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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 MARCH 31, 1997.

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 for the transition period from _______ to _______.

Commission file number 0-23926

                                    GEOWORKS
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             (Exact name of registrant as specified in its charter)

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                 CALIFORNIA                                94-2920371
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       (State or other jurisdiction of                  (I.R.S. Employer
       incorporation or organization)                  Identification No.)

     960 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA                      94501
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     (Address of principal executive offices)                    (Zip code)

                                  510-814-1660
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              (Registrant's telephone number, including area code)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE

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


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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on May 31,
1997, as reported on the Nasdaq National Market, was approximately $ 85,542,819.
Shares of Common Stock held by each executive officer and director and by
certain persons who own five percent (5%) or more of the outstanding Common
Stock have been excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of May 31, 1997, there were 15,524,634 shares of the Registrant's Common
Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1997 Annual Meeting of Shareholders to be held on August 19, 1997 are
incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof.


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                                    GEOWORKS

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----
                                     PART 1

<S>        <C>                                                                       <C>
Item 1     Business                                                                     5
Item 2     Properties                                                                  26
Item 3     Legal Proceedings                                                           27
Item 4     Submission of Matters to a Vote of Security Holders                         27
Item 4A    Executive Officers of the Registrant                                        27


                                     PART 1

Item 5     Market for the Registrant's Common Equity and Related Shareholder Matters   30
Item 6     Selected Financial Data                                                     31
Item 7     Management's Discussion and Analysis of Financial Condition and Results
                 of Operations                                                         34
Item 7A    Quantitative and Qualitative Disclosure About Market Risk                   38
Item 8     Financial Statements and Supplementary Data                                 39
Item 9     Changes in and Disagreements with Accountants on Accounting and
                 Financial Disclosure                                                  58


                                     PART 1

Item 10    Directors and Executive Officers of the Registrant                          58
Item 11    Executive Compensation                                                      58
Item 12    Security Ownership of Certain Beneficial Owners and Management              58
Item 13    Certain Relationships and Related Transactions                              58


                                     PART 1

Item 14    Exhibits, Financial Statement Schedules, and Reports on Form 8-K            59
           Signatures                                                                  66
</TABLE>


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PART I

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

    Many of the discussions in this Form 10-K are forward looking statements,
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 ("Exchange Act"). Words such as "expects,"
"anticipates," "believes," "intends," "plans," "seeks," "estimates," and
variations of such words and similar expressions are intended to identify these
forward looking statements. In particular, discussions of the following topics
include forward looking statements: the anticipated emergence, timing and size
of the market for mobile communicating devices, particularly smart phones; the
Company's strategy for establishing its operating system as a standard for the
smart phone market; the Company's intention to fund and complete ongoing
research and development projects, including the development of a new generation
of its operating system software; the Company's intention to attract new OEM
licensees and to develop additional devices with existing licensees; and the
Company's plans to develop and market wireless content and service technologies
for use by cellular operators.

    Actual results may vary significantly, due to various risks and
uncertainties. In particular, those risks include, but are not limited to, the
following: (i) the Company's business is critically dependent upon the emergence
of a new market and on the activities of a limited number of device
manufacturers, and the Company has no direct control over those activities; (ii)
the Company's success depends upon the acceptance of its existing and future
technologies by existing and new market participants; (iii) development by the
Company of its next generation operating system, and its wireless content and
service technologies, is subject to the scheduling and delivery risks inherent
in the development of complex technologies, and such risks have in the past
caused product delays and may in the future affect the Company's ability to
develop and release new products on a timely basis; (iii) widespread adoption of
mobile communicating devices may depend upon the commercial availability of
complementary relationships and technologies, such as cellular network
infrastructure; (iv) the Company anticipates the emergence and potential impact
of competitive products and services; and (v) the Company has historically
experienced significant losses and disappointing revenue from past products.
Please refer to the detailed discussions of these and other risk factors at Risk
Factors, beginning on page 20.

    Readers are cautioned not to place undue reliance on forward-looking
statements contained herein, which reflect the analysis of the management of
Geoworks only as of the date hereof. Geoworks does not undertake any obligation
to release publicly the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.


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ITEM 1.           BUSINESS

    Geoworks develops and markets operating system and application software for
the emerging markets of mobile communicating devices, focusing principally on
smart phones. Smart phones are next-generation, digital-cellular telephones that
integrate voice and data transmission capabilities--including electronic mail,
facsimile, paging and access to content and services--within one handheld
device. Available in Europe since August, 1996, smart phones are targeted for
availability within Asia and the United States in 1997.

    The Company's primary objective is to establish its operating system
software as a leading operating system platform for the mobile communicating
device market. To achieve this objective, Geoworks' Platform Software Products
group has established OEM licensing relationships with a number of leading
manufacturers of mobile communicating devices, including Nokia, Ericsson Mobile
Communications AB ("Ericsson"), NEC, and Toshiba Corporation ("Toshiba").

    Through its Wireless Content and Services ("WCS") group, the Company's
objective is to leverage its position as an operating system supplier by
developing and marketing products and services to the installed base of mobile
communicating devices, including but not limited to devices, both current and
future, based upon the Company's operating system software. In particular,
through its Wireless Content and Services group, Geoworks intends to work with
wireless operators, content providers, hardware vendors and integrated service
vendors to enable a complete, end-to-end solution for users of smart phones.
Geoworks plans to develop and facilitate software technologies that are intended
to enable cellular operators to provide mobile communicating device users with
access to the rapidly growing stream of electronic content and communications,
including the Internet, World-Wide Web ("WWW"), electronic mail, paging and
targeted interactive content.

    Geoworks' Wireless Content and Services group has established a licensing
relationship with Telecom Finland Oy. The Company is also working with NTT
DoCoMo to identify opportunities for wireless content and services for the
Japanese market.

    Geoworks has also previously licensed its GEOS operating system technology
to manufacturers of electronic organizers and consumer computing devices,
including Brother International Corporation ("Brother"), Canon Business
Machines, Inc. ("Canon Business Machines"), and Hewlett-Packard Company
("Hewlett-Packard"). The Company has also in the past developed products for
America Online Incorporated ("America Online"), Casio Computer Company Limited
("Casio"), International Business Machines Corporation ("IBM"), Motorola Inc.'s
EMBARC Subsidiary ("Motorola"), and Sharp Electronics Corporation ("Sharp").


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    Hewlett-Packard, Nokia, Novell and Toshiba have also made significant equity
investments in Geoworks.

INDUSTRY BACKGROUND

Computing Market Trends

    Over the past four decades, significant new markets have emerged in the
computing industry around innovative applications of microprocessor technology.
During the 1960s, the introduction of powerful, multi-million dollar mainframe
computers provided the ability to automate the business enterprise under the
control of a few highly trained computer professionals. In the 1970s, the
emergence of minicomputers, priced an order of magnitude less than mainframe
computers, made computing technology available at the departmental level, though
still under the control of computer professionals.

    In the 1980s, dramatically less expensive personal computers brought
computing technology to the desktop, allowing individual workers to efficiently
perform tasks which were previously executed only at the departmental level. The
1990s have witnessed the integration of technology in products sold to a market
far broader than computer professionals. Products such as pagers, electronic
organizers, and cellular telephones have begun to achieve widespread unit growth
and mass market penetration among consumers. In each of the preceding computing
markets, lower prices have resulted from the combination of higher
microprocessor integration and more efficient system software. These lower
prices have been accompanied by new distribution methods and broader customer
profiles, creating opportunities for new market participants, many of whom had
not been leading participants in the previous market.


The Mobile Communicating Device Market

    The Company believes that there is now emerging a significant new market
based upon mobile communicating devices, such as smart cellular telephones,
which combine wireless voice communications with applications and services such
as fax, electronic mail, interactive content and access to the Internet and WWW.
The Company believes that the mobile communicating device market will develop
through the addition of data capabilities to existing voice-only cellular
telephones. The Company expects these products to be designed to provide the
user with greater mobility and greater access to information from a variety of
sources, including cellular networks, the Internet and the WWW. For example,
mobile professionals may use mobile communicating devices to stay in touch with
their office through wireless communications, send and receive e-mail, schedule
appointments and retrieve data.

    The Company believes the mobile communicating device market will have the
following characteristics:


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    Segmented Market. The Company believes that the mobile communicating device
market will exhibit characteristics of both the existing cellular telephone
market and the current, highly segmented consumer electronics market. Both of
these markets are focused on individual users, and are characterized by diverse
product offerings, significant differentiation among product lines and wide
price/performance ranges within each product line. In such a market, hardware
manufacturers may choose to offer a specialized method for users to control and
interact with each product (a "user interface") in order to customize that
product for its targeted segment. In addition, the Company believes that, within
each segment of the mobile communicating device market, manufacturers will
endeavor to provide differentiated devices and services that will avoid
replicating the commodity nature of the PC hardware market.

    Unique Operating System Requirements. As the mobile communicating device
market emerges, the Company believes consumers will not be satisfied with fixed
functionality, such as that found in standard cellular phones, organizers and
pagers. Rather, it is expected that consumers will demand "intelligent" devices
that are able to provide a broad and flexible range of functionality. This will
require the incorporation of a graphical operating system in the device. To make
the devices affordable, the operating system must be efficient in its usage of
limited microprocessor (CPU), memory (RAM) and storage (ROM) resources. The
Company believes that current operating systems designed for PCs or their
subsets are not well suited for use in mobile communicating devices. In addition
to their large size and inefficient coding, current operating systems allow for
only a single user interface. The Company believes that the consumer electronics
companies who produce devices will demand unique interfaces which vary with the
device and the sophistication of the user. In addition, devices will have to be
designed for "ease of use" by the average consumer. The Company believes that
delivering "ease of use" will require a sophisticated operating system with an
innovative approach to user interface technology.

    Price Sensitivity. The Company believes that consumer demand for mobile
communicating devices will be related to the price of such devices. As mobile
communicating device prices decline, volumes should increase. While mobile
communicating devices may initially be introduced at higher prices, as with many
other consumer electronic devices, the Company anticipates that prices will
typically decline as unit volumes increase.

    Aftermarket For Products And Services. The Company believes that the
anticipated volume and diversity of products and users in the mobile
communicating device market will create opportunities for aftermarket products
and services, i.e., products and services which are intended for the installed
base of mobile communicating device owners. In contrast to the PC market, which
has traditionally been focused on business productivity applications (word
processors, spreadsheets, databases and presentation graphics), the Company
believes that applications for the mobile communicating device market will be
distributed across a broader range of categories including communications
(e-mail, Internet connectivity, paging and access to electronic information),
connectivity (access 


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to local, corporate and public networks), information publishing (reference,
travel and news), and personal productivity applications (time and contact
management, expense reports, and the like).

    The emergence of the Internet and commercial online services has
demonstrated the consumer interest in up-to-date information access. While to
date this trend has been limited to the wired world, the Company believes that
in the future an increase in the delivery of information over wireless networks
will also occur. Access to the Internet and targeted, market-specific
information services are expected to play an important role in mobile
communicating device differentiation.

THE GEOWORKS SOLUTION

    Geoworks develops and markets operating system and application software for
the emerging mobile communicating device market. Since its inception, the
Company has focused on developing, optimizing and enhancing software which
excels in environments with limited microprocessor power and memory and storage
capacity. The Company is focused on the mass market for mobile communicating
devices, with the goal of creating the preferred operating system software
solution for these products. The result of these efforts, the Company's GEOS(R)
system software, has been specifically designed to be a key underlying and
enabling technology in this market. The Company believes that the GEOS system
software provides the functionality and efficiency that will enable hardware
manufacturers to provide the features and pricing structure necessary for
successful mobile communicating devices.

    The Company believes that there are three primary points of differentiation
which make the GEOS system software well suited as an operating system for
mobile communicating devices. First, the GEOS system software incorporates a
patented, flexible user interface that allows hardware manufacturers to
customize the "look and feel" of the user interface for a specific product or
market segment, allowing for a high degree of product differentiation. This
flexible user interface also allows the Company and independent software
developers to write applications that, without major modifications, operate on
different mobile communicating devices with different user interfaces. Second,
the integration in GEOS of standard communication protocols is designed to allow
user access to cellular networks, corporate databases, the Internet and WWW, and
personal desktop computer systems. This technology is intended to enable
cellular operators, content providers, and corporate MIS managers to deliver
information services--any time, anywhere--to mobile communicating device users.
Third, the efficient design of the GEOS system software provides functionality
comparable to that of other advanced operating systems but with significantly
lower microprocessor, memory and storage requirements. The Company's GEOS system
software incorporates advanced operating system technologies such as
object-oriented programming, multi-tasking, high-quality imaging, communications
capabilities and Internet protocol support, all implemented in compact,
high-performance code.


