively affect international license
revenues for Pervasive.SQL in the future. We expect that international
revenues will continue to account for a significant portion of our revenues in
the future.

 Costs and Expenses

   Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for
our shrink-wrap software products, the cost to provide technical support,
primarily telephone support which is typically provided within 30 days of
purchase, and license fees for third-party technologies embedded in our
products. Cost of revenues and technical support for continuing operations was
$8.0 million, $8.9 million and $9.7 million in fiscal 1999, 2000 and 2001,
representing 14%, 17%, and 23% of revenues from continuing operations,
respectively. The increase in cost of revenues and technical support in each
period is primarily related to increased technical support and consulting
personnel in the United States, Europe and Japan. Cost of revenues and
technical support increased as a percentage of revenue primarily as a result
of the decrease in revenue in both fiscal 2000 and 2001. We anticipate that
cost of revenues and technical support will decrease in dollar amount in the
future as we reduce costs associated with technical support and training
personnel following our reduction in force in June 2001 and the formation of
our new business venture in Japan, and as we reduce amortization expenses
following the write-off of certain license fees for third-party technologies
embedded in or bundled with our products.

   Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, travel and entertainment, marketing programs
and promotional expenses. Sales and marketing expenses related to continuing
operations were $18.2 million, $19.4 million and $18.4 million in fiscal 1999,
2000 and 2001, representing 31%, 38% and 44% of revenues from continuing
operations, respectively. Sales and marketing expenses increased in dollar
amount in fiscal 2000 primarily due to increased costs associated with hiring
additional sales and marketing personnel, the promotion of Pervasive.SQL and
increased infrastructure costs associated with foreign sales office expansion.
Sales and marketing expenses decreased in dollar amount in fiscal 2001
primarily due to a reduction of costs associated with sales and marketing
personnel. Sales and marketing expenses increased as a percentage of sales in
both fiscal 2000 and 2001 primarily as a result of decreased revenue. We
expect sales and marketing expenses will decrease in dollar amount in the near
term as we reduce costs associated with sales and marketing personnel
following our reduction in force in June 2001 and the formation of our new
business venture in Japan,

                                      26
<PAGE>

partially offset by the timing and extent of product market development
activities and costs associated with new product releases, marketing
promotions, brand awareness campaigns and partner programs.

   Research and Development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
related to continuing operations were $13.1 million, $13.7 million and $10.5
million in fiscal 1999, 2000 and 2001, representing 23%, 26% and 25% of
revenues from continuing operations, respectively. Research and development
expenses increased in dollar amount and as a percentage of revenue in fiscal
2000 primarily due to the increased hiring of, and contracting with,
additional research and development personnel. Research and development costs
decreased in dollar amount and as a percentage of revenue in fiscal 2001
primarily due to the reduction in force in July 2000. We anticipate that
research and development expenses will decrease in dollar amount in the near
term as we reduce costs associated with research and development personnel
following our reduction in force in June 2001 and the formation of our new
business venture in Japan.

   Software development costs that were eligible for capitalization in
accordance with Statement of Financial Accounting Standards No. 86 were
insignificant during these periods. Accordingly, we charged all software
development costs to research and development expenses.

   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
related to continuing operations were $4.8 million, $5.8 million and $6.0
million in fiscal 1999, 2000 and 2001, representing 8%, 11% and 14% of
revenues from continuing operations, respectively. We attribute the increase
in dollar amount in each period primarily to the increased staffing and
associated expenses necessary to manage and support our increased scale of
operations, both domestically and internationally. General and administrative
expenses increased as a percentage of revenue in fiscal years 2000 and 2001
primarily because of the decrease in revenue during fiscal 2000 and 2001. We
believe our general and administrative expenses will decrease in dollar amount
in the near term as we reduce costs associated with general and administrative
personnel following our reduction in force in June 2001 and the formation of
our new business venture in Japan.

   Business Restructuring Charge. Business restructuring charges in fiscal
2001 consist of charges related to our reduction in workforce in June 2001 and
related charges for idle leased facilities and certain intangible assets. We
incurred a non-recurring charge of approximately $2.5 million in fiscal 2001,
representing 6% of revenues from continuing operations. The business
restructuring was initiated to further improve profitability going forward and
as a precautionary measure in light of the continued uncertain economic
environment.

   Provision for Income Taxes. Provision for income taxes related to
continuing operations was approximately $4.5 million, $1.8 million and $0.5
million in fiscal 1999, 2000 and 2001, respectively. Our effective tax rate
related to continuing operations was 30% for fiscal 1999 and 2000. We recorded
a tax provision for fiscal 2001 related to taxes on our foreign operations,
despite our consolidated operating loss for the year.

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

  .  Recent trends in revenue related to continuing operations;

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

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

   Accordingly, we have recorded a valuation equal to the net deferred tax
asset due to uncertainties regarding the realization of deferred tax assets
based on the lack of earnings history. We expect to continue to incur foreign
taxes associated with our international operations while our domestic income
taxes will remain minimal as we utilize substantial net operating losses
carried forward from previous years. See Note 4 of Notes to Consolidated
Financial Statements for further discussion of our provision for income taxes.

                                      27
<PAGE>

   Gain (Loss) from Discontinued Operations. Gain (loss) from discontinued
operations relates to the discontinuation of the Tango product line at the end
of fiscal 2000. Total loss from discontinued operations was $6.8 million in
fiscal 1999 and $33.0 million in fiscal 2000, net of income tax benefits of
$2.0 million and $1.1 million in 1999 and 2000, respectively. Gain from
discontinued operations in fiscal 2001 was $1.7 million. The loss in fiscal
1999 is attributable to operating losses of $7.0 million for the seven-month
period following our acquisition of the Tango product line in November 1998
and a $1.8 million charge for purchased research and development. The loss in
fiscal 2000 includes a $17.1 million loss from operations and a $17.0 million
charge for estimated loss on disposal, including a reduction of Tango-related
assets to their estimated net realizable values and accrual for estimated
future liabilities of the discontinued Tango operations. The gain in fiscal
2001 is the result of the sale of the Tango technology in June 2001, as well
as a reduction in the estimated future liabilities of the discontinued Tango
operations.

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 such periods
when read in conjunction with the audited consolidated financial statements
and notes.