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    The previous discussion summarizes some of the points of differentiation for
the Company's GEOS technology, which is now in its fifth generation of
development. The GEOS technology operates on microprocessors based upon the
Intel x86 architecture. The Company is currently developing a
processor-independent operating system designed specifically for the mobile
communicating device market. The Company believes that this
processor-independent operating system solution will allow hardware
manufacturers to deliver a broader range of functionality and price points as
well as reduce development cycle time. There can be no assurance that the
processor-independent operating system will contain all of the points of
differentiation described above with respect to the GEOS operating system, or
that the Company will successfully execute its development strategy. These and
other risks are discussed under Risk Factors, elsewhere in this Form 10-K.

GEOWORKS STRATEGY

    Through the Company's Platform Software Products group, the Company's
primary objective is to establish its operating system software as a leading
operating system technology for the mobile communicating device market. Through
its WCS group, the Company's objective is to enhance and leverage this position
by marketing a variety of software products and services to cellular network
operators to sell to the installed base of mobile communicating devices,
including technology and services intended to facilitate messaging, content
delivery, data protection and access and use of the Internet. The Company's
strategy has the following components:

    Focus On The Smart Phone Segment Of The Mobile Communicating Device Market.
Since its inception, the Company has designed software focused on the particular
requirements of affordable, high-volume computing devices. This focus has
resulted in extensive experience and expertise in designing and delivering
efficient and highly functional operating system software suitable for mobile
communicating devices. The Company believes that its extensive experience and
sustained focus give it a competitive advantage in delivering the system
software necessary for successful mobile communicating devices. The Company has
chosen to focus on the smart phone segment of this market.

    The Company believes its technology is well suited for a variety of mobile
communicating devices and electronic organizers. However, the Company believes
that the smart phone segment will be the first to realize significant volume
sales, and therefore is concentrating on developing complete solutions for the
smart phone market. The Company believes that the key to delivering successful
products in this segment lies in developing complete, end-to-end solutions,
including efficient system software which enables easy-to-use functionality at
competitive prices, as well as content and services to extend the functionality
of the device.

    Establish Alliances To Penetrate The Mobile Communicating Device Market.
Geoworks has established alliances and OEM license relationships with leading


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manufacturers that it believes are capable of expanding the mobile communicating
device market. The Company intends to expand its relationships with existing
licensees as well as to establish additional relationships in the future. The
Company believes that it can leverage the greater resources, experience and
market presence of its licensees to expand the range of devices and applications
incorporating the Company's operating system software.

    The Company has developed relationships to create mobile communicating
devices with a number of leading hardware manufacturers, including the
following:

    Ericsson. Ericsson has licensed the Company's system software to design a
family of smart phones. Ericsson is a leading cellular infrastructure provider
and a leading provider of digital handsets worldwide.

    Nokia. Nokia made a significant equity investment in Geoworks in 1995. Nokia
has licensed the Company's system software to design intelligent communications
products, such as smart phones, including the Nokia 9000 Communicator, which was
introduced in August 1996, based on the GEOS system software. Nokia is a leading
supplier of cellular phones worldwide.

    Toshiba. Toshiba made a significant equity investment in Geoworks in 1995.
Toshiba has licensed the Company's system and applications software and worked
with the Company to develop a Japanese-language version of the Company's GEOS
system software for use in mobile communicating devices. In February 1997,
Toshiba announced the GENIO PCV-100, a pocket communicator with built-in web
browsing capabilities for the Japanese market, based on GEOS system software.
Toshiba is a leading worldwide supplier of computing and electronic products.

    NEC. NEC has licensed the Company's system and applications software for a
family of smart phones for the Japanese market. NEC is a leading provider of
digital cellular handsets in Japan.

    Hewlett-Packard. Hewlett-Packard made a significant equity investment in
Geoworks in 1994, and licensed the Company's system software for use in the
OmniGo 100 electronic organizer based on the GEOS system software.
Hewlett-Packard is an international manufacturer of measurement and computation
products and systems used in industry, business, engineering, science, medicine
and education.

    Brother. Brother has selected GEOS for a family of information appliances,
including the Ensemble personal desktop publishing systems. Brother has recently
included the GEOS operating system in its recently released digital mobile
notebook computer known as GeoBook, a notebook computer that allows users to
send e-mail, access the Internet, send and receive faxes, in addition to
containing a number of PC-type applications, such as word processing,
spreadsheet, addressbook, and calendaring. Brother is a leading supplier in the
home office equipment market.


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    Canon. Canon Business Machines has licensed the Company's system and
applications software for use in a mobile computing device. Canon Business
Machines has also licensed GEOS for its StarWriter Pro 5000, a dedicated word
processing system having many of the features of a desktop personal computer.
Canon Business Machines is a leader in the home office equipment market in the
United States.

    Continue To Evolve The Company's Operating System Technologies. The Company
has developed the technology underlying the current operating system, GEOS, over
a period of twelve years. The software is currently in its fifth generation of
design, and has been incorporated in a number of electronic organizers and smart
phones, including the Nokia 9000 Communicator, the Toshiba GENIO PCV-100, and
the Hewlett-Packard OmniGo. In addition, GEOS has been selected by NEC and
Ericsson for smart phones.

    In order to provide support for microprocessors other than those based on
the Intel x86 architecture, the Company is developing a next generation of
operating system software that is intended to be processor-independent, i.e.,
able to run on an array of RISC processors. In part to advance this objective,
the Company recently completed the acquisition of the Eden Group, Ltd. ("Eden"),
creating Geoworks Ltd., a wholly owned subsidiary in the United Kingdom. The
Company expects to be able to leverage Eden's complementary operating system
technology to further this development objective. The next generation operating
system is expected to be compact, with each component designed to be small and
efficient; open, with a published API that is not expected to vary from platform
to platform, allowing Geoworks, licensees and third parties to reuse code and
enabling clients to adopt alternative silicon solutions; modular, allowing
licensees to omit or replace components with special versions and to build
low-end solutions with minimum ROM requirements; written in ANSI C to allow
portability and the production of compact code; and communications focused.

    The Company expects to continue its research and development efforts in
order to take advantage of developments in communications technology, and to
increase its product efficiency and optimization for use in mobile communicating
devices. The Company believes that these capabilities are particularly
appropriate for smart phones.

    Facilitate Information Access And Use. The Company believes that information
access is a key component of a total mobile communicating device product
offering, and will be a primary reason for product purchases. The Company
recognizes that information access by the mobile communicating device user
depends upon more than the distribution of devices incorporating the Company's
operating system. Technology and infrastructure for the creation, transmission
and receipt of electronic content by mobile communicating devices must be
established. The Company is working to create the technologies intended to
enable cellular network providers to offer value-added interactive and
information services. The WCS group of Geoworks intends to provide end-to-end
solutions for cellular operators.


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    The Company believes that users of wireless mobile devices have
fundamentally different information needs than those wired to desktop PCs.
Mobile users are restricted by time and space, needing more compact devices that
allow immediate access to highly personalized information, and content and
services that are specifically tailored to their information needs and devices.
The Company expects that in the wireless world, in addition to directionless web
"surfing," there will be a need for rapid connections to essential information.
Content will need to be tailored to the delivery mechanisms and viewing
capabilities of small mobile devices. The volume of information will need to be
filtered to ensure reasonable delivery time over slower wireless connections.
Content will also need to be restructured and streamlined for presentation on
compact smart phone screens. Recognizing these needs, the Company is developing
software, architecture and content relationships to facilitate access to usable
content for users of mobile communicating devices, in an appropriate interface
for their devices, via cellular network operators.

    Currently anticipated WCS products include Internet access technologies;
information applications, such as travel, stock quotes and news delivery; and a
data backup product, enabling smart phone users to back up their data across the
wireless network.

    The Company's objective is to license its WCS client and server technologies
to cellular operators in exchange for a combination of license fees, service
fees and recurring revenues. The Company may also license its client WCS
technologies to manufacturers of mobile communicating devices for installation
on such devices.

    Internally Developed Applications. Although the Company's strategy is to
establish relationships with a limited number of independent software developers
for the Company's operating system platform, the Company intends to continue to
develop and offer mobile communicating device applications and services to help
establish a market presence for the platform, to support a particular device or
to encourage independent software developers to participate in applications
development.


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GEOS TECHNOLOGY

    The following discussion summarizes some of the key technologies embodied in
the Company's GEOS technology, which is now in its fifth generation of
development. The GEOS technology operates on microprocessors based upon the
Intel x86 architecture. The Company is currently developing a
processor-independent operating system designed specifically for the mobile
communicating device market. The Company believes that this
processor-independent operating system solution will allow hardware
manufacturers to deliver a broader range of functionality and price points as
well as reduce development cycle time. There can be no assurance that the
processor-independent operating system will contain all of the technologies
described below with respect to the GEOS operating system, or that the Company
will successfully execute its development strategy. These and other risks are
discussed under Risk Factors, elsewhere in this Form 10-K.

    Compact, High Performance Code. The compact, efficient GEOS software code
incorporates advanced system software design features into an operating system
suitable for the full range of Intel x86-based devices, from an 8088 to a
Pentium. This solution provides the ability to utilize a relatively low-end
microprocessor, that, when combined with limited memory and storage capacity
requirements, gives Geoworks' licensees the ability to add sophisticated,
graphically oriented functionality to their mobile communicating devices.

    Specialized skills in at least two software development disciplines are
required to produce compact, high-performance code. The first discipline is
software architecture design. The GEOS system software design team has applied
object-oriented programming techniques with organization and structure that is
intended to maximize execution efficiency and minimize code duplication for
systems with limited microprocessor power and limited memory and storage
capacity. The second discipline is writing compact code and related software
development tools. Geoworks has emphasized writing compact code, in contrast to
a number of software developers that rely on high-level programming languages to
speed code development, at the expense of code size and efficiency. These
disciplines have enabled the Geoworks engineering team to develop operating
system and application software designed for computing devices with limited
microprocessor power and limited memory and storage capacity. For example, the
GEOS system software (including the operating system kernel, the user interface,
drivers and standard class libraries) occupies less than 2 Mb of storage.
Further, the comprehensive set of features built into the GEOS system software
allows mobile communicating device applications to be small, without sacrificing
functionality. To illustrate, the OmniGo 100 includes 14 applications, the GEOS
system software, and a handwriting recognition engine all in 4Mb of ROM and
running in 1Mb of RAM, of which 416Kb is reserved for storing user data.

    Flexible Graphical User Interface. For the GEOS operating system, Geoworks
has developed its patented flexible graphical user interface to be a solution
for a market with diverse products and consumers. The flexible graphical user
interface offers mobile 


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communicating device market participants significant benefits over the typical
single-PC-user interface. For hardware manufacturers, this technology provides
the ability to incorporate a customized user interface as an element of product
differentiation and enables the manufacturer to design new and unique products
which can take advantage of an existing library of mobile communicating device
software applications. In addition, the flexible graphical user interface
enables a hardware manufacturer to design a product which utilizes various input
devices, such as a keyboard, pen pointer or remote control, to achieve the
desired functionality. For applications developers, a flexible graphical user
interface allows creation of a single application that operates across multiple
devices and device categories, each with a distinctive user interface.

    Communications Capabilities. GEOS has a broad array of communications
capabilities. These include: an integrated messaging architecture to handle the
sending, receiving and management of communications; e-mail, short messaging
service ("SMS"), paging, fax and other message types such as voice; network
protocols such as TCP/IP and PPP; Internet protocols, including SMTP, POP3,
IMAP4 and HTTP; IrDA infrared support; and serial communications to personal
computers, printers and peripheral devices. These capabilities enable wired and
wireless communication between GEOS-based mobile communicating devices and
users' homes and offices, as well as access to the Internet, WWW and information
service providers.

    Object-Oriented Design And Extensive Object Library. Object-oriented
programming leads to standardized approaches, fast prototyping and more
efficient program coding by independent software developers. It also frees the
developer from reinventing repetitive program features to satisfy common
functionality requirements. The GEOS platform has a completely object-oriented
design, which assists the applications developer in creating small and efficient
applications. For example, all text and graphics handling resides within the
system software, rather than in the application itself.

    Preemptive Multi-tasking, Multi-threaded Execution. The GEOS system
software's preemptive multi-tasking and multi-threaded execution allows multiple
tasks to run simultaneously within a mobile communicating device. For example, a
mobile communicating device with appropriate processor capabilities can receive
a fax and print a document at the same time that the user is using an address
book application. This capability also enables the system software to prioritize
tasks, so that, for example, input received from the user is given priority over
other tasks taking place concurrently.