<TABLE>
<CAPTION>
                                                    Quarter Ended
                          -------------------------------------------------------------------------
                          Sept. 30  Dec. 31  Mar. 31  June 30   Sept. 30  Dec. 31  Mar. 31  June 30
                            1999     1999     2000      2000      2000     2000     2001     2001
                          --------  -------  -------  --------  --------  -------  -------  -------
                                        (in thousands, except per share data)
<S>                       <C>       <C>      <C>      <C>       <C>       <C>      <C>      <C>
Revenues................  $16,237   $14,738  $11,254  $  9,849  $10,020   $10,600  $10,712  $10,827
Costs and expenses:
 Cost of revenues and
  technical support.....    2,067     2,576    2,230     2,018    2,464     2,603    2,278    2,314
 Sales and marketing....    4,476     5,230    5,063     4,633    5,035     5,012    4,509    3,801
 Research and
  development...........    3,177     3,607    3,572     3,364    2,976     2,669    2,472    2,427
 General and
  administrative........    1,112     1,635    1,524     1,484    1,488     1,505    1,409    1,625
 Business restructuring
  charges...............       --        --       --        --       --        --       --    2,472
                          -------   -------  -------  --------  -------   -------  -------  -------
Total costs and
 expenses...............   10,832    13,048   12,389    11,499   11,963    11,789   10,668   12,639
                          -------   -------  -------  --------  -------   -------  -------  -------
Operating income (loss)
 from continuing
 operations.............    5,405     1,690   (1,135)   (1,650)  (1,943)   (1,189)      44   (1,812)
Interest and other
 income, net............      491       430      406       275      351       325      292      285
Income tax benefit
 (provision)............   (1,769)     (636)     219       412     (200)     (101)    (100)     (99)
Minority interest in
 (earnings) loss of
 subsidiary, net of
 tax....................      (23)        4       --        --       --        --       --       --
                          -------   -------  -------  --------  -------   -------  -------  -------
Income (loss) from
 continuing operations..    4,104     1,488     (510)     (963)  (1,792)     (965)     236   (1,626)
                          -------   -------  -------  --------  -------   -------  -------  -------
Discontinued operations:
 Loss from operations...   (3,480)   (4,189)  (4,668)   (4,808)      --        --       --       --
 Income tax benefit
  (provision)...........      923     1,551     (668)     (712)      --        --       --       --
 Gain (loss) on
  disposal..............       --        --       --   (16,963)      --        --       --    1,692
                          -------   -------  -------  --------  -------   -------  -------  -------
Gain (loss) from
 discontinued
 operations.............   (2,557)   (2,638)  (5,336)  (22,483)      --        --       --    1,692
                          -------   -------  -------  --------  -------   -------  -------  -------
Net income (loss).......  $ 1,547   $(1,150) $(5,846) $(23,446) $(1,792)  $  (965) $   236  $    66
                          =======   =======  =======  ========  =======   =======  =======  =======
Basic earnings (loss)
 per share:
 Income (loss) from
  continuing
  operations............  $  0.26   $  0.10  $ (0.03) $  (0.06) $ (0.11)  $ (0.06) $  0.01  $ (0.10)
 Gain (loss) from
  discontinued
  operations............    (0.16)    (0.17)   (0.34)    (1.43)      --        --       --     0.11
                          -------   -------  -------  --------  -------   -------  -------  -------
 Net income (loss)......  $  0.10   $ (0.07) $ (0.37) $  (1.49) $ (0.11)  $ (0.06) $  0.01  $  0.00
                          =======   =======  =======  ========  =======   =======  =======  =======
Diluted earnings (loss)
 per share:
 Income (loss) from
  continuing
  operations............  $  0.23   $  0.08  $ (0.03) $  (0.06) $ (0.11)  $ (0.06) $  0.01  $ (0.10)
 Gain (loss) from
  discontinued
  operations............    (0.14)    (0.15)   (0.34)    (1.43)      --        --       --     0.11
                          -------   -------  -------  --------  -------   -------  -------  -------
 Net income (loss)......  $  0.09   $ (0.06) $ (0.37) $  (1.49) $ (0.11)  $ (0.06) $  0.01  $  0.00
                          =======   =======  =======  ========  =======   =======  =======  =======
</TABLE>


                                      28
<PAGE>

<TABLE>
<CAPTION>
                                                    Quarter Ended
                          ------------------------------------------------------------------
                          Sept. 30 Dec. 31 Mar. 31 June 30  Sept. 30 Dec. 31 Mar. 31 June 30
                            1999    1999    2000    2000      2000    2000    2001    2001
                          -------- ------- ------- -------  -------- ------- ------- -------
<S>                       <C>      <C>     <C>     <C>      <C>      <C>     <C>     <C>
As a Percentage of
 Revenues:
Revenues................    100%     100%    100%    100%     100%     100%    100%    100%
Costs and expenses:
 Cost of revenues and
  technical support.....     13       18      20      21       24       25      21      21
 Sales and marketing....     28       36      45      47       50       47      43      36
 Research and
  development...........     19       24      32      34       30       25      23      22
 General and
  administrative........      7       11      13      15       15       14      13      15
 Business restructuring
  charge................     --       --      --      --       --       --      --      23
                            ---      ---     ---    ----      ---      ---     ---     ---
Total costs and
 expenses...............     67       89     110     117      119      111     100     117
                            ---      ---     ---    ----      ---      ---     ---     ---
Operating income (loss)
 from continuing
 operations.............     33       11     (10)    (17)     (19)     (11)     --     (17)
 Interest and other
  income, net...........      3        3       4       3        3        3       3       3
 Income tax benefit
  (provision)...........    (11)      (4)      2       4       (2)      (1)     (1)     (1)
 Minority interest in
  (earnings) loss of
  subsidiary, net of
  tax...................     --       --      --      --       --       --      --      --
                            ---      ---     ---    ----      ---      ---     ---     ---
Income (loss) from
 continuing operations..     25       10      (4)    (10)     (18)      (9)      2     (15)
                            ---      ---     ---    ----      ---      ---     ---     ---
Discontinued operations:
 Loss from operations...    (21)     (28)    (42)    (49)      --       --      --      --
 Income tax benefit
  (provision)...........      6       10      (6)     (7)      --       --      --      --
 Gain (loss) on
  disposal..............     --       --      --    (172)      --       --      --      16
                            ---      ---     ---    ----      ---      ---     ---     ---
Gain (loss) from
 discontinued
 operations.............    (15)     (18)    (48)   (228)      --       --      --      16
                            ---      ---     ---    ----      ---      ---     ---     ---
Net income (loss).......     10%      (8)%   (52)%  (238)%    (18)%     (9)%     2%      1%
                            ===      ===     ===    ====      ===      ===     ===     ===
</TABLE>

   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 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 continuing operations was $9.0 million, $4.4 million and
$5.1 million for fiscal 1999, 2000 and 2001, respectively. The decrease in
cash provided by continuing operations from fiscal 1999 to 2000 resulted
primarily from the decrease in earnings from continuing operations in fiscal
2000. Cash provided by continuing operations increased from fiscal 2000 to
2001 despite a loss from continuing operations in fiscal 2001, primarily due
to non-cash business restructuring charges, a decrease in current assets and
to a lesser extent an increase in accounts payable and accrued liabilities.

   During fiscal 1999, we invested a net amount of $16.8 million in marketable
securities, consisting of various taxable and tax advantaged securities.
During fiscal 2000 and 2001, we received net proceeds of $8.5 million and $6.8
million, respectively, from the sale or maturity of marketable securities. In
addition, we purchased property and equipment totaling approximately $5.7
million, $4.2 million and $0.8 million in fiscal 1999, 2000 and 2001,
respectively. This property consisted primarily of computer hardware and
software for our growing employee base in fiscal 1999 and 2000 and general
upgrade requirements in fiscal 2001, as well as approximately $1.3 million for
furniture, fixtures and improvements related to our new facility in 1999. We
expect that our

                                      29
<PAGE>

capital expenditures will increase in the next fiscal year as compared to
fiscal 2001 as a result of specific capital projects anticipated to upgrade
certain front and back office systems.

   In November 1998, we acquired 93% of the outstanding stock of EveryWare
Development Inc. and acquired the remaining outstanding shares in December
1998. We financed the acquisition by using available funds of approximately
$11.8 million during the quarter ended December 31, 1998. In July 2000, we
discontinued the operations of the Tango product line acquired in our purchase
of EveryWare Development Inc., and in June 2001, we completed the sale of the
Tango technology.

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

   In October 1999, we purchased an additional 19.5% ownership interest in our
majority owned subsidiary, Pervasive Software Co., Ltd. (formerly known as
Btrieve Technologies Japan, Ltd.), by purchasing stock held by a minority
shareholder for $750,000 in cash. The October 1999 acquisition was accounted
for under the purchase method, and, accordingly, the excess of purchase price
over fair market value of net assets acquired of $160,000 was recorded as
goodwill and will be amortized over a 10 year period. After the acquisition,
we hold 100% of the outstanding stock of Pervasive Software Co., Ltd.

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

   We have a stock repurchase plan in place whereby we may repurchase shares
of our common stock up to a total of $5.0 million through July 21, 2002.
Depending on market conditions and other factors, such purchases may be
commenced or suspended at any time without prior notice.

   On June 30, 2001, we had $23.6 million in working capital including $27.1
million in cash and cash equivalents and marketable securities.

Recently Issued Accounting Standards

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

   In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 became effective
for us beginning in the fourth quarter of the year ended June 30, 2001. The
adoption of SAB No. 101 did not have a material effect on our results of
operations or financial position.

   In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after

                                      30
<PAGE>

December 15, 2001. Early adoption is permitted in certain circumstances. Under
the new rules, goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives.

   We are required to adopt the new rules on accounting for goodwill and other
intangible assets no later than the first quarter of fiscal 2003. We have not
yet determined whether we will early adopt the new rules beginning in the
first quarter of fiscal 2002. Application of the nonamortization provisions of
Statement 142 is expected to result in a decrease in operating expenses of
approximately $104,000 per year. During the year of adoption we will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of July 1 of such fiscal year. We are still evaluating
the impact of adoption to determine the impairment charge, if any, that will
be recorded during the first quarter of the fiscal year of adoption.

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 Japan, Germany, France, England and Belgium and conduct
transactions in the local currency of each location. In fiscal 1999 the U.S.
dollar weakened against the Japanese yen. If the U.S. dollar to Japanese yen
rate had remained unchanged throughout fiscal 1999, the result would have been
a decrease in revenue and operating income of approximately $1.2 million and
$85,000, respectively. If the U.S. dollar to Japanese yen rate had remained
unchanged throughout fiscal 2000, the result would have been a decrease in
revenue and operating income from continuing operations of approximately $1.0
million and $20,000, respectively. If the U.S. dollar to Japanese yen rate had
remained unchanged throughout fiscal 2001, the result would have been an
increase in revenue and operating loss of approximately $0.6 million and
$30,000, respectively. If the U.S. dollar to euro rate had remained unchanged
throughout fiscal 2001, the result would have been an increase in operating
loss of approximately $320,000. The impact of fluctuations in the relative
value of all other currencies for fiscal 1999, 2000 and 2001 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, 1999, 2000 and 2001.

   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 14(a)(1) and begin at page F-1 of this Report.

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

   Not applicable.

                                      31
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information regarding directors is incorporated herein by reference
from the section entitled "Election of Directors" of the Company's definitive
Proxy Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934, as amended, for the registrants'
Annual Meeting of Stockholders to be held on November 1, 2001. The Proxy
Statement is anticipated to be filed within 120 days after the end of the
registrant's fiscal year ended June 30, 2001. For information regarding
executive officers of the Company, see the Information appearing under the
caption "Executive Officers of the Registrant" in Part I, Item 4a of this
Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                      32
<PAGE>

                                    PART IV

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

   (a)(1) Financial Statements

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

Index to Consolidated Financial Statements

<TABLE>
<S>                                                                         <C>
Report of Independent Auditors............................................  F-2
Consolidated Balance Sheets at June 30, 2000 and 2001.....................  F-3
Consolidated Statements of Operations for each of the three years in the
 period ended
 June 30, 2001............................................................  F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
 three years in the period ended June 30, 2001............................  F-5
Consolidated Statements of Cash Flows for each of the three years in the
 period ended
 June 30, 2001............................................................  F-6
Notes to the Consolidated Financial Statements............................  F-7
</TABLE>

   (a)(2) Financial Statement Schedules

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

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

   (a)(3) Exhibits

<TABLE>
 <C>     <S>
 3.1*    Restated Certificate of Incorporation
 3.2*    Bylaws of the Company
 4.1*    Reference is made to Exhibits 3.1, 3.2 and 4.3
 4.2*    Specimen Common Stock certificate
 4.3*    Investors' Rights Agreement dated April 19, 1995, between the Company
         and the investors named therein
 10.1*   Form of Indemnification Agreement
 10.2*   1997 Stock Incentive Plan
 10.3*   Employee Stock Purchase Plan
 10.4*   First Amended and Restated 1994 Incentive Plan
 10.10** Lease agreement dated April 2, 1998, between the Company and
         CarrAmerica Realty, L.P. T/A Riata Corporate Park
 21.1    Subsidiaries of the registrant
 23.1    Consent of Independent Auditors
</TABLE>
--------
*  Incorporated by reference to the Company's Registration Statement on Form
   S-1 (File No. 333-32199).
** Incorporated by reference to the Company's Annual Report on Form 10-K for
   the fiscal year ended June 30, 1998 (File No. 000-230431).

   (b) Reports filed on Form 8-K

   On June 26, 2001, the Company filed a Current Report on Form 8-K dated June
26, 2001, which included information under Item 5 (Other Events).

                                      33
<PAGE>

                                   SIGNATURES

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

                                          Pervasive Software Inc.
                                          (Registrant)

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

                                          September 28, 2001
                                          -------------------------------------
                                          Date

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

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

<S>                                    <C>                        <C>
        /s/ Ron R. Harris              President and Chief        September 28, 2001
______________________________________   Executive Officer
            Ron R. Harris               (Principal Executive
                                        Officer)

         /s/ John E. Farr              Chief Financial Officer    September 28, 2001
______________________________________  (Principal Financial and
             John E. Farr               Accounting Officer)

      /s/ Nancy R. Woodward            Director and Chairman of   September 28, 2001
______________________________________  the Board
          Nancy R. Woodward

       /s/ David A. Boucher            Director                   September 28, 2001
______________________________________
           David A. Boucher

      /s/ David R. Bradford            Director                   September 28, 2001
______________________________________
          David R. Bradford

    /s/ Shelby H. Carter, Jr.          Director                   September 28, 2001
______________________________________
        Shelby H. Carter, Jr.

      /s/ James R. Offerdahl           Director                   September 28, 2001
______________________________________
          James R. Offerdahl
</TABLE>

                                       34
<PAGE>

                                  SCHEDULE II

                            PERVASIVE SOFTWARE INC.
                       VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

<TABLE>
<CAPTION>
                                    Additions  Deductions/
                         Balance at Charged to Write-offs              Balance
                         Beginning  Costs and  Charged to    Other     at End
      Description        of Period   Expenses   Allowance  Additions* of Period
      -----------        ---------- ---------- ----------- ---------- ---------
<S>                      <C>        <C>        <C>         <C>        <C>
Allowance for Doubtful
 Accounts:
Year ended June 30,
 1999...................  $   300     $   50      $ 78       $  257    $   529
Year ended June 30,
 2000...................      529        405       589           --        345
Year ended June 30,
 2001...................      345         96        41           --        400

Valuation Allowance for
 Deferred Tax Asset:
Year ended June 30,
 1999...................  $ 1,236     $   --      $816       $4,322    $ 4,742
Year ended June 30,
 2000...................    4,742      9,578        --           --     14,320
Year ended June 30,
 2001...................   14,320      1,685        --           --     16,005
</TABLE>
--------
*  Additions allocated as part of the purchase accounting treatment of the
   acquisition of EveryWare Development Inc

                                      S-1
<PAGE>

                            PERVASIVE SOFTWARE INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors............................................  F-2
Consolidated Balance Sheets at June 30, 2000 and 2001.....................  F-3
Consolidated Statements of Operations for each of the three years in the
 period ended June 30, 2001...............................................  F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
 three years in the period ended June 30, 2001............................  F-5
Consolidated Statements of Cash Flows for each of the three years in the
 period ended June 30, 2001...............................................  F-6
Notes to Consolidated Financial Statements................................  F-7
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Pervasive Software Inc.