WIRELESS CONTENT AND SERVICES TECHNOLOGIES

    The Company's WCS group currently has under development several products
that promote access to information via mobile communicating devices. The
Company's mobile information server technologies are expected to enable network
operators to deliver information services, tailored to the needs of mobile
subscribers who may use a variety of mobile communicating devices. The Company
also expects to license client technologies that will reside on the devices,
designed to operate in conjunction with the 


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mobile information services. To enable access to the WWW from mobile
communicating devices, the Company's WCS group intends to provide a browser that
is appropriate for smart phones. The Company also plans to provide server
technologies that will improve the experience of WWW browsing on mobile
communicating devices, which have smaller screens and lower data transmission
rates than the personal computers for which the WWW was designed. The Company's
data backup product is expected to allow mobile communicating device users to
protect against the loss of valuable data stored on the device by enabling data
backup and restoration over the cellular network. All WCS products are intended
to be network, protocol and operating system neutral.

SALES AND MARKETING

The Company's sales and marketing function is a cooperative process involving
direct sales staff and commissioned sales representatives, as well as the
Company's executive officers. The Company fundamentally has two industrial
customers: manufacturers of mobile communicating devices, and cellular
operators. On the manufacturer side, the Company's sales approach is to secure
licensing relationships with selected mobile communicating device manufacturers
with whom the opportunity exists to develop significant business relationships.
The Company also focuses on developing relationships with selected independent
software developers, communications providers and cellular operators to
supplement and enhance the Company's software offerings. Likewise, on the
cellular operator side, the Company's sales approach is to secure licensing
relationships with key operators in primary markets. The Company attempts to
leverage the greater resources, experience and market presence of its industrial
customers to establish the Company's operating system software as an accepted
platform for mobile communicating devices, and to establish the Company's WCS
offerings as value-added solutions for operators.

The Company has negotiated agreements with certain consumer products companies,
including Brother, Hewlett-Packard and Toshiba, which give the Company access to
the vendors' lists of customers of GEOS-based devices. In addition, the Company
has negotiated with some of its licensees rights that allow the Company to
enclose its own marketing materials in the package with the licensees' mobile
communicating devices. The Company believes these rights provide it a
substantial benefit by allowing the Company to establish direct relationships
with end-user customers of mobile communicating devices and to create a separate
identity for the Company and its products. The Company can then use this
relationship and the derived information to market additional products and
services to these customers on a targeted basis.

PRODUCT DEVELOPMENT

    The Company expects to continue its research and development efforts in
order to increase its product efficiency and optimization, and in order to
support a broader range of mobile communicating devices. The Company's future
success will depend on its 


                                                                              15
<PAGE>   16
ability to develop and release, on a timely basis, new operating system software
and associated products and upgrades.

    As of March 31, 1997, the Company employed 216 full-time persons, of whom
142 were employed in research and development activities. The Company's research
and development expenses during fiscal years 1997, 1996 and 1995 were $13.7
million, $9.1 million, and $6.5 million, respectively. The Company expects to
expend significant resources on research and development activities in the
future.

COMPETITION

    The Company expects there to be intense competition among mobile
communicating device operating systems as and to the extent the market develops,
especially in the smart phone segment. Although the Company believes that the
diverse segments of the mobile communicating device market will provide
opportunities for more than one operating system, it is possible that a single
operating system supplier may dominate in one or more segments of the market.
Companies with significantly greater financial, technical and marketing support
and greater name recognition than the Company, including Psion, Microsoft, Apple
Computer, Sun Microsystems, U.S. Robotics (through its Palm Computing division)
and Lucent Technologies, have each developed or are reported to be developing
operating systems that may compete directly with the Company's current and
anticipated future operating system software, either in the electronic organizer
market, or in the smart phone market, or in some cases, both. Further,
developers of real-time operating systems and low-end operating system software
may attempt to adapt their products for the mobile communicating device market,
thus providing an operating system that competes with the Company's offerings in
terms of size and battery life. Each of these systems represents an effort to
deliver an operating system for use in mobile communicating devices, and one or
more of these systems may include or improve upon features which the Company
believes currently give the GEOS system software an advantage on mobile
communicating devices over competing operating systems which were originally
PC-based. Moreover, a number of the Company's current licensees have also
established relationships with certain of these competing companies, and future
licensees may do the same. In addition, manufacturers may choose to develop or
acquire proprietary operating systems for their mobile communicating devices and
thereby compete directly with the Company. There can be no assurance that the
Company's competitors will not develop or market mobile communicating device
operating system or application software products that are superior to those of
the Company, that are offered at substantially lower prices than those of the
Company or that achieve greater market acceptance than those of the Company.

    Microsoft currently holds the dominant position in the PC operating system
market, and has introduced its Windows CE operating system for handheld PCs. In
addition to competing on a technical basis, Microsoft's dominant position in the
PC operating system market, as well as its existing relationships with PC
manufacturers and 


                                                                              16
<PAGE>   17
ISVs, may enable it to exert significant influence over the operating system
selection by manufacturers and ISVs who intend to participate in the mobile
communicating device market. In addition, the possibility that Microsoft might
introduce an operating system for one or more mobile communicating devices,
whether anticipated, announced or actually shipping, may have the effect of
causing hardware vendors to delay committing to another operating system. In the
future, the Company may face increased competition from Microsoft in the smart
phone market segment.

     Apple Computer introduced the Newton PDA in 1993, and has had limited
success selling a line of handheld devices based upon its Newton 2.0 operating
system. The Newton Message Pad 2000 is a high-end PDA with Internet and e-mail
capabilities, and Apple has predicted that it will sell in meaningful volumes.
In May 1997, Apple Computer spun off its Newton division into a wholly-owned
subsidiary. The restructuring may increase the competitive strength of the
Newton operating system in the handheld device market.

     Psion develops, manufactures and sells handheld electronic organizers.
Psion has developed a proprietary, RISC-based operating system for use in its
own organizer products. Psion has recently created a separate operating system
business and has stated its intention to license its technology to additional
hardware manufacturers.

    The Company competes primarily on the basis of the features, performance,
reliability, product support and price of its operating system and application
software. While many of the Company's current and expected competitors have
greater financial, technical and marketing resources than the Company, the
Company believes that it competes favorably with respect to these factors. The
Company also believes that a current competitive advantage of the GEOS system
software is its ability to operate in computing systems which require limited
microprocessor power, memory (RAM) and storage (ROM). A significant decline in
the cost or related space requirements of computer processors, memory or storage
could reduce the relative cost benefits of using the GEOS system software.

    As the market for wireless information services emerges, a variety of
companies are beginning to offer products that may be competitive with those of
the Company's WCS group. The Company believes that Spyglass, Navio, Microsoft,
Wink Communications, Unwired Planet and CCC are building browser technology to
scale down the Web for a wide range of smaller devices. Of these, the Company
believes that only Wink Communications, Unwired Planet, and CCC have
specifically focused on the smart phone market at this time. CCC also offers a
product that wirelessly backs-up data to a personal computer, thus competing
with the Company's data backup product. In addition, III ("Triple I"), DataCast,
PageNet, SmartServ and GIN all deliver content packages via short messaging
service (SMS) to Global Systems for Mobile Communications (GSM) and paging
devices. Potential competition may also emerge from current Internet-based
publishing companies that choose to target the small device market. These may
include America Online, Prodigy, CompuServe, Pointcast and My Yahoo.


                                                                              17
<PAGE>   18
INTELLECTUAL PROPERTY

    The Company regards its software and development methods as proprietary and
relies upon a combination of patent, copyright, trademark and trade secret laws,
employee and third-party nondisclosure agreements and license agreements to
establish and protect proprietary rights in its products and methods. The
Company has patents in the United States, the United Kingdom, Germany and
France, and pending applications in the United States, Europe and Japan.

    There can be no assurance that any of the Company's intellectual property
rights can be successfully asserted in the future or that they will not be
invalidated, circumvented or challenged. In addition, the laws of certain
foreign countries in which the Company's products or products containing the
Company's system software are or may be sold do not protect the Company's
intellectual property rights to the same extent as the laws of the United
States. The failure of the Company to protect its proprietary information could
have a material adverse effect on the Company's business, operating results and
financial condition.

    From time to time, third parties, including competitors of the Company, may
assert exclusive patent, trademark, copyright and other intellectual property
rights over technologies or products that are important to the Company's
business. Further, from time to time, the Company may receive communications
from third parties asserting that features or content of certain of the
Company's products infringe upon intellectual property rights held by such third
parties. In addition, the Company may find cause to assert its own intellectual
property rights in its products and technologies against third parties whom the
Company believes are infringing such rights. The status of United States patent
protection in the software industry is not well defined and will evolve as the
United States Patent and Trademark Office grants additional patents. Patents
have been granted recently on fundamental technologies in software, and patents
may issue which relate to fundamental technologies incorporated into the
Company's products. As the number of patents, copyrights and other intellectual
property rights in the Company's industry increases, products based on the
Company's technology may increasingly become the subject of infringement claims
both by and against the Company. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
the Company will not assert infringement claims against others. Litigation, in
and of itself and regardless of its outcome, could also result in substantial
cost and diversion of resources of the Company.

    Litigation in the software development industry has been used as a
competitive tactic both by established companies seeking to protect their
existing position in the market and by emerging companies attempting to gain
access to the market. If the Company were forced to defend itself against a
claim, whether or not meritorious, the Company could be forced to incur
substantial expense and diversion of management attention, and may encounter
market confusion and reluctance of licensees to commit resources to mobile
communicating devices utilizing the Company's operating system or 


                                                                              18
<PAGE>   19
any of the Company's other technologies. The Company could incur substantial
costs in defending itself or its licensees in litigation brought by others, in
prosecuting infringement claims against third parties or in responding to
interference or opposition proceedings in connection with its patents or
trademarks or applications therefor. Moreover, any of these proceedings could
also result in an adverse decision as to the priority of the Company's
inventions or trademarks. A third party claiming infringement may also be able
to obtain an injunction or other equitable relief, which could effectively block
the ability of the Company or certain of its hardware partners to distribute,
sell, export or import products containing the Company's software products. Such
results could materially adversely affect the Company, and might also require
the Company to obtain one or more licenses from third parties. There can be no
assurance that the Company would be able to obtain any such required licenses
upon reasonable terms, if at all, and the failure by the Company to obtain such
licenses could have a material adverse effect on its business, operating results
and financial condition.

EMPLOYEES

    As of March 31, 1997, Geoworks employed 216 full-time employees, of whom 142
were employed in research and development, 45 in sales and marketing, and 29 in
administration. Of these employees, 10 are employed on a temporary basis. None
of the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement, and Geoworks has never experienced a work
stoppage.

    The Company endeavors to maintain competitive compensation, benefits, equity
participation and work conditions policies to assist in attracting and retaining
qualified personnel. The Company believes that its employee relations are good.

    The Company's future success depends in large part on the continued service
of its key technical, marketing and management personnel and on its ability to
continue to attract and retain qualified employees, particularly highly skilled
software design engineers involved in the development of new products. The
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel. In
addition, the Company does not have employment contracts with most of its key
personnel, except that former employees of Eden Group Ltd. (now Geoworks Ltd.)
have employment contracts consistent with U.K. personnel practice. The loss of
key employees could have a material adverse effect on the Company's business,
operating results and financial condition.


                                                                              19
<PAGE>   20
RISK FACTORS

    Dependence On Emergence Of Smart Phone Market. The Company's efforts are
currently concentrated on developing and marketing operating system software and
applications for use in smart phones and other mobile communicating devices. The
Company's success depends upon the development of a new market for these
products. Although the market for cellular telephones is well-established and is
currently growing at an appreciable rate, the smart phone market is in the early
stages of development, and to date no smart phone device has achieved broad
market acceptance or been shipped in volume in the United States. In August
1996, Nokia released a smart phone in selected geographic markets which
incorporates the Company's GEOS software. Although the device has received
positive reviews and several awards, the market acceptance of these products has
not yet been fully established. More generally, the failure of these or any
other early, highly publicized products, or the discontinuance of any such
products by their manufacturers, could significantly affect the marketability of
other similar or related products and components and the development of the
market. The Company has no control over the pricing of devices incorporating the
Company's operating system and, therefore, cannot guarantee that any devices
will reach the desired price points to achieve mass market acceptance.

    The development of the smart phone market, like that of other computer and
consumer electronics markets, is dependent upon the simultaneous development of
a substantial infrastructure of related and supporting products and services,
including hardware and software products, distribution channels and services,
communications services, and support and repair services. The Company has only
limited influence over and, therefore, is substantially dependent upon, the
activities of third parties for the development of this infrastructure. The
success of smart phones also depends on a number of other general market factors
outside the Company's control, including consumer acceptance of particular smart
phone concepts.