   We have audited the accompanying consolidated balance sheets of Pervasive
Software Inc. and Subsidiaries (the "Company") as of June 30, 2001 and 2000,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pervasive
Software Inc. and Subsidiaries at June 30, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

                                       /s/ Ernst & Young LLP

Austin, Texas
July 12, 2001

                                      F-2
<PAGE>

                            PERVASIVE SOFTWARE INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                June 30,
                                                            ------------------
                                                              2000      2001
                                                            --------  --------
                                                             (in thousands,
                                                                 except
                                                               share data)
<S>                                                         <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents, including interest bearing
   investments of $10,999 in
   2000 and $19,303 in 2001................................ $ 12,822  $ 20,593
  Marketable securities....................................   13,322     6,510
  Trade accounts receivable, net of allowance for doubtful
   accounts of $345 in 2000 and $400 in 2001...............    6,350     5,356
  Prepaid expenses and other current assets................    4,475     1,895
                                                            --------  --------
Total current assets.......................................   36,969    34,354
Property and equipment, net................................    7,244     4,755
Intangible assets:
  Excess of cost over fair value of net assets acquired....    1,133     1,133
  Accumulated amortization.................................     (172)     (280)
                                                            --------  --------
Total intangible assets....................................      961       853
Other assets...............................................    2,074       506
                                                            --------  --------
Total assets............................................... $ 47,248  $ 40,468
                                                            ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable................................... $  1,382  $    500
  Accrued payroll and payroll related costs................    1,793     1,583
  Other accrued expenses...................................    3,658     5,263
  Deferred revenue.........................................    1,531     1,530
  Income taxes payable.....................................       --       280
  Liabilities of discontinued operations...................    6,240     1,633
                                                            --------  --------
Total current liabilities..................................   14,604    10,789
                                                            --------  --------
Stockholders' equity:
  Common stock, $0.001 par value; Authorized--75,000,000
   shares; issued and outstanding--15,805,531 shares in
   2000 and 15,927,041 shares in 2001......................   59,950    60,148
  Accumulated other comprehensive loss.....................     (284)     (991)
  Retained deficit.........................................  (27,022)  (29,478)
                                                            --------  --------
Total stockholders' equity.................................   32,644    29,679
                                                            --------  --------
Total liabilities and stockholders' equity................. $ 47,248  $ 40,468
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                            PERVASIVE SOFTWARE INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               Year ended June 30,
                                     -----------------------------------------
                                         1999          2000           2001
                                     ------------  -------------  ------------
                                      (in thousands, except per share data)
<S>                                  <C>           <C>            <C>
Revenues............................ $     58,038  $      52,078  $     42,158
Costs and expenses:
  Cost of revenues and technical
   support..........................        8,027          8,890         9,660
  Sales and marketing...............       18,154         19,402        18,357
  Research and development..........       13,063         13,720        10,545
  General and administrative........        4,798          5,755         6,025
  Business restructuring charge.....           --             --         2,472
                                     ------------  -------------  ------------
Total costs and expenses............       44,042         47,767        47,059
                                     ------------  -------------  ------------
Operating income (loss) from
 continuing operations..............       13,996          4,311        (4,901)
  Interest and other income.........          825          1,602         1,253
                                     ------------  -------------  ------------
Income (loss) before income taxes
 and minority interest..............       14,821          5,913        (3,648)
  Income tax provision..............       (4,452)        (1,774)         (500)
  Minority interest in earnings of
   subsidiary, net of income taxes..          (36)           (19)           --
                                     ------------  -------------  ------------
Income (loss) from continuing
 operations.........................       10,333          4,120        (4,148)
                                     ------------  -------------  ------------
Discontinued operations:
  Charge for purchased research and
   development......................       (1,800)            --            --
  Loss from operations..............       (6,986)       (17,146)           --
  Income tax benefit................        2,031          1,094            --
  Gain (loss) on disposal...........           --        (16,963)        1,692
                                     ------------  -------------  ------------
Gain (loss) from discontinued
 operations.........................       (6,755)       (33,015)        1,692
                                     ------------  -------------  ------------
Net income (loss)................... $      3,578  $     (28,895) $     (2,456)
                                     ============  =============  ============
Basic earnings (loss) per share:
  Income (loss) from continuing
   operations....................... $       0.74  $        0.26  $      (0.26)
  Gain (loss) from discontinued
   operations.......................        (0.48)         (2.11)         0.11
                                     ------------  -------------  ------------
  Net income (loss)................. $       0.26  $       (1.85) $      (0.16)
                                     ============  =============  ============
Diluted earnings (loss) per share:
  Income (loss) from continuing
   operations....................... $       0.65  $        0.23  $      (0.26)
  Gain (loss) from discontinued
   operations.......................        (0.42)         (1.87)         0.11
                                     ------------  -------------  ------------
  Net income (loss)................. $       0.22  $       (1.64) $      (0.16)
                                     ============  =============  ============
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                            PERVASIVE SOFTWARE INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                              Stockholders' Equity
                                  -----------------------------------------------
                                            Accumulated
                                               Other     Retained       Total
                                  Common   Comprehensive Earnings   Stockholders'
                                   Stock       Loss      (Deficit)     Equity
                                  -------  ------------- ---------  -------------
                                        (in thousands, except share data)
<S>                               <C>      <C>           <C>        <C>
Balances at June 30, 1998.......  $26,270     $ (586)    $ (1,705)    $ 23,979
  Issuance of 1,894,500 shares
   of common stock, net of
   issuance costs of $742.......   29,977         --           --       29,977
  Issuance of 33,251 shares of
   common stock in purchase of
   business.....................      326         --           --          326
  Value assigned to replacement
   options issued in purchase of
   a business...................      269         --           --          269
  Acquisition of 31,662 treasury
   shares, cumulative treasury
   shares of 105,674 and cost of
   $21 at June 30, 1999.........      (11)        --           --          (11)
  Issuance of 191,625 shares of
   common stock pursuant to the
   exercise of stock options....      551         --           --          551
  Issuance of 59,956 shares of
   common stock pursuant to the
   employee stock purchase
   plan.........................      487         --           --          487
  Foreign currency translation
   adjustment...................       --        (70)          --          (70)
  Net income....................       --         --        3,578        3,578
                                                                      --------
   Total comprehensive income...                                         3,508
                                  -------     ------     --------     --------
Balances at June 30, 1999.......   57,869       (656)       1,873       59,086
  Issuance of 14,251 shares of
   common stock in purchase of
   business.....................      167         --           --          167
  Acquisition of 58,062 treasury
   shares, cumulative treasury
   shares of 163,736 and cost of
   $51 at June 30, 2000.........      (30)        --           --          (30)
  Issuance of 236,600 shares of
   common stock pursuant to the
   exercise of stock options....    1,187         --           --        1,187
  Issuance of 112,004 shares of
   common stock pursuant to the
   employee stock purchase
   plan.........................      757         --           --          757
  Foreign currency translation
   adjustment...................       --        372           --          372
  Net loss......................       --         --      (28,895)     (28,895)
                                                                      --------
   Total comprehensive loss.....                                       (28,523)
                                  -------     ------     --------     --------
Balances at June 30, 2000.......   59,950       (284)     (27,022)      32,644
  Acquisition of 3,925 treasury
   shares, cumulative treasury
   shares of 167,661 and cost of
   $55 at June 30, 2001.........       (4)        --           --           (4)
  Issuance of 22,838 shares of
   common stock pursuant to the
   exercise of stock options....       22         --           --           22
  Issuance of 96,274 shares of
   common stock pursuant to the
   employee stock purchase
   plan.........................      180         --           --          180
  Foreign currency translation
   adjustment...................       --       (707)          --         (707)
  Net loss......................       --         --       (2,456)      (2,456)
                                                                      --------
   Total comprehensive loss.....                                        (3,163)
                                  -------     ------     --------     --------
Balances at June 30, 2001.......  $60,148     $ (991)    $(29,478)    $ 29,679
                                  =======     ======     ========     ========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                            PERVASIVE SOFTWARE INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                    ---------------------------
                                                      1999     2000      2001
                                                    --------  -------  --------
                                                         (in thousands)
<S>                                                 <C>       <C>      <C>
Cash from continuing operations
  Income (loss) from continuing operations........  $ 10,333  $ 4,120  $ (4,148)
  Adjustments to reconcile net income to net cash
   provided by continuing operations:
   Depreciation and amortization..................     2,323    3,126     3,305
   Business restructuring charge..................        --       --     2,234
   Non cash compensation expense pursuant to
    employee stock purchase plan..................       732      637        76
   Deferred income tax provision (benefit)........      (856)     270        --
   Other non cash items...........................       253      130        (1)
   Change in current assets and liabilities:
     Decrease (increase) in current assets........    (5,112)     522     3,035
     Increase (decrease) in accounts payable &
      accrued liabilities.........................       877   (3,745)      639
     Increase (decrease) in deferred revenue......       425     (633)        3
                                                    --------  -------  --------
Net cash provided by continuing operations........     8,975    4,427     5,143
Cash from discontinued operations
   Gain (loss) from discontinued operations.......    (6,755) (33,015)    1,692
   Depreciation and amortization..................       835    1,443        --
   Charge for purchased research and development..     1,800       --        --
   Write-down of assets and liabilities of
    discontinued operations.......................      (386)  10,723        --
   Income tax benefit.............................     2,031    1,094        --
   Net change in assets and liabilities of
    discontinued operations.......................        --     (162)      (29)
   Accrued liabilities of discontinued
    operations....................................        --    6,240    (4,607)
                                                    --------  -------  --------
Net cash used in discontinued operations..........    (2,475) (13,677)   (2,944)
Cash from investing activities
  Purchase of property and equipment..............    (5,742)  (4,209)     (799)
  Purchase of marketable securities...............   (26,273)  (1,540)  (15,313)
  Proceeds from sale of marketable securities.....     9,438    9,995    22,125
  Purchase of business, net of cash acquired......   (11,867)    (750)       --
  (Increase) decrease in other assets.............        20   (1,079)     (328)
                                                    --------  -------  --------
Net cash provided by (used in) investing
 activities.......................................   (34,424)   2,417     5,685
Cash from financing activities
  Proceeds from issuance of stock, net of issuance
   costs..........................................    30,350       --        --
  Purchase of treasury stock......................       (11)     (30)       (4)
  Payment of royalty to Novell....................      (158)      --        --
  Proceeds from exercise of stock options and
   employee stock purchase plan...................       551    1,187       202
                                                    --------  -------  --------
Net cash provided by financing activities.........    30,732    1,157       198
Effect of exchange rate changes on cash and cash
 equivalents......................................      (269)     372      (311)
                                                    --------  -------  --------
Increase (decrease) in cash and cash equivalents..     2,539   (5,304)    7,771
Cash and cash equivalents at beginning of year....    15,587   18,126    12,822
                                                    --------  -------  --------
Cash and cash equivalents at end of year..........  $ 18,126  $12,822  $ 20,593
                                                    ========  =======  ========
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                            PERVASIVE SOFTWARE INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 June 30, 2001

1. The Company

   Pervasive Software Inc. (the "Company"), is a leading worldwide provider of
data management solutions and services which dramatically simplify the
development, deployment and management of business applications for Small and
Medium Enterprises ("SME"). Pervasive.SQL, the primary product, combines the
high performance associated with enterprise-class databases with low
maintenance features, and is ideally suited for Web and client/server
applications deployed on a wide variety of operating systems and devices. The
Company develops, markets, sells and supports its offerings worldwide through
its principal office in Austin, Texas and through international offices in
Brussels, Frankfurt, Paris and London. In July 2000, the Company announced its
intention to sell its Tango product line and in June 2001, completed the sale
of the Tango technology. Accordingly, the Tango product line is accounted for
as a discontinued operation (see Note 8). The consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.

2. Summary of Significant Accounting Policies

 Revenue Recognition

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

 Software Development Costs

   Software development costs incurred by the Company in connection with its
long-term development projects are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. The Company has not
capitalized any internal costs through June 30, 2001 related to its software
development activities.

 Advertising Costs

   The Company expenses costs of producing advertising and sales related
collateral materials as incurred. Other production costs associated with
direct mail programs, placement costs associated with magazine or other
printed media and all direct costs associated with trade shows and other sales
related events are expensed when the related direct mail is sent, advertising
space is used or the event is held. These expenses for continuing and
discontinued operations combined in 1999, 2000 and 2001 were approximately
$3.0 million, $6.4 million and $1.7 million, respectively.

                                      F-7
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Income Taxes

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

 Cash and Cash Equivalents

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

 Marketable Securities

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

   Substantially all of the Company's marketable securities mature on or
before June 30, 2002. All are stated at cost, which approximates fair market
value as of June 30, 2000 and 2001, and consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                    June 30,
                                                                 --------------
                                                                  2000    2001
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Marketable securities
     U.S. Government agencies................................... $ 7,390 $5,338
     Treasury Notes.............................................   3,926     --
     Commercial Paper...........................................      --    997
     Medium Term Notes..........................................   1,005     --
     Certificates of Deposit....................................   1,001    175
                                                                 ------- ------
       Total.................................................... $13,322 $6,510
                                                                 ======= ======
</TABLE>

 Property and Equipment

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

 Intangible Assets

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

   The Company periodically reviews the carrying amounts of property and
equipment, identifiable intangible assets and excess of cost over fair value
of net assets acquired, which has been purchased in the normal course of
business or acquired through acquisition to determine whether current events
or circumstances, as defined in

                                      F-8
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Financial Accounting Standards Board Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
warrant adjustments to such carrying amounts by considering, among other
things, the future cash inflows expected to result from the use of the asset
and its eventual disposition, less the future cash outflows expected to be
necessary to obtain those inflows. Other than the write-down of the long-lived
assets related to the Tango product line in the year ended June 30, 2000, no
impairment loss has been identified. Management reviews the valuation and
amortization periods of excess of cost over fair value of net assets acquired
on a periodic basis, taking into consideration any events or circumstances
which might result in diminished fair value or revised useful life. No events
or circumstances have occurred to warrant a diminished fair value or reduction
in the useful life of excess of cost over fair value of net assets acquired.

 Foreign Currency Transactions

   For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income and were not significant in 1999,
2000 or 2001.

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

 Fair Value of Financial Instruments

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

 Concentration of Credit Risk

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

   For the year ended June 30, 1999, one distributor accounted for $7.2
million, or 12% of the Company's total revenues. No other customers accounted
for more than 10% of the Company's revenues during the years ended June 30,
1999, 2000 or 2001.