    In addition, the Company's long-term results will depend upon its success in
developing and marketing aftermarket wireless content products and services that
operate on smart phones. There can be no assurance, however, that the wireless
content and services market will develop as anticipated or that the Company will
be able to execute its business plan successfully.

    Risks of Software Product Development, Including Risk of Developing Next
Generation Operating System. The Company's future success will depend on its
ability to develop and release, on a timely basis, new operating system and
application software products and upgrades and new aftermarket products and
services. In particular, Geoworks intends to introduce a next generation of its
operating system software that, unlike its current GEOS technology, will be
processor-independent, i.e., not limited to processors based upon the Intel x86
architecture. Broad acceptance of Geoworks' existing and yet to be released
products in new markets, including markets that may be characterized by greater
usage of non-Intel microprocessors, is critical to Geoworks' 


                                                                              20
<PAGE>   21
future success. Although Geoworks has made significant progress toward this
development goal through its acquisition of the Eden Group, Ltd. and through
ensuing development efforts, adaptation and/or development of core technology
for a different microprocessor architecture can be technically difficult, time
consuming and subject to delays. There can be no assurance that Geoworks will be
successful in this development effort. Further, there can be no assurance that
Geoworks will be successful in marketing and selling products developed for
non-Intel microprocessors.

    Further, because of the short product life cycles and intense competition
expected in the mobile communicating device market, the timeliness of new
product introductions and shipments can be critical to whether a particular
product will ever achieve market acceptance. There can be no assurance that the
Company will be able to develop, introduce and ship new products or upgrades on
a timely basis. Furthermore, from time to time, the Company and others may
announce new products, features or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
There can be no assurance that announcements by the Company or competitors will
not cause customers to defer purchasing existing products of the Company or its
hardware partners, or cause distributors and dealers to return products. Delays
or difficulties associated with developing or introducing new products could
have a material adverse effect on the Company's business and results of
operations.

    The Company has historically engaged in significant customization of its
GEOS system software for each mobile communicating device hardware partner. The
software development and customization process is inherently unpredictable.
Development time and the achievability of design objectives may not be
determinable until very late in the development process. Problems and delays in
product development or customization may result in the delay or cancellation of
planned product or service offerings by the Company and its strategic partners,
and consequently could have an adverse effect on the Company's operating
results. In the past, the Company has experienced significant delays in the
completion of development and customization projects and the release of new
products to mobile communicating device hardware partners. Consequently, the
receipt of development fees and license revenue from these partners has at times
also been delayed. Such delays have resulted from a number of factors, including
changes in specifications initiated by the Company's hardware partners. The
extent of these delays has varied depending upon the size and scope of the
project and the nature of the problems encountered. There can be no assurance
that the Company will not experience similar problems and delays in the future,
resulting in material adverse effects on the Company's operating results.
Furthermore, no complex software product is totally free of errors, and
significant errors may go undetected for some time. Discovery of significant
errors may delay or cancel product releases and, if not discovered until after
product release, may necessitate recall of products by the Company and its
strategic partners and expose the Company to substantial expense and claims for
reimbursement. As is common in the industry, the Company has experienced product
development delays on previous custom engineering work.


                                                                              21
<PAGE>   22
    Acceptance Of Geoworks Technology. The Company's success in establishing its
current or its anticipated future operating system software as a leading
operating system in the mobile communicating device market is critically
dependent on the Company's ability to establish and sustain business
relationships with key mobile communicating device market participants. The
Company has already established relationships with several mobile communicating
device hardware manufacturers and other companies which the Company believes
will be significant participants in the mobile communicating device and services
markets. Despite the importance of these relationships, the Company must secure
additional strategic design wins and licensing relationships with its existing
licensees and with other market participants in order to establish the Company's
system software as an accepted operating system. Accordingly, there can be no
assurance that the Company's existing licenses will result in sustained license
relationships, successful products or substantial revenues for the Company.
Furthermore, even if the Company is able to establish and sustain relationships
with particular participants in the mobile communicating device market, the
Company's success depends upon the development by the Company and others of
aftermarket application products and services for mobile communicating device
products in order to derive revenue from aftermarket products and services.
There can be no assurance that the Company will be able to establish any such
relationships, that the Company's operating system software will be accepted as
an operating system or that successful aftermarket products and services will be
developed or licensed. The Company's application strategy initially includes
supporting a limited number of independent software developers who elect to
create, produce and market aftermarket applications and services targeted for
devices that incorporate the Company's operating system software. There can be
no assurance that the Company will develop such ISV relationships, or that a
limited number of independent software developer relationships will be
sufficient for the Company to compete effectively in the mobile communicating
device market, that the Company or independent software developers will be able
to develop aftermarket applications and services in a timely manner or, if
developed, that such applications and services will achieve market acceptance.

    Dependence On Limited Number Of Manufacturers, Particularly Nokia. The
Company's business is critically dependent upon the timely introduction and
successful marketing and sale by a limited number of consumer product companies
of smart phones based upon the Company's operating system software. In August
1996, Nokia released in selected geographic markets a smart phone which
incorporates the Company's GEOS software. This has yet to generate significant
royalty revenue or make a material, favorable contribution to the Company's
operating results. It is unclear what effect in the long term this new product
will have on the Company's reported royalties or the adoption rate of smart
phones. The Company has no direct control over any particular smart phone's
hardware design, product functionality, pricing strategy, release dates, market
positioning, product promotion or distribution, all of which affect the
product's success and, therefore, the Company's business results. In addition,
foreign currency fluctuations may limit the ability of foreign consumer product
companies to achieve production costs low enough to meet the pricing
requirements of the smart phone market or otherwise affect the pricing of their
products in foreign markets, to the extent that pricing is 


                                                                              22
<PAGE>   23
denominated in U.S. dollars. If a particular smart phone does not achieve broad
market acceptance and generate anticipated sales volume, the Company's operating
system royalties from such product and the Company's opportunity for aftermarket
sales of products and services to users of such product will be materially
adversely affected. Furthermore, under the terms of the Company's agreements
with hardware manufacturers, the manufacturer is generally permitted to add
product enhancements or new products to the agreement. In such event, the
Company may be obligated to apply unamortized advance payments under the
agreement against license revenue to be earned by the Company on per unit sales
of such additional products. The Company may incur additional research and
development expenses to provide software for such products. Any such activities
are generally subject to reaching agreement on specifications, delivery, pricing
and additional payments.


    Dependence On Development Of Wireless Content And Services. Even if the
general smart phone market develops as anticipated by the Company and the
Company's operating system software becomes a leading platform for hardware
devices, the Company's long-term financial success is also dependent on its
ability to derive revenue from the delivery of wireless content and services for
mobile communicating devices. The Company's plan for generating such revenue
includes: sales by the Company of internally developed client and server
software and services for, as well as upgrades to and associated products for,
smart phones based upon the Company's operating system; recurring license
revenue from communication services providers; and electronic distribution by
the Company of its own and third-party content, applications and services. There
can be no assurance, however, that the Company will be able to derive
significant revenue from any of these sources. The Company currently offers only
a very limited number of aftermarket applications in selected smart phone market
segments. The Company's wireless server and client development resources,
experience and market presence are more limited than those of many other
developers. There can be no assurance that the Company will be able to
successfully develop additional aftermarket products or services or obtain
distribution rights to third-party products or content, or that any such
products or content will achieve acceptance in the market. Further, the Company
has historically marketed an integrated package of operating system and
applications, and has only limited experience marketing server and client
applications to communication service providers. There can be no assurance that
the Company will be able to offer sufficiently attractive products to generate
significant revenue. Moreover, the Company may be required to respond to
competitive products and to customer demands by including features of its
aftermarket products or services in updated versions of the Company's operating
system software. To the extent that the Company is required to so include such
products and services, the Company may be unable to derive the level of revenue
from such products and services that the Company would derive if such products
or services were sold separately. While, in the past, the Company has been able
to obtain recurring license revenue from certain communication services
providers, there can be no assurance that the Company will be able to obtain
similar arrangements with other providers. Finally, practicable and effective
cellular distribution of content and services 


                                                                              23
<PAGE>   24
is an unproven concept which depends on many factors for success, including the
size of the data and applications to be distributed and the presence of an
appropriate infrastructure. Accordingly, there can be no assurance that cellular
distribution will prove to be feasible. Regardless of the success of the
Company's operating system software, if the Company is unable to derive
significant revenue from one or more of the foregoing aftermarket sources, the
Company's long-term business, results of operations and financial condition will
be materially adversely affected.

    Dependence On Complementary Technologies. In certain mobile communicating
device market segments, widespread adoption and use of mobile communicating
devices may depend on the commercial availability of other technologies and
business relationships. For example, widespread use of cellular telephones for
data transfer in the United States or other regions may depend upon the
development of a cellular network infrastructure capable of digital
transmission, as well as reliable, affordable and convenient wireless
transmission of data. For mobile communicating devices to achieve consumer-level
pricing, technologies which reduce the cost of manufacturing and the cost of
goods may need to be developed and implemented. These cost reductions will also
require the Company's OEM licensees to achieve economies of scale in
manufacturing. There can be no assurance that such complementary technologies
will develop, or that such cost and price reductions can be achieved.

    History Of Operating Losses; Anticipated Future Losses. Since its inception
in 1983, the Company has realized limited revenues, incurred significant losses,
and suffered substantial negative operating cash flow. As of March 31, 1997, the
Company had an accumulated deficit of $58.4 million, and had incurred operating
losses of approximately $15.5 million, $10.7 million, and $10.5 million in the
fiscal years ended March 31, 1997, 1996 and 1995, respectively. The Company
expects to continue to incur substantial annual operating losses at least
through its fiscal year ending March 31, 1998, and it is unclear how soon
thereafter, if ever, the Company will operate profitably. The Company's
strategic plan to achieve profitability includes focusing in the near term on
the smart phone segment of the market for mobile communicating devices. The
Company's objective is to establish its operating system software as a leading
operating system for this market in the near term, and to leverage this position
by developing and marketing products and services to the installed base of smart
phone devices. The duration and outcome of any of these efforts is uncertain,
and the Company's future operating results will depend upon the growth rate of
the smart phone market segment, the Company's ability to establish licensing
relationships with leading smart phone hardware manufacturers, the introduction
by those manufacturers of successful smart phone products, the emergence of
wireless content and services for smart phones to spur demand and generate
additional revenues, and the Company's ability to achieve and maintain a
competitive advantage should such market develop.

    Disappointing Revenue from Past Products. Prior to its concentration on
software for the emerging smart phone market, the Company licensed its operating
system software to manufacturers of non-communicating mobile devices, such as
personal digital assistants 


                                                                              24
<PAGE>   25
and handheld electronic organizers. These non-communicating devices - in
particular the Hewlett-Packard OmniGo and Casio Z-7000 -- as well as those
introduced by competitors, such as the Apple Newton, Sony MagicLink and Motorola
Envoy, have achieved only modest unit sales to date. As a result of the slow
adoption rates in these device categories, the Company has failed to generate
significant royalty revenues in connection with its licensing efforts to date,
and its operating results have been affected adversely. The Casio Z-7000, a
first-generation personal digital assistant based upon the Company's system
software, has been discontinued. Sharp and Toshiba have each developed a
non-communicating device on the Company's system software and subsequently
elected to cancel introduction of such devices into the market. (More recently,
Toshiba introduced the GENIO, a mobile communicating device for the Japanese
market.) Other market participants have announced restructurings of their
efforts relating to similar products. In addition, sales of low-cost, GEOS-based
educational computer systems fell short of the Company's expectations, causing
the Company to discontinue its development efforts in this segment and
restructure its licensing agreement with IBM/Eduquest. During calendar year
1995, Brother released the Ensemble, a personal desktop publishing system, and
Hewlett-Packard announced and shipped its OmniGo 100, a second generation
electronic organizer. Both of these products are based on the Company's
operating system software. Royalty revenues earned on reported unit shipments of
these products, however, have been modest to date, and it is unlikely that they
will ever make a significant favorable contribution to the Company's operating
results. Collectively, these third-party product terminations and
disappointments have resulted in the Company recognizing lower-than-expected
recurring license revenues in the current fiscal year and previous fiscal years.