 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 has adopted the provisions of Financial Accounting Standards
Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123").
As allowed by Statement 123, the Company has elected to

                                      F-9
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

continue to account for its employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees.

 Net Income (Loss) Per Share

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

 Segments

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

 Reclassifications

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

 Recently Issued Accounting Standards

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

   In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 was effective for
the Company beginning in the fourth quarter of the year ended June 30, 2001.
The adoption of SAB No. 101 did not have a material impact on the financial
statements of the Company.

   In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Early adoption is permitted in certain circumstances.
Under the new rules, goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives.

   The Company is required to adopt the new rules on accounting for goodwill
and other intangible assets no later than the first quarter of fiscal 2003.
The Company has not yet determined whether it will early adopt the new rules
beginning in the first quarter of fiscal 2002. Application of the
nonamortization provisions of Statement 142 is expected to result in a
decrease in operating expenses of approximately $104,000 per year. During the
year of adoption, the Company will perform the first of the required
impairment tests of goodwill and indefinite

                                     F-10
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

lived intangible assets as of July 1 of such fiscal year. The Company is still
evaluating the impact of adoption to determine the impairment charge, if any,
that will be recorded during the first quarter of the fiscal year of adoption.

3. Property and Equipment

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

<TABLE>
<CAPTION>
                                                                 June 30,
                                                             ------------------
                                                               2000      2001
                                                             --------  --------
   <S>                                                       <C>       <C>
   Computer equipment and purchased software................ $ 11,357  $ 11,983
   Office equipment, furniture and fixtures.................    4,484     3,547
   Leasehold improvements...................................    1,432     1,472
                                                             --------  --------
                                                               17,273    17,002
   Less accumulated depreciation and amortization...........  (10,029)  (12,247)
                                                             --------  --------
                                                               $7,244  $  4,755
                                                             ========  ========
</TABLE>

4. Income Taxes

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

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                       ----------------------
                                                        1999    2000   2001
                                                       ------- ------ -------
   <S>                                                 <C>     <C>    <C>
   Domestic income (loss)............................. $13,671 $5,242 $(3,721)
   Foreign income (loss)..............................   1,150    671      73
                                                       ------- ------ -------
   Income (loss) from continuing operations before
    taxes and minority interest....................... $14,821 $5,913 $(3,648)
                                                       ======= ====== =======
</TABLE>

   As of June 30, 2001, the Company had federal net operating loss
carryforwards of approximately $18.1 million, a research and development
credit carryforward of approximately $456,000 and a foreign tax credit
carryforward of approximately $1.8 million. These carryforwards will begin to
expire in 2020, 2013, and 2003, respectively, if not utilized.

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

<TABLE>
<CAPTION>
                                                          Year ended June 30,
                                                         ------------------------
                                                          1999     2000    2001
                                                         -------  -------  ------
   <S>                                                   <C>      <C>      <C>
   Income tax provision:
     Current:
       Federal.......................................... $ 4,039  $ 1,027  $  --
       Foreign..........................................   1,125      396    500
       State............................................     144       81     --
                                                         -------  -------  -----
     Total current......................................   5,308    1,504    500
                                                         -------  -------  -----
     Deferred:
       Federal..........................................    (731)     405     --
       Foreign..........................................    (125)    (135)    --
                                                         -------  -------  -----
     Total deferred.....................................    (856)     270     --
                                                         -------  -------  -----
                                                         $ 4,452  $ 1,774  $ 500
                                                         =======  =======  =====
</TABLE>


                                     F-11
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The Company's provision for income taxes for the year ended June 30, 2001
consists primarily of withholdings on income generated in foreign countries.
The Company's provision for income taxes differs from the expected provision
amount computed by applying the statutory federal income tax rate of 34% to
income from continuing operations before income taxes and minority interest
for 1999, 2000 and 2001 as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                       -----------------------
                                                        1999    2000    2001
                                                       ------  ------  -------
   <S>                                                 <C>     <C>     <C>
   Computed at statutory rate of 34%.................  $5,040  $2,010  $(1,240)
   Effect of foreign operations......................     441       7       27
   State income taxes, net of federal benefit........      94      53       --
   Tax exempt interest...............................     (91)     --       --
   Research tax credit...............................     (72)   (111)    (150)
   Future benefits not currently recognized..........    (816)     --    1,685
   Foreign Sales Corporation benefit.................      --    (258)      --
   Non-deductible charges and amortization related to
    acquisitions.....................................      34      73       60
   Other.............................................    (178)     --      118
                                                       ------  ------  -------
                                                       $4,452  $1,774  $   500
                                                       ======  ======  =======
</TABLE>

   The components of deferred income taxes at June 30, 2000 and 2001 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                               June 30,
                                                           ------------------
                                                             2000      2001
                                                           --------  --------
   <S>                                                     <C>       <C>
   Deferred tax assets:
     Purchased technology, net............................ $  3,792  $    492
     Domestic net operating loss carryforwards............      935     6,140
     Domestic tax credit carryforwards....................    1,585     2,236
     Canadian net operating loss carryforwards............    3,814     3,897
     Canadian capitalized research and development
      carryforwards.......................................      595       595
     Accrued expenses not deductible for tax purposes.....    3,283     2,627
     Revenue deferred for financial purposes..............      273        --
     Other ...............................................       43        18
                                                           --------  --------
   Total deferred tax assets..............................   14,320    16,005
   Valuation allowance for deferred tax assets............  (14,320)  (16,005)
                                                           --------  --------
   Net deferred tax assets................................ $     --  $     --
                                                           ========  ========
</TABLE>

   At June 30, 2001, the Company's Canadian subsidiary, EveryWare, had
Canadian Federal and Provincial net operating loss carryforwards ("NOL") of
approximately $9.0 million and capitalized research and development cost
carryforwards of approximately $1.4 million. Unless utilized, the NOLs will
expire entirely by fiscal 2006. The capitalized research and development cost
may be carried forward without limitation.

   The Company has established a valuation allowance equal to the net deferred
tax asset due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $1.7 million due to operations during the
year ended June 30, 2001.

5. Employee Benefits

   The Company's employees are offered health coverage under a partially self-
funded plan in which the Company purchases specific stop-loss insurance
coverage at $50,000 per year, per employee. The Company has

                                     F-12
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

also purchased an aggregate stop-loss insurance coverage to limit its maximum
annual exposure to claims funded. Based on the policy census at June 30, 2001,
such maximum annual exposure for the policy year ending December 31, 2001 is
approximately $1.1 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, 1999, 2000 and 2001 were approximately $902,000, $1,244,000,
and $978,000 respectively.

   The Company has a 401(k) retirement plan which is available to all
domestic, full-time employees. The Company's expenses related to the plan were
not significant in the years ended June 30, 1999, 2000 or 2001.

6. Common Stock and Stock Options

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

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

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

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


                                     F-13
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   A summary of changes in common stock options during the year ended June 30,
1999, 2000 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                          Range of     Weighted
                                                          Exercise      Average
                                               Shares      Prices    Exercise Price
                                             ----------  ----------- --------------
   <S>                                       <C>         <C>         <C>
   Options outstanding, June
    30, 1998................................  2,558,799  $0.10-13.88     $ 1.68
     Granted................................  1,572,604  $2.87-24.88     $13.51
     Exercised..............................   (191,625) $0.10-13.88     $ 2.85
     Surrendered............................   (336,750) $0.13-16.75     $ 8.31
                                             ----------
   Options outstanding, June
    30, 1999................................  3,603,028  $0.10-24.88     $ 7.03
     Granted................................  2,056,475  $6.88-20.06     $ 9.09
     Exercised..............................   (236,600) $0.10-13.88     $ 5.21
     Surrendered............................ (1,252,244) $0.13-24.88     $11.98
                                             ----------
   Options outstanding, June
    30, 2000................................  4,170,659  $0.10-24.88     $ 6.66
     Granted................................  2,887,500  $1.06- 3.09     $ 2.11
     Exercised..............................    (22,838) $0.10- 0.90     $ 0.25
     Surrendered............................ (1,691,889) $0.10-24.88     $ 8.04
                                             ----------
   Options outstanding, June
    30, 2001................................  5,343,432  $0.10-24.88     $ 3.79
                                             ==========
</TABLE>

   The following is additional information relating to options outstanding at
June 30, 2001:

<TABLE>
<CAPTION>
                             Options Outstanding         Options Exercisable
                     ----------------------------------- ---------------------
                               Weighted-Average Weighted             Weighted
                                  Remaining     Average               Average
       Range of      Number of Contractual Life Exercise Number of   Exercise
    Exercise Price    Options     of Options     Price    Options      Price
    --------------   --------- ---------------- -------- ----------- ---------
   <S>               <C>       <C>              <C>      <C>         <C>
   $ 0.10 to $ 0.90  1,354,240       3.81        $ 0.11    1,354,240  $   0.11
   $ 1.06 to $ 2.00  1,504,700       9.69        $ 1.25       13,950  $   2.00
   $ 2.31 to $ 5.58  1,003,053       8.93        $ 3.11       31,314  $   3.69
   $ 6.00 to $ 9.88    963,273       8.25        $ 8.05      311,504  $   8.13
   $10.00 to $13.88    286,841       7.81        $11.78      114,849  $  11.90
   $14.75 to $24.88    231,325       7.82        $17.19      112,256  $  17.06
                     ---------                           -----------
   $ 0.10 to $24.88  5,343,432       7.62        $ 3.79    1,938,113  $   3.15
                     =========                           ===========
</TABLE>

   For the options exercised, all related shares are vested at June 30, 2001
and are no longer subject to repurchase by the Company. At June 30, 2001,
5,648,033 shares of common stock were reserved for exercise of stock options.
As part of the Company's 1997 Plan, the number of shares of common stock
available for issuance automatically increased on July 1 each calendar year
beginning July 1, 1998 and ending July 1, 2000 by an amount equal to five
percent (5%) of the shares of common stock and common stock equivalents
outstanding on the trading day immediately preceding July 1, with a maximum
annual increase of 1,000,000 shares. The 1997 Plan was amended in November
2000 to extend the automatic annual increase to July 1 each calendar year
beginning July 1, 2001 and ending July 1, 2003, by an amount equal to five
percent (5%) of the shares of common stock outstanding on the trading day
immediately preceding July 1, with a maximum annual increase of 1,000,000
shares.


                                     F-14
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Pro forma compensation expense regarding net income and earnings per share
is required by Statement 123, which also requires the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to June 30, 1995, under the fair value method prescribed by
Statement 123. During fiscal 1999, 2000 and 2001, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model, with the following weighted average assumptions:


<TABLE>
<CAPTION>
                                                                  Employee
                                                                    Stock
                                             Employee Stock       Purchase
                                                 Options            Plan
                                            -------------------  ------------
                                            1999   2000   2001   2000   2001
                                            -----  -----  -----  -----  -----
   <S>                                      <C>    <C>    <C>    <C>    <C>
   Risk free interest rate.................  5.12%  6.22%  5.08%  6.12%  5.13%
   Dividend yield..........................  0.00%  0.00%  0.00%  0.00%  0.00%
   Volatility factor....................... 0.945  1.414  1.518  1.414  1.518
   Weighted average expected life of
    options (in years).....................     4      4      4    0.5    0.5
</TABLE>

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

<TABLE>
<CAPTION>
                                                       1999    2000     2001
                                                      ------ --------  -------
   <S>                                                <C>    <C>       <C>
   Pro forma stock based compensation expense........ $3,220 $  3,362  $ 2,872
   Pro forma net income (loss)....................... $  358 $(32,257) $(5,328)
   Pro forma basic earnings (loss) per share......... $ 0.03 $  (2.06) $ (0.34)
   Pro forma diluted earnings (loss) per share....... $ 0.02 $  (1.83) $ (0.34)
   Weighted average grant date fair value............ $ 9.43 $   7.83  $  1.86
</TABLE>

7. Earnings Per Share

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

<TABLE>
<CAPTION>
                                                        Year Ended June 30,
                                                       ----------------------
                                                        1999    2000   2001
                                                       ------- ------ -------
   <S>                                                 <C>     <C>    <C>
   Numerator:
     Income (loss) from continuing operations......... $10,333 $4,120 $(4,148)
                                                       ======= ====== =======
   Denominator:
     Denominator for basic earnings per share--
      weighted average shares.........................  13,960 15,648  15,830
     Effect of dilutive securities:
       Employee stock options.........................   2,038  1,974      --
                                                       ------- ------ -------
       Potentially dilutive common shares.............   2,038  1,974      --
     Denominator for diluted earnings per share--
      adjusted weighted average shares and assumed
      conversions.....................................  15,998 17,622  15,830
                                                       ======= ====== =======
   Basic earnings (loss) per share from continuing
    operations........................................ $  0.74 $ 0.26 $ (0.26)
                                                       ======= ====== =======
   Diluted earnings (loss) per share from continuing
    operations........................................ $  0.65 $ 0.23 $ (0.26)
                                                       ======= ====== =======
</TABLE>

   At June 30, 1999 and 2000, approximately 142,000 and 699,000 shares,
respectively, were not included in the diluted earnings per share calculation
since the shares are antidilutive. At June 30, 2001, all outstanding stock

                                      F-15
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

options and other potentially dilutive shares (approximately 5,343,000) were
not included in the diluted earnings per share calculation since the shares
are antidilutive due to the Company's net loss.

8. Business Combinations and Divestitures

 Investment in Pervasive Software Co., Ltd.

   In October 1999, the Company acquired an additional 19.5% ownership
interest in Pervasive Software Co. Ltd. ("Pervasive Japan") by purchasing
stock held by a minority shareholder for $750,000 in cash. The acquisition was
also accounted for under the purchase method and, accordingly, the excess of
purchase price over the fair market value of net assets acquired of $160,000
was recorded as goodwill and will be amortized over a ten year period. After
the acquisition, the Company holds 100% of the outstanding stock of Pervasive
Japan.

   In July 2001, the Company and Pervasive Japan formed a new business venture
with AG-TECH Corporation, a company developing, selling and importing packaged
software, to sell and support the Company's products in Japan. AG-TECH has
been engaged in the sales and support of Btrieve (predecessor to
Pervasive.SQL) and Pervasive.SQL products since 1986. In conjunction with the
joint venture, AG-TECH receives a discount on the purchase of Pervasive
products in Japan, in exchange for assuming responsibility for OEM sales,
packaged software sales, technical support and localization and translation of
our products into Japanese.

 Smithware, Inc.