    Fluctuations in Operating Results. The Company's operating results have in
the past been, and are expected in the future to be, subject to significant
fluctuations on both a quarterly and annual basis. Specifically, the Company
expects that its operating results will fluctuate as a result of the timing and
success of the Company's efforts to establish and maintain relationships with
significant smart phone market participants; the introduction by these
participants and market acceptance of new smart phones based upon the Company's
operating system software; the introduction and distribution of new system and
application software by the Company; actions by competitors of the Company; and
actions by its partners. License revenue related to OEM customer products which
contain the Company's software is contingent upon those OEM customers' success
in meeting anticipated shipment dates, obtaining market acceptance for their
products, and realizing significant sales volume of those products. Revenue from
research and development fees can vary considerably among periods, depending
upon the specific terms of the Company's contracts with OEM licensees and the
relative level of development effort devoted toward projects on which research
and development fees are charged. The Company's results are also affected by the
timing and extent of product development, engineering, and sales and marketing
expenses. The Company presently intends to devote substantial resources toward
product development, which may affect its investment and performance in other
activities and in turn affect reported operating results in future periods. In
addition, the Company's results may be affected by seasonal 


                                                                              25
<PAGE>   26
and other fluctuations in demand for smart phones and for related software
products and services, as well as by the general state of the domestic and
global economies. The Company expects the market for smart phones and other
mobile communicating devices could ultimately reflect significant seasonal
swings in demand similar to those in the consumer electronics market, in which
demand typically peaks in the fourth calendar quarter of each year.

    Non-Recurring Revenues. The Company's operating results may also vary as a
result of the receipt of one-time technology license or engineering fees, and
the recognition as revenue of paid but unamortized advance royalties under OEM
agreements (currently recorded as deferred revenue) upon the restructuring or
termination of such agreements or upon product discontinuation. Amounts
recognized upon such restructuring or termination have accounted in the past,
and could account in the future, for a material portion of the Company's
revenue, with no corresponding cash flow benefit in the period in which the
revenue is recognized.

    Effect Of Wholesale Prices On Royalties. Royalties from the license of the
Company's operating system to mobile communicating device hardware manufacturers
are expected to represent a significant component of the Company's future
revenues. The royalties the Company receives from these licenses are usually
correlated to the wholesale or comparable transfer price of the mobile
communicating devices in which the Company's software is incorporated. The price
of mobile communicating devices is expected to decline over time, as a result of
competitive pressures and consumer demands, and due to the efforts of the
Company's OEM customers to achieve increased sales volume through price
reductions. To the extent that the Company's royalty is determined as a
percentage of said price, or to the extent that the Company responds to market
pressures by reducing the amount of fixed-dollar royalties, any such reduction
in the wholesale or comparable transfer price will have a material adverse
effect on the royalty per unit the Company receives. There can be no assurance
that an increase in sales volume will result from a decline in the wholesale or
comparable price and thereby compensate for any decline in royalties per unit
which the Company receives from its OEM licensees.

    Volatility Of Stock Price. Shortfalls in the Company's revenues or results
of operations in comparison with levels expected by securities analysts could
have an immediate and significant adverse effect on the trading price of the
Company's common stock. Moreover, the Company' stock price is subject to the
volatility generally associated with technology stocks and may also be affected
by broader market trends unrelated to the Company's specific performance.


ITEM 2.  PROPERTIES

    Geoworks' corporate headquarters are located in Alameda, California, in a
leased facility consisting of approximately 40,000 square feet of office space
under a lease which expires in February 1999. The Company has an option to renew
the lease for up to 


                                                                              26
<PAGE>   27
six additional years. The Company leases additional office space in Berkeley,
California and in Seattle, Washington. The Company operates a subsidiary,
Geoworks Kabushiki Kaisha, in Tokyo, Japan, which leases office facilities from
the Company's independent agent, Aisys Corporation. The Company operates a
second subsidiary in Macclesfield, England, which leases office facilities
consisting of approximately 7,000 square feet, under a lease which expires in
2006. The Company believes that its existing facilities will be adequate to meet
its needs in fiscal year 1998 and that additional space will be available as
needed.


ITEM 3.  LEGAL PROCEEDINGS

    The Company is not involved in any legal proceedings whose resolution would
have a material adverse effect on its financial condition or results of
operations.


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

    There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1997.


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
       Name            Age                   Position
       ----            ---                   --------

<S>                    <C>  <C>                                              
Gordon E. Mayer        39   Chairman, President and Chief Executive Officer
Jordan J. Breslow      41   Vice President, General Counsel
David E. J. Crisp      42   Vice President, Platform Software Products Group
Leland J. Llevano      39   Vice President, Strategic Partnerships
Christopher M. Noble   40   Vice President, Business Development
Grover P. Righter      41   Vice President, Wireless Content & Services Group
Daniel L. Sicotte      36   Treasurer
David A. Thatcher      42   Vice President, Administration, Chief Financial Officer
</TABLE>

Mr. Mayer joined the Company in July 1993 as President, became the Chief
Executive Officer in March 1994, and Chairman of the Board of Directors in May
1997. Prior to joining Geoworks, he was an "Entrepreneur in Residence" with
Merrill, Pickard, Anderson, and Eyre, a venture capital and investment
management firm that manages private investment funds. From July 1991 to June
1992, Mr. Mayer was President and Chief Executive Officer of InfoChip Inc., a
developer of data compression hardware and software. From February 1988 to July
1991, he was Vice President, Sales and Marketing 


                                                                              27
<PAGE>   28
for Proxim, Inc., a supplier of OEM wireless data communications products. Mr.
Mayer attended Purdue University, where he earned a B.S. and M.S. in Electrical
Engineering.

Mr. Breslow joined the Company in June 1992 as General Counsel and became Vice
President, General Counsel in January 1995. Prior to joining Geoworks, Mr.
Breslow was in private law practice at the firm of Donahue, Gallagher, Thomas &
Woods in Oakland, California, specializing in intellectual property and computer
software licensing. Mr. Breslow holds a B.A. summa cum laude from San Francisco
State University and a J.D. from Hastings College of the Law.

Mr. Crisp joined the Company in February 1997, in connection with the Company's
acquisition of the Eden Group, Ltd., which he founded and where he served as
Managing Director. Mr. Crisp is responsible for operations and management of the
Platform Software Products Group. Mr. Crisp's prior experience includes senior
management positions with Schlumberger Limited. He holds a BSc in Physics from
Manchester University.

Mr. Llevano has been with the Company since its inception in 1983. He served as
Manager of Corporate Operations and then Director of New Business Development
until December 1985, when he assumed the responsibilities of Vice President,
Marketing. In July 1993, Mr. Llevano assumed his current position of Vice
President, Strategic Partnerships. Mr. Llevano received his B.A. from the
University of California, Berkeley.

Mr. Noble joined the Company in August 1990 as Director of Product Marketing
until February 1993, when he assumed responsibilities of Vice President and
General Manager of Developer Products until May 1993, when he became Vice
President, Developer Products Group. Mr. Noble became Vice President, Business
Development and Product Management in February 1995. From May 1984 to July 1990,
Mr. Noble worked at Lotus Development Corporation, a developer of software
products. At Lotus, Mr. Noble held various positions, most recently as Senior
Product Design Manager. Mr. Noble holds an A.B. from Harvard College.

Mr. Righter joined the Company in January 1996. He served as Vice President,
Marketing until April 1997, at which time he assumed the responsibilities of
Vice President, Wireless Content and Services Group. Prior to joining the
Company, Mr. Righter was Vice President of Strategic Marketing at Santa Cruz
Operation. Mr. Righter held a previous position as Vice President of UNIX
Products at Novell, and has also held positions at AT&T and Unisys. Mr. Righter
earned a B.S. in Computer Science from Brigham Young University and served in
the U.S. Navy and U.S. Coast Guard.

Mr. Sicotte was named Treasurer of the Company in January 1995. He has been the
Company's Controller since December 1989 after joining the Company in February
1988 in the position of Accounting Manager. Previous to Geoworks, Mr. Sicotte
was employed on the audit staff at Coopers & Lybrand where he worked from
December 


                                                                              28
<PAGE>   29
1985 to February 1988. Mr. Sicotte is a Certified Public Accountant and holds a
B.S. in Business Administration from the University of California, Berkeley.

Mr. Thatcher joined the Company in March 1997 as Vice President, Administration
and Chief Financial Officer. He is responsible for all financial and
administrative functions of the Company. Prior to joining the Company, Mr.
Thatcher held positions with Pacific Data Products, Peregrine Systems, The
McKinley Group and Diba. Mr. Thatcher holds a B.S. degree in Accounting from San
Diego State University.


                                                                              29
<PAGE>   30
PART II

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


    The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "GWRX." The following table sets forth the high and low last reported
sales prices for the Company's Common Stock as reported by the Nasdaq National
Market for the quarters indicated:


<TABLE>
<CAPTION>
                                                  JUN 30             SEP 30              DEC 31              MAR 31
                                                  ------             ------              ------              ------
                                       
<S>                                        <C>               <C>                 <C>                 <C>          
     FISCAL YEAR ENDED MARCH 31, 1997
     Common stock price per share          $29.0 - 46.25      $19.0 - 35.75        $19.0 - 26.5       $6.625 - 26.0


     FISCAL YEAR ENDED MARCH 31, 1996
     Common stock price per share            $8.0 - 12.5     $11.25 - 19.25      $16.25 - 22.75      $15.25 - 32.25
</TABLE>

There were approximately 353 registered shareholders as of May 31, 1997. The
Company has not paid or declared cash dividends and has no present plans to do
so.


                                                                              30
<PAGE>   31
ITEM 6.  SELECTED FINANCIAL DATA

The data set forth below are qualified in their entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the "Consolidated Financial
Statements" and notes thereto included elsewhere in this Form 10-K.


         SELECTED FINANCIAL DATA
         QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
         (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                     JUN 30        SEP 30        DEC 31        MAR 31
                                     ------        ------        ------        ------
<S>                                 <C>           <C>           <C>           <C>    

     YEAR ENDED MARCH 31, 1997
     Net revenues                   $ 2,733       $ 2,760       $ 3,672       $ 1,931
     Gross margin                     2,340         2,733         3,461         1,938
     Net loss                       (2,532)       (2,715)       (2,406)       (5,823)
     Net loss per share              (0.17)        (0.18)        (0.16)        (0.38)


     YEAR ENDED MARCH 31, 1996
     Net revenues                       508         1,147         3,342         1,267
     Gross margin                       492         1,123         3,277         1,250
     Net loss                       (3,099)       (2,624)         (672)       (2,974)
     Net loss per share              (0.26)        (0.22)        (0.05)        (0.20)
</TABLE>


                                                                              31
<PAGE>   32
CONSOLIDATED BALANCE SHEET SUMMARIES
March 31, 1997, 1996, 1995, 1994, and 1993
(in thousands)


<TABLE>
<CAPTION>
                                            MAR 97       MAR 96       MAR 95        MAR 94       MAR 93
                                            ------       ------       ------        ------       ------
<S>                                       <C>          <C>          <C>         <C>          <C>      

Working Capital (Deficiency)              $ 33,626     $ 43,585     $  7,122    $ (2,553)    $ (4,658)

Total Assets                                41,393       54,040       19,085        9,377        2,914

Deferred Revenue                             1,444        5,529        8,311        6,737        2,530

Long-term Obligations                          739        2,927        2,527        1,400        2,162

Redeemable Convertible Preferred Stock           0            0        1,626       12,526        1,047

Accumulated Deficit                       (58,372)     (44,896)     (35,491)     (25,101)     (15,874)

Shareholders' Equity (Deficit)              36,553       43,312        6,757     (13,204)      (5,282)
</TABLE>


                                                                              32
<PAGE>   33
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Years Ended March 31, 1997, 1996, 1995, 1994, and 1993 
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                          MAR 97       MAR 96       MAR 95       MAR 94       MAR 93
                                          ------       ------       ------       ------       ------
<S>                                     <C>          <C>          <C>          <C>          <C>     

Total net revenues                      $ 11,096     $  6,279     $  5,327     $  5,803     $  6,245
Cost of revenues                             624          122          473        1,022        1,813
Sales and marketing                        7,108        4,510        5,272        5,297        5,841
Research and development                  13,698        9,109        6,520        5,042        3,917
General and administrative                 3,708        3,254        3,557        2,826        3,201
Cost of merger                             1,450            0            0            0            0
                                      --------------------------------------------------------------
Total operating expenses                  26,588       16,995       15,822       14,187       14,772
                                      --------------------------------------------------------------
Operating loss                          (15,492)     (10,716)     (10,495)      (8,384)      (8,527)

Other income (expense)                     2,080        1,005          118        (688)        (276)
                                      --------------------------------------------------------------
Loss before income taxes                (13,412)      (9,711)     (10,377)      (9,072)      (8,803)
                                      --------------------------------------------------------------
Provision for income taxes                    64            0          175          234           39
                                      --------------------------------------------------------------
Net loss                               ($13,476)    ($ 9,711)    ($10,552)    ($ 9,306)    ($ 8,842)
                                      --------------------------------------------------------------
Net loss per share                     ($  0.88)    ($  0.75)    ($  1.09)    ($  1.54)    ($  1.49)
                                      --------------------------------------------------------------
Shares used in per share computation      15,234       13,032        9,674        6,051        5,915
</TABLE>


                                                                              33
<PAGE>   34
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Results of Operations

Acquisition of Eden Group, Ltd.

    In February 1997, the Company acquired all the outstanding stock of Eden
Group Ltd. ("Eden"), a UK software publisher. The acquisition has been accounted
for as a pooling-of-interests, and the historical consolidated financial
statements of the Company for all periods prior to the acquisition have been
restated to include the financial position, results of operations, and cash
flows of Eden.

Net Revenues

    Net revenues in fiscal year 1997 increased $4,817,000, or 77%, in comparison
with fiscal year 1996. License revenue increased between the two periods by
$1,971,000, or 42%, and consisted principally of revenue recognized upon the
termination or restructuring of four OEM license agreements in fiscal year 1997
for which there were non-refundable, prepaid royalty balances. The prepaid
balances related to these agreements had been recorded as deferred revenue, and
had not yet been fully amortized at the time the agreements were terminated or
restructured. Revenue recognized upon the termination or restructuring of these
four agreements was included in license revenue, and accounted for $3,535,000,
or 53%, of the Company's license revenue during fiscal year 1997. During fiscal
year 1996, revenue resulting from the termination or restructuring of OEM
license agreements amounted to $3,175,000.

    In addition to revenue recognized upon the termination or restructuring of
license agreements, license revenue for fiscal year 1997 included $1,685,000 of
source code license fees paid by two OEM customers. Source code license fees
accounted for $250,000 of license revenue during fiscal year 1996. Revenues
associated with source code license fees and with the termination or
restructuring of OEM license agreements are non-recurring. As a result of these
and other non-recurring transactions, revenues during fiscal year 1997 are not
indicative of revenues to be recognized in future periods.

    The remainder of license revenue for fiscal year 1997, approximately
$1,400,000, consisted primarily of royalties on units sold by OEM licensees. The
Company believes that royalties on units sold by OEMs will represent an
increasing portion of the Company's revenues in future fiscal periods.

          Revenue related to research and development fees increased $2,546,000,
or 156%, during fiscal year 1997 in comparison with fiscal year 1996. Research
and development fees represent amounts received pursuant to contracts with OEM
licensees under which the Company is reimbursed for a portion of its development
costs related to 


                                                                              34
<PAGE>   35
specific products. The Company is typically paid by the OEM licensee as certain
project milestones are achieved. Revenue under these research and development
arrangements is recognized under the percentage of completion method. The extent
to which such revenue is reported can vary considerably among periods, depending
upon the specific terms of the Company's contracts with OEM licensees and the
relative level of development effort devoted towards projects on which research
and development fees are charged. The substantial increase in research and
development fees during fiscal year 1997 over fiscal year 1996 resulted from
higher reimbursement levels specified in the Company's contracts with OEM
licensees.

    Service revenue of $300,000 in fiscal year 1997 represents amounts earned
for the support and maintenance of software licensed by OEM customers.

    Net revenues increased $952,000, or 18%, during fiscal year 1996 in
comparison with fiscal year 1995. This result was primarily attributable to the
growth of license revenue, which increased $1,245,000, or 37%, in fiscal year
1996 in comparison with fiscal year 1995. Revenue recognized upon the
termination or restructuring of OEM license agreements during fiscal year 1996
amounted to $3,175,000. There was no revenue of a similar nature in fiscal year
1995. The growth in license revenue during fiscal year 1996 more than offset the
decline in research and development fees, which fell $293,000, or 15%, in fiscal
year 1996 in comparison with fiscal year 1995.

Operating Expenses

    Cost of License Revenue. The Company's gross margin percentage on license
revenue was 91% in fiscal year 1997, 97% in fiscal year 1996, and 86% in fiscal
year 1995. Cost of license revenue for all periods presented consisted
principally of license payments to third parties for software that is
incorporated into the Company's software. The Company anticipates that its gross
margin percentage on license revenue will decline gradually in the event that
OEM unit shipments increase and royalty revenues come to represent a greater
share of total license revenue.

    Sales and Marketing. Sales and marketing expense increased $2,598,000, or
58%, during fiscal year 1997 in comparison with fiscal year 1996. This increase
resulted from the Company's expanded efforts to pursue opportunities in the
market for smart phones and mobile communicating devices. As this market has
evolved, the Company has dedicated additional resources towards the design and
marketing of products and services for wireless devices, and has also broadened
its services to VARs and other outside developers of software for the market. To
support these activities, staffing and related costs for travel, benefits, and
facilities increased during fiscal year 1997 over fiscal year 1996. Sales and
marketing expense decreased $762,000, or 14%, during fiscal year 1996 in
comparison with fiscal year 1995, due primarily to reduced expenses for
technical support, deferred compensation, and marketing programs as the Company
abandoned its desktop product lines and phased out entirely its sales activities
in the PC market.


                                                                              35
<PAGE>   36
    Research and Development. Research and development expense increased
$4,589,000, or 50%, during fiscal year 1997 in comparison with fiscal year 1996.
This increase was due primarily to the expansion of the Company's engineering
staff, which resulted in higher compensation costs and related increases in
costs for employee benefits, travel, and facilities. For the same reasons,
research and development expense increased by $2,589,000, or 40%, during fiscal
year 1996 in comparison with fiscal year 1995.

    General and Administrative. General and administrative expense increased
$454,000, or 14%, during fiscal year 1997, in comparison with fiscal year 1996.
Higher costs for compensation, recruiting, and outside services were the primary
components of this increase. General and administrative expense declined
$303,000, or 9%, during fiscal year 1996 in comparison with fiscal year 1995.
This decrease was mainly attributable to cost reductions in compensation,
accounting software, and executive relocation, partially offset by increases in
recruiting costs.

    Cost of Merger. Certain non-recurring transaction charges were incurred in
connection with the Company's acquisition of Eden during fiscal year 1997. These
expenditures amounted to $1,450,000, and consisted principally of professional
fees and regulatory charges.


Other Income (Expense)

    Interest income rose $947,000, or 69%, during fiscal year 1997 in comparison
with fiscal year 1996. This increase was attributable to the significantly
higher balances available to the Company for short-term investment throughout
fiscal year 1997 as a direct result of the Company's secondary public offering
of common stock and concurrent sale of common stock to a private investor in
November 1995. These concurrent equity offerings raised over $40 million for the
Company. As the offerings were not completed until the second half of fiscal
year 1996, balances available to the Company for short-term investment were
higher during most months of fiscal year 1997 in comparison with the
corresponding period of fiscal year 1996. Interest expense declined $128,000, or
34%, during fiscal year 1997 in comparison with fiscal year 1996, as the Company
reduced its outstanding balances.

    Interest income increased $902,000, or 190%, during fiscal year 1996 in
comparison with fiscal year 1995, due to the concurrent equity offerings in
November 1995 which made significantly higher balances available to the Company
for short-term investment during the second half of fiscal year 1996.


                                                                              36
<PAGE>   37
Provision for Income Taxes

    The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income
tax expense consists of foreign income tax withholding on foreign source
royalties paid to the Company. The Company has a July 31 year end for income tax
purposes. As of March 31, 1997, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $55,370,000, for U.K.
income tax purposes of approximately $4,073,000, and for state income tax
purposes of approximately $18,090,000. The Company also had research and
development credit carryforwards for federal income tax purposes of
approximately $1,718,000 and for state income tax purposes of approximately
$708,000. Utilization of the company's U.S. net operating loss and research
credit carryforwards will be subject to an annual limitation due to the "change
of ownership" provisions of the Tax Reform Act of 1986. The annual limitation
may result in the expiration of net operating loss and research credit
carryforwards before utilization.

Liquidity and Capital Resources

    The Company's cash, cash equivalents, and marketable securities declined to
$36.8 million at March 31, 1997 from $50.7 million at March 31, 1996. This net
decrease of $13.9 million resulted from the use of cash during the period of
$16.1 million for operating activities and $2.3 million for the purchase of
property and equipment, offset by the net receipt of approximately $4.4 million
through equity and debt financing activities. The Company expects to incur
additional substantial losses at least through its fiscal year ending March 31,
1998, but anticipates that its existing capital resources will be adequate to
satisfy its operating and capital requirements at least through March 31, 1998.

    Prepaid expenses and other current assets increased $198,000 from March 31,
1996 to March 31, 1997, due to increases in the balance of prepaid insurance
premiums in connection with the Company's commercial and liability coverages.
Property and equipment, net of depreciation, increased $1,052,000 from March 31,
1996 to March 31, 1997, due to equipment purchases for new employees, leasehold
improvements related to office expansions, and ongoing enhancements to the
Company's computer equipment used for research and development.

    Accounts payable and accrued liabilities decreased $68,000 at March 31, 1997
in comparison with March 31, 1996, principally because of higher accrual
balances in the previous fiscal year for issuance costs in connection with the
Company's equity offerings in November 1995. Deferred revenue at March 31, 1997
fell $4,085,000 from March 31, 1996, as the Company recognized as revenue in
fiscal year 1997 certain advance royalty payments collected in previous periods
under contracts with OEM customers. The amount of such advance royalty payments
recognized as revenue during fiscal year 1997 exceeded the amount of any
payments collected during the period, causing the balance in deferred revenue to
decline significantly. The significant decrease in the Company's 


                                                                              37
<PAGE>   38
deferred revenue balance during the period was attributable primarily to the
recognition as revenue of $3,535,000 in connection with the termination or
restructuring of four OEM license agreements for which there had been
non-refundable, prepaid royalty balances outstanding at the time of the
termination or restructuring. Other current liabilities increased $323,000 from
March 31, 1996 to March 31, 1997 as a result of higher accrual balances for
certain incentive compensation and employee benefit programs. Lease obligations
decreased $303,000 from March 31, 1996 to March 31, 1997, as monthly lease
payments amortized outstanding principal balances. Notes payable at March 31,
1996 to former shareholders of Eden in the amount of $1,755,000 were converted
into equity concurrent with the Company's acquisition of Eden in February 1997.

Factors Affecting Future Operating Results

Please See the Risk Factors discussion in Part I, Item 1, beginning on page 20.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.


                                                                              38
<PAGE>   39
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                         Report of Independent Auditors

The Board of Directors and Shareholders
Geoworks

We have audited the accompanying consolidated balance sheets of Geoworks as of
March 31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Geoworks at March
31, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 1997, in
conformity with generally accepted accounting principles.


                                       /s/ Ernst & Young LLP
                                       ---------------------
                                       Ernst & Young LLP
                      
San Francisco, California
April 23, 1997


                                                                              39
<PAGE>   40
                           Consolidated Balance Sheets
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                              MARCH 31
                                                                          1997         1996
                                                                      -------------------------
<S>                                                                     <C>          <C>     
ASSETS
Current assets:
   Cash and cash equivalents                                            $  6,319     $ 11,052
   Marketable securities                                                  30,501       39,625
   Prepaid expenses and other current assets                                 907          709
                                                                      -------------------------
Total current assets                                                      37,727       51,386

Property and equipment, net                                                3,546        2,494
Other assets                                                                 120          160
                                                                      -------------------------
Total assets                                                            $ 41,393     $ 54,040
                                                                      =========================

LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
   Accounts payable and accrued liabilities                             $  1,193     $  1,261
   Accrued compensation and related expenses                               1,029          706
   Lease obligations due within one year                                     435          305
   Deferred revenue                                                        1,444        5,529
                                                                      -------------------------
Total current liabilities                                                  4,101        7,801

Notes payable to shareholders of Eden Group, Ltd.                              -        1,755
Lease obligations due after one year                                         739        1,172
Commitments and contingencies

Shareholders' equity:
   Preferred stock, no par value; 2,000 shares authorized; no shares
     issued or outstanding                                                     -            -
   Common stock, no par value; 20,000 shares authorized; 15,471
     shares issued and outstanding (1996 - 14,624 shares)
                                                                          94,851       88,448
   Accumulated deficit                                                   (58,372)     (44,896)
   Notes receivable from shareholders                                        (68)        (122)
   Deferred compensation                                                     (32)        (175)
   Cumulative foreign currency translation adjustment                        174           57
                                                                      -------------------------
Total shareholders' equity                                                36,553       43,312
                                                                      -------------------------
Total liabilities and shareholders' equity                              $ 41,393     $ 54,040
                                                                      =========================
</TABLE>

See accompanying notes.