   On February 13, 1998, the Company acquired Smithware, Inc. ("Smithware") a
developer of database development and reporting components for Pervasive
products. The Company acquired Smithware for approximately $390,000 consisting
of $170,000 in cash, 23,752 shares of common stock of the Company valued at
$160,000 and acquisition costs of $60,000, plus up to an additional $80,000 of
cash and 47,502 shares of stock payable upon achievement of certain milestones
in the future. The Company issued 33,251 shares of common stock valued at
$326,000 and 14,251 shares of common stock valued at $167,000 relating to
milestones achieved in fiscal 1999 and 2000 respectively. In conjunction with
the acquisition, the Company repaid Smithware's outstanding debts of
approximately $110,000. The acquisition has been accounted for under the
purchase method and, accordingly, the operating results of Smithware have been
included in the consolidated financial statements from the date of the
acquisition. The acquisition did not have a material effect on operations. The
excess of purchase price over the fair value of the net assets of $951,000,
(including increases related to milestone achievements in 1999 and 2000), was
recorded as goodwill and is being amortized over a ten year period. As of June
30, 2001, accumulated amortization of goodwill related to the Smithware
acquisition was approximately $276,000.

 EveryWare Development Inc.

   In November and December 1998, Pervasive acquired for cash 93% and 7%,
respectively, of the outstanding common shares of EveryWare Development Inc.
("EveryWare"). The total value of the acquisition, including assumption of
outstanding options and transaction costs, was approximately $11.8 million.

   During June 2000, the Company adopted a formal plan to sell the Tango
product line acquired in the EveryWare acquisition. Accordingly, the Tango
product line is accounted for and presented as a discontinued operation in the
accompanying consolidated financial statements. Included in the $17.0 million
loss on disposal in the accompanying statement of operations for fiscal 2000
is a charge of $10.4 million related to the write-down of certain long-lived
assets (primarily purchased intangibles and goodwill related to the Tango
product line),

                                     F-16
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

termination benefits of $0.7 million related to Tango employees and estimated
operating costs for Tango in fiscal 2001 of $5.9 million.


   In June 2001, the Company completed the sale of the Tango technology. The
gain on disposal in fiscal 2001 consists of the proceeds from the sale of the
Tango technology and a reduction in the estimated future liabilities of the
discontinued Tango operations.

9. Commitments and Contingencies

   The Company leases its headquarters and remote office space and, in some
cases, is obligated for its proportionate share of utilities and other defined
operating expenses of the related building. Office rent expense for our
domestic and international offices for the year ended June 30, 1999, 2000 and
2001, was approximately $2,359,000, $3,215,000, and $2,935,000 respectively,
net of approximately $462,000 of sublease income for the year ended June 30,
2001.

   Future minimum lease payments at June 30, 2001, under the operating leases
for worldwide office space are as follows (in thousands):

<TABLE>
     <S>                                                                 <C>
     2002............................................................... $ 1,877
     2003...............................................................   1,841
     2004...............................................................   1,812
     2005...............................................................   1,888
     2006...............................................................   1,967
     Thereafter.........................................................   4,192
                                                                         -------
                                                                         $13,577
                                                                         =======
</TABLE>

   The Company has entered into certain sublease arrangements. Future offsets
to minimum lease payments as a result of these subleases at June 30, 2001 are
as follows (in thousands):

<TABLE>
     <S>                                                                  <C>
     2002................................................................ $  499
     2003................................................................    219
     2004................................................................    219
     2005................................................................    226
     2006................................................................    163
     Thereafter..........................................................    176
                                                                          ------
                                                                          $1,502
                                                                          ======
</TABLE>

10. General Litigation

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

11. Business Restructuring Charge

   The Company incurred a non-recurring charge of approximately $2.5 million
related to business restructuring for the year ended June 30, 2001. The
business restructuring charge in fiscal 2001 consists of charges related to a
reduction in workforce in June 2001 and related charges for idle leased
facilities and certain

                                     F-17
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

intangible assets. The reduction in workforce consisted of approximately 40
employees, resulting in approximately $600,000 in severance and other employee
termination benefits. At June 30, 2001, the Company had remaining cash outlays
of approximately $600,000 related to restructuring charges.

12. Segments of Business and Geographic Area Information

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

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

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                     ------------------------
                                                      1999    2000     2001
                                                     ------- -------  -------
   <S>                                               <C>     <C>      <C>
   Revenue:
     North America.................................. $32,809 $26,515  $23,320
     Europe (all originating from U.S.).............  15,883  15,644   11,258
     Japan..........................................   7,890   8,679    6,861
     Rest of World (all originating from U.S.)......   1,456   1,240      719
                                                     ------- -------  -------
     Total.......................................... $58,038 $52,078  $42,158
                                                     ======= =======  =======
   Operating income (loss)(A):
     North America.................................. $ 4,814 $(1,987) $(9,514)
     Europe (inclusive of revenue originating from
      U.S.).........................................   8,383   6,666    4,747
     Japan..........................................     799    (368)    (134)
                                                     ------- -------  -------
     Total.......................................... $13,996 $ 4,311  $(4,901)
                                                     ======= =======  =======
   Identifiable assets:
     North America.................................. $66,889 $41,738  $36,614
     Europe.........................................   1,362   1,753      459
     Japan..........................................   4,622   3,757    3,395
                                                     ------- -------  -------
     Total.......................................... $72,873 $47,248  $40,468
                                                     ======= =======  =======
</TABLE>

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

13. Statements of Cash Flows

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

<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                                       -----------------------
                                                        1999     2000    2001
                                                       -------  ------  ------
   <S>                                                 <C>      <C>     <C>
   Decrease (increase) in trade accounts receivable... $(3,806) $3,013  $  733
   Decrease (increase) in prepaid expenses and other
    current assets....................................  (1,306) (2,491)  2,302
                                                       -------  ------  ------
                                                       $(5,112) $  522  $3,035
                                                       =======  ======  ======
</TABLE>


                                     F-18
<PAGE>

                            PERVASIVE SOFTWARE INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
                                                       Year ended June 30,
                                                      ------------------------
                                                       1999    2000     2001
                                                      ------  -------  -------
   <S>                                                <C>     <C>      <C>
   Increase (decrease) in trade accounts payable....  $1,117  $(1,086) $  (566)
   Increase (decrease) in accrued payroll and
    payroll related costs...........................     (71)     408     (386)
   Increase (decrease) in income taxes
    refundable/payable..............................    (930)  (2,701)     227
   Increase (decrease) in other accrued expenses....     761     (366)   1,364
                                                      ------  -------  -------
                                                      $  877  $(3,745) $   639
                                                      ======  =======  =======
   Supplemental disclosures:
     Income taxes paid (refunds received) during the
      year:
       Domestic.....................................  $1,185  $  (564) $(1,782)
                                                      ======  =======  =======
       Foreign......................................  $  793  $   800  $   220
                                                      ======  =======  =======
     Noncash activities:
       Issuance of common stock and options in
        purchase of business........................  $  595  $   167  $    --
                                                      ======  =======  =======
       Issuance of common stock under employee stock
        purchase plan...............................  $  487  $   757  $   180
                                                      ======  =======  =======
</TABLE>

14. Subsequent Event

   In July 2001, the Company implemented an option exchange program allowing
employees to exchange all stock options to purchase shares of the Company's
stock under the Pervasive Software Inc. 1997 Stock Incentive Plan (the Plan)
for new options under the Plan. The Company cancelled approximately 770,000
stock options previously granted to those employees who voluntarily
participated in the program in exchange for an equal number of new options
that will be granted on or after February 27, 2002. The exercise price of
these new options will be equal to the fair market value of the Company's
common stock on the grant date. The program has been organized to comply with
FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation, and is not expected to result in any additional
compensation charges or variable plan accounting.

                                     F-19