                                                                              40
<PAGE>   41
                      Consolidated Statements of Operations
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                 YEAR ENDED MARCH 31
                                          1997         1996          1995
                                      --------------------------------------
<S>                                     <C>          <C>          <C>     

Revenues:
    License revenue                     $  6,620     $  4,649     $  3,404
    Research and development fees          4,176        1,630        1,923
    Service revenue                          300          -            -
                                      --------------------------------------
Total net revenues                        11,096        6,279        5,327

Operating expenses:
    Cost of license revenue                  624          122          473
    Sales and marketing                    7,108        4,510        5,272
    Research and development              13,698        9,109        6,520
    General and administrative             3,708        3,254        3,557
    Cost of merger                         1,450          -            -
                                      --------------------------------------
Total operating expenses                  26,588       16,995       15,822
                                      --------------------------------------
Operating loss                           (15,492)     (10,716)     (10,495)

Other income (expense):
    Interest income                        2,324        1,377          475
    Interest expense                        (244)        (372)        (357)
                                      --------------------------------------
Total other income (expense)               2,080        1,005          118
                                      --------------------------------------
Loss before income taxes                 (13,412)      (9,711)     (10,377)
Provision for income taxes                    64          -            175
                                      --------------------------------------
Net loss                                $(13,476)    $ (9,711)    $(10,552)
                                      ======================================

Net loss per share                      $  (0.88)    $  (0.75)    $  (1.09)
                                      ======================================
Shares used in per share computation      15,234       13,032        9,674
                                      ======================================
</TABLE>

See accompanying notes.


                                                                              41
<PAGE>   42
                 Consolidated Statements of Shareholders' Equity
                                 (in thousands)



<TABLE>
<CAPTION>
                                                                                        NOTE                 CUMULATIVE
                                                                                    RECEIVABLE                FOREIGN        TOTAL
                                     CONVERTIBLE                                       FROM                   CURRENCY       SHARE
                                   PREFERRED STOCK      COMMON STOCK    ACCUMULATED   SHARE-    DEFERRED    TRANSLATION     HOLDERS'
                                  SHARES     AMOUNT   SHARES    AMOUNT    DEFICIT     HOLDERS COMPENSATION   ADJUSTMENT     EQUITY
                                  -----------------   ----------------  ------------------------------------------------------------
<S>                                <C>     <C>         <C>    <C>        <C>          <C>        <C>           <C>       <C>        
  Balances at March 31, 1994       3,239   $  9,165    3,419  $  4,262   $(25,311)    $ (248)    $ (1,160)     $   (2)   $  (13,294)
Common shares issued under stock                                                                                         
   option and stock purchase plans   -          -        948       221          -         (3)           -           -           218
Conversion of redeemable                                                                                                 
   preferred stock into common                                                                                           
   stock                             -          -      1,524    10,950          81         -            -           -        11,031
Conversion of notes payable to                                                                                           
   shareholders to common stock      -          -        350     2,098          -          -            -           -         2,098
Conversion of convertible                                                                                                
   preferred stock into common                                                                                           
   stock                          (3,239)    (9,165)   2,816     9,165          -          -            -           -             -
Issuance of common stock in                                                                                              
   initial public offering,                                                                                              
   net of offering costs of          -          -      1,725     8,650          -          -            -           -         8,650
                                                                                                                           $  1,700
Issuance of common stock in                                                                                              
   private placement                 -          -      1,000     7,500          -          -            -           -         7,500
Payments received from                                                                                                   
   shareholders                      -          -        -         -            -        128            -           -           128
Foreign currency translation                                                                                             
   adjustment                        -          -        -         -            -          -            -          (8)           (8)
Amortization of deferred                                                                                                 
   compensation                      -          -        -         -            -          -          674           -           674
Net loss                             -          -        -         -      (10,552)         -            -           -       (10,552)
                                  -----------------   ----------------  ------------------------------------------------------------
  Balances at March 31, 1995         -          -     11,782    42,846    (35,782)      (123)        (486)        (10)        6,445
Common shares issued under                                                                                               
   stock option and stock                                                                                                
   purchase plans                    -          -        511       612          -         (1)           -           -           611
Issuance of common stock in                                                                                              
   secondary offering and                                                                                                
   private placement, net of                                                                                             
   offering costs of $2,910          -          -      2,209    44,590          -          -            -           -        44,590
</TABLE>


                                                                              42
<PAGE>   43
           Consolidated Statements of Shareholders' Equity (continued)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                        NOTE                 CUMULATIVE
                                                                                    RECEIVABLE                FOREIGN        TOTAL
                                     CONVERTIBLE                                       FROM                   CURRENCY       SHARE
                                   PREFERRED STOCK      COMMON STOCK    ACCUMULATED   SHARE-    DEFERRED    TRANSLATION     HOLDERS'
                                  SHARES     AMOUNT   SHARES    AMOUNT    DEFICIT     HOLDERS COMPENSATION   ADJUSTMENT     EQUITY
                                  -----------------   ----------------  ------------------------------------------------------------
<S>                                <C>     <C>         <C>    <C>        <C>          <C>        <C>           <C>       <C>        
Issuance of common stock in
   private placement                   -$         -      122   $   400   $          $      -    $         $
                                                                                           -            -           -           400
Unrealized loss on marketable                                                                                
   securities                          -          -        -         -         (4)         -            -           -            (4)
Payments received from                                                                                       
   shareholders                        -          -        -         -          -          2            -           -             2
Foreign currency translation                                                                                 
   adjustment                          -          -        -         -          -          -            -          67            67
Amortization of deferred                                                                                     
   compensation                        -          -        -         -          -          -          311           -           311
Adjustment for                         -          -        -         -        601          -            -           -           601
   pooling-of-interests                                                                                      
Net loss                               -          -        -         -     (9,711)         -            -           -        (9,711)
  Balances at March 31, 1996           -          -   14,624    88,448    (44,896)      (122)        (175)         57        43,312
Common stock issued under                                                                                   
   stock option and stock              -          -      318     1,341          -          -            -           -         1,341
   purchase plans                                                                                 
Issuance of common stock in                                                                       
   private placement                   -          -      444     3,043          -          -            -           -         3,043
Conversion of notes payable to                                                                    
   shareholders to common stock        -          -       85     2,019          -          -            -           -         2,019
Payments received from                                                                            
   shareholders                        -          -        -         -          -         54            -           -            54
Foreign currency translation                                                                      
   adjustment                          -          -        -         -          -          -            -         117           117
Amortization of deferred                                                                          
   compensation                        -          -        -         -          -          -          143           -           143
Net loss                               -          -        -         -    (13,476)         -            -           -       (13,476)
 Balances at March 31, 1997            -    $     -   15,471  $ 94,851  $ (58,372)   $    (68)  $     (32) $      174      $ 36,553
</TABLE>

See accompanying notes.


                                                                              43
<PAGE>   44
                      Consolidated Statements of Cash Flows
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                       YEAR ENDED MARCH 31
                                                                                1997          1996          1995
                                                                           ----------------------------------------
<S>                                                                         <C>           <C>           <C>       

OPERATING ACTIVITIES
Net loss                                                                    $ (13,476)    $  (9,711)    $ (10,552)
Adjustments to reconcile net loss to net cash used in operating
   activities:
   Depreciation and amortization                                                1,221           821           829
   Amortization of deferred compensation                                          143           311           674
   Other                                                                          264           -             145
   Changes in operating assets and liabilities:
     Other current assets                                                        (158)         (332)           53
     Deferred revenues                                                         (4,085)       (2,782)        1,574
     Other current liabilities                                                    255           670          (235)
                                                                           ----------------------------------------
Net cash used in operating activities                                         (15,836)      (11,023)       (7,512)

INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements                   (2,292)       (1,317)         (889)
Purchases of marketable securities                                            (62,655)     (119,070)      (14,482)
Sales of marketable securities                                                 52,383        78,377         1,235
Maturities of marketable securities                                            19,396        15,550             -
Other                                                                               -           329           199
                                                                           ----------------------------------------
Net cash provided by (used in) investing activities                             6,832       (26,131)      (13,937)

FINANCING ACTIVITIES
Proceeds from issuance of notes payable to shareholders                             -           409           119
Proceeds from sale/leaseback of equipment                                           -           288           900
Payment of obligations under capital leases                                      (284)         (225)          (58)
Proceeds from issuance of common stock                                          4,384        45,602        16,466
Proceeds from notes receivable from shareholders                                   54             2           128
                                                                           ----------------------------------------
Net cash provided by financing activities                                       4,154        46,076        17,555

Foreign currency translation adjustments                                          117            67            (8)
                                                                           ----------------------------------------
Net (decrease) increase in cash and cash equivalents                           (4,733)        8,989        (3,902)
Cash and cash equivalents, beginning of year                                   11,052         2,063         5,965
                                                                           ----------------------------------------
Cash and cash equivalents, end of year                                      $   6,319     $  11,052     $   2,063
                                                                           ========================================

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING/FINANCING ACTIVITIES
Conversion of preferred stock to common stock                              $        -     $       -     $  20,115
                                                                           ========================================
Conversion of notes payable to shareholders and related accrued interest
   to common stock                                                          $   2,019     $       -     $   2,098
                                                                           ========================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments                                                           $     244     $     372     $     357
                                                                           ========================================
Income tax payments                                                         $      64     $       -     $     175
                                                                           ========================================
</TABLE>

See accompanying notes.


                                                                              44
<PAGE>   45
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY

Geoworks (the "Company") develops and markets operating system and application
software for the emerging mobile communicating device market.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries located in Japan and the United Kingdom. All
significant intercompany balances and transactions have been eliminated.

As more fully described in Note 8, in February 1997, Geoworks acquired Eden
Group, Ltd. The acquisition has been accounted for as a pooling-of-interests and
the historical consolidated financial statements of Geoworks for all periods
prior to the date of the acquisition have been restated to include the financial
position, results of operations and cash flows of Eden Group, Ltd. Costs of the
merger are included in the consolidated results of operations for fiscal year
1997.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.


REVENUE RECOGNITION

License revenue represents revenue from hardware manufacturers that incorporate
the Company's software products into their systems, software publishers who
produce customized versions of the Company's software for specific markets and
communication services providers whose services are accessed through products
utilizing the Company's operating system software. Revenues from products or
technology licensed to original equipment manufacturers ("OEMs") are recognized
when the related products or technology is accepted by the OEM customer. Advance
payments of license fees (prepaid royalties) are recorded as deferred revenue
and recognized as license revenue as products containing the licensed software
are sold and reported by the licensee. If an OEM license agreement is terminated
(through contract termination or as a result of product discontinuation), any
remaining deferred revenue related to unamortized prepaid royalties is
recognized as revenue, provided that the Company has no material obligations
remaining under the agreement. For fiscal year 1995, license revenue also
includes sales of operating system and application software to end users and
distributors. 


                                                                              45
<PAGE>   46
Research and development fees represent amounts received pursuant to contracts
with OEMs under which the Company is reimbursed for a portion of its development
costs related to specific products up to the amounts specified in the contracts.
The Company is typically paid by the OEM as it achieves certain project
milestones. Revenue under these research and development arrangements is
recognized under the percentage-of-completion method based on the relationship
of costs incurred to date to total anticipated project costs.

Service revenue represents amounts earned for the support and maintenance of
software licensed by OEM customers.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits and highly liquid U.S.
government securities with original maturities of three months or less and are
stated at cost, which approximates fair value.

MARKETABLE SECURITIES

In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (FAS No. 115),
management is required to determine the appropriate classification of its debt
and equity securities at the time of purchase and reevaluate such designation as
of each balance sheet date. The Company has classified all of its marketable
securities as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, included in shareholders' equity
until disposition. Realized gains and losses and declines in value judged to be
other than temporary on available-for-sale debt and equity securities are
included in interest and other income.


CAPITALIZED SOFTWARE

The Company has not capitalized any software development expenses for its
products as such expenses have been incurred prior to the Company's products
attaining technological feasibility or such costs have been reimbursed by third
parties in connection with OEM license agreements. Software development expenses
incurred for product enhancements after the product has reached technological
feasibility have not been material and, accordingly, have been charged to
operations as incurred.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of four
years. Assets acquired under capital lease obligations and leasehold
improvements are amortized using the straight-line method over the shorter of
the useful lives of the assets or the terms of the leases.


                                                                              46
<PAGE>   47
RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense includes both internally funded development and
projects funded in part by customers. Total research and development expenses
for projects for which OEM funding was received were $7,439,000, $3,639,000 and
$1,629,000 for fiscal years 1997, 1996 and 1995, respectively, of which
$4,176,000, $1,630,000 and $1,923,000 was funded and recognized as revenue in
fiscal years 1997, 1996 and 1995, respectively.

MAJOR CUSTOMERS

Revenues from four major customers accounted for 20%, 17%, 10% and 10% of net
revenues for fiscal year 1997. Revenues from two major customers accounted for
40% and 11% of total revenues for fiscal year 1996. Revenues from two major
customers accounted for 19% and 14% of total revenues for fiscal year 1995.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the Company has
elected to apply the intrinsic-value method under Accounting Principles Board
Opinion No. 25 ("APB Opinion 25") and related Interpretations in accounting for
its stock option and stock purchase plans and has not recognized compensation
cost in connection with such plans. A summary of the pro forma effects on
reported net loss and net loss per share for fiscal years 1997 and 1996 as if
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by FAS 123 is presented in
Note 5.

PER SHARE DATA

Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from convertible preferred
stock and from stock options and warrants are not included in the computation as
they are anti-dilutive. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share, which is required to be
adopted on December 31, 1997. The adoption of this statement is not expected to
have a significant effect on the historical loss per share of the Company for
fiscal 1997, 1996 or 1995.

FOREIGN CURRENCY TRANSLATION

The Company's international subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expense accounts are
translated at average exchange rates during each period. Resulting translation
adjustments are recorded directly to a separate component of shareholders'
equity.


                                                                              47
<PAGE>   48
2. MARKETABLE SECURITIES

The Company's available-for-sale debt and equity securities consist of the
following at March 31, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                            GROSS          GROSS
                                                          UNREALIZED     UNREALIZED       ESTIMATED
                                                COST         GAINS         LOSSES        FAIR VALUE
                                               ----------------------------------------------------
<S>                                            <C>           <C>            <C>            <C>     
MARCH 31, 1997
U.S. Agency bonds                              $ 10,993      $    -         $    -         $ 10,993
U.S. Treasury securities                          6,886           -              -            6,886
U.S. commercial paper and corporate bonds
                                                  1,950           -              -            1,950
                                               ----------------------------------------------------
                                                 19,829           -              -           19,829
Equity securities (mutual funds)                 10,672           -              -           10,672
                                               ----------------------------------------------------
                                               $ 30,501      $    -         $    -         $ 30,501
                                               ====================================================

MARCH 31, 1996
U.S. Agency bonds                              $  5,983      $      1       $    -         $  5,984
U.S. Treasury securities                         21,499             9            -           21,508
U.S. commercial paper and corporate bonds
                                                  8,456           -              (14)         8,442
                                               ----------------------------------------------------
                                                 35,938            10            (14)        35,934
Equity securities (mutual funds)                 11,570           -              -           11,570
                                               ----------------------------------------------------
                                               $ 47,508      $     10       $    (14)      $ 47,504
                                               ====================================================
</TABLE>

Such debt and equity securities have been recorded as follows (in thousands):

<TABLE>
<CAPTION>
                                     MARCH 31
                                1997        1996
                             -----------------------
<S>                            <C>          <C>        

Cash and cash equivalents      $   -        $ 7,879
Marketable securities           30,501       39,625
                             -----------------------
                               $30,501      $47,504
                             =======================
</TABLE>


Substantially all of the Company's investments in debt and equity securities at
March 31, 1997 and 1996 are due within one year.


                                                                              48
<PAGE>   49
3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                          MARCH 31
                                                     1997         1996
                                                  ----------------------
<S>                                                 <C>         <C>   

Equipment                                           $3,999      $3,128
Furniture and fixtures                                 976         662
Leasehold improvements                                 823         329
Land and buildings                                     467         467
                                                  ----------------------
                                                     6,265       4,586
Less accumulated depreciation and amortization       2,719       2,092
                                                  ----------------------
                                                    $3,546      $2,494
                                                  ======================
</TABLE>



4. INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"), under
which the liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.

Significant components of the Company's net deferred income tax assets are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                MARCH 31
                                                         1997             1996
                                                    ----------------------------
<S>                                                    <C>            <C>     
Net operating loss carryforwards                       $ 21,809       $ 14,906
Research and development tax credit carryforwards         2,178          1,620
Deferred revenue                                            592          2,177
Capitalized research expenditures                         1,269            588
Other, net                                                  331            186
                                                    ----------------------------
Total deferred tax assets                                26,179         19,477
Valuation allowance on deferred tax assets              (26,179)       (19,477)
                                                    ----------------------------
Net deferred tax assets                                $      -       $      -
                                                    ============================
</TABLE>


The income tax provisions of $64,000 and $175,000 for fiscal years 1997 and
1995, respectively, consist of foreign withholding tax payments made with
respect to royalties received from original equipment manufacturers.

The changes in the valuation allowance for fiscal years 1997 and 1996 were
$6,702,000 and $5,776,000, respectively.


                                                                              49
<PAGE>   50
Deferred tax assets relating to net operating loss carryforwards as of March 31,
1997 include approximately $3,900,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
shareholders' equity.

The Company has a July 31 year end for income tax purposes. As of March 31,
1997, the Company has net operating loss carryforwards for U.S. federal income
tax purposes of approximately $55,370,000, for U.K. income tax purposes of
approximately $4,073,000, and for state income tax purposes of $18,090,000. The
Company also has federal and state research and development credit carryforwards
of approximately $1,718,000 and $708,000, respectively. The net operating loss
and the research and development tax credit carryforwards expire in various
years from 1998 through 2012.

Utilization of the Company's U.S. net operating loss and research credit
carryforwards will be subject to an annual limitation due to the change in
ownership provisions of the Internal Revenue Code of 1986. The annual limitation
may result in the expiration of net operating loss and research credit
carryforwards before utilization.


5. SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Company's Articles of Incorporation authorize two million shares of
preferred stock, none of which is issued or outstanding. The Board of Directors
has the authority to issue the preferred stock with rights, preferences,
privileges and restrictions, including vesting rights, without any further vote
or action by the shareholders.

STOCK OPTION PLANS

Under the Company's stock option plans, incentive and nonqualified stock options
may be granted to employees, consultants and outside directors, to purchase a
maximum of 5,255,000 common shares. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant. In the case
of incentive stock options, the exercise price is at least equal to the fair
market value of the stock on the grant date. Options for new employees generally
vest 25% on the first anniversary of the recipient's hire date and 1/48 per
month thereafter. Options for continuing employees generally vest 1/48 per month
from the date of grant. Options expire ten years from the date of grant.


                                                                              50
<PAGE>   51
The following table summarizes activity under the Company's stock option plans:

<TABLE>
<CAPTION>
                                                                     WEIGHTED 
                                                       NUMBER         AVERAGE
                                                     OF SHARES    EXERCISE PRICE
                                                   -----------------------------
<S>                                                  <C>             <C>      
Balance at March 31, 1994                            1,596,000       $     .52
    Granted                                            394,000            6.68
    Exercised                                         (352,000)            .40
    Forfeited                                         (111,000)           3.32
                                                   -----------------------------
Balance at March 31, 1995                            1,527,000            2.00
    Granted                                          1,100,000           14.33
    Exercised                                         (357,000)            .78
    Forfeited                                          (55,000)           7.87
                                                   -----------------------------
Balance at March 31, 1996                            2,215,000            8.25
    Granted                                          1,439,000           19.06
    Exercised                                         (292,000)           2.66
    Forfeited                                         (190,000)          11.05
                                                   -----------------------------
Balance at March 31, 1997                            3,172,000           13.43
                                                   =============

Outstanding  options exercisable and vested at
    March 31, 1997                                     942,000            6.55
                                                   =============

Options available for grant at March 31, 1997          487,000
                                                   =============
</TABLE>


The weighted average fair value at grant date of options granted during fiscal
years 1997 and 1996 was $12.21 and $10.28 per share, respectively.


                                                                              51
<PAGE>   52
The following table summarizes information concerning currently outstanding and
exercisable options:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                    ----------------------------------------------------------------------------------------
                                           WEIGHTED
                                           AVERAGE           WEIGHTED                          WEIGHTED
                                          REMAINING          AVERAGE           NUMBER           AVERAGE
   EXERCISABLE     NUMBER OUTSTANDING  CONTRACTUAL LIFE   EXERCISE PRICE     EXERCISABLE    EXERCISE PRICE
     PRICES                                                                  AND VESTED
------------------ ------------------- ----------------- ----------------- ---------------- ----------------
<S>                <C>                 <C>               <C>               <C>              <C>       

$       .27-4.00           547,000            5.93       $        .61            453,000    $        .59
       6.25-9.00           412,000            8.43               6.69            161,000            6.63
     11.25-16.50           841,000            8.58              13.64            284,000           13.46
     17.75-19.50           873,000            9.89              17.88             11,000           18.15
     20.50-29.00           499,000            9.40              24.69             33,000           24.56
                      ================                                       ==============
                         3,172,000                                               942,000
                      ================                                       ==============
</TABLE>


EMPLOYEE STOCK PURCHASE PLAN

During fiscal year 1995, the Company established an employee stock purchase plan
for all employees meeting certain eligibility criteria. Under the plan,
employees may purchase shares of the Company's common stock, subject to certain
limitations, at not less than 85% of fair market value as defined in the plan. A
total of 200,000 shares have been reserved for issuance under the plan. In
fiscal years 1997 and 1996, 26,000 and 44,000 shares, respectively, were issued
under the plan at average prices of $18.83 and $7.93 per share. At March 31,
1997, a total of 116,000 shares were available for issuance under the plan.


                                                                              52
<PAGE>   53
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of FAS 123 and applies
APB Opinion 25 and related Interpretations in accounting for its stock option
and employee stock purchase plans and has not recognized compensation cost. Had
compensation cost for the Company's stock plans been determined based on the
fair value at the grant date for awards during fiscal years 1997 and 1996, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                  YEAR ENDED MARCH 31
                                                1997              1996
                                            -------------------------------

<S>                                           <C>               <C>         
Net loss - as reported                        $ (13,476)        $  (9,711)
Net loss - pro forma                            (17,410)          (10,673)

Net loss per share - as reported                  (.88)             (.75)
Net loss per share - pro forma                   (1.14)             (.82)
</TABLE>

The effect on net loss and net loss per share is not expected to be indicative
of the effects on net loss and net loss per share in future years.

The fair value of each option grant has been estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for fiscal years 1997 and 1996: expected volatility calculations based on
historical data (.893) and risk free interest rates based on U.S. government
strip bonds on the date of grant with maturities equal to the expected option
lives of five years (6.27% and 5.75%, respectively). No dividends are assumed.


NOTES RECEIVABLE FROM SHAREHOLDERS

Notes receivable from shareholders consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                        MARCH 31
                                                                 1997             1996
                                                               --------------------------
<S>                                                             <C>              <C>   

Note receivable from officer, with interest at 5.0% payable
    semiannually, due October 4, 1998                           $   67           $  120
Other notes receivable from officers and employees                   1                2
                                                               --------------------------
                                                                $   68           $  122
                                                               ==========================
</TABLE>


The notes receivable from shareholders arose from the sale of the Company's
common stock and are secured by the shares of common stock issued. In addition,
the note due October 4, 1998, is secured by a deed of trust on such officer's
principal residence.


                                                                              53
<PAGE>   54
6. RETIREMENT PLAN

The Company has a deferred compensation plan for substantially all employees.
Under this plan, which qualifies under Section 401(k) of the Internal Revenue
Code, eligible employees may contribute up to 15% of their pretax salary,
subject to certain limitations.

The Company may, at its discretion, contribute amounts to the 401(k) plan. No
employer contributions were made during fiscal years 1997, 1996 or 1995.


7. COMMITMENTS

The Company leases its office facilities and certain computer equipment under
noncancelable lease agreements which require the Company to pay operating costs,
including property taxes, insurance and maintenance. The Company's facilities
leases are secured by certificates of deposit in the amount of $56,000 and
$84,000 at March 31, 1997 and 1996, respectively, which are included in other
assets. Rent expense was $1,207,000, $849,000 and $854,000 for fiscal years
1997, 1996 and 1995, respectively.

The Company also leases certain furniture and equipment under noncancelable
capital lease agreements. The cost of equipment under capital leases was
approximately $1,258,000 and $1,285,000 at March 31, 1997 and 1996,
respectively. The related accumulated amortization was approximately $919,000
and $598,000 at March 31, 1997 and 1996, respectively. Amortization of assets
under capital leases is included in depreciation expense.

During fiscal years 1996 and 1995, the Company sold certain equipment for
$288,000 and $900,000, respectively, which it is leasing back for three and a
half year periods. No gain or loss was recognized on these transactions. The
Company is required to purchase the equipment from the lessor at the completion
of the lease for 20% of the sales price. The minimum lease payments are included
in future minimum payments due under capital leases below. 


                                                                              54
<PAGE>   55
Future minimum payments under noncancelable operating leases having terms in
excess of one year and capital leases are due as follows (in thousands):

<TABLE>
<CAPTION>
                                             OPERATING     CAPITAL
FISCAL YEAR                                    LEASES      LEASES
                                           -------------------------
<S>                                          <C>           <C>   

   1998                                      $  1,317      $  435
   1999                                         1,235         386
   2000                                           563          30
   2001                                           496           -
   2002 and thereafter                            753           -
                                           -------------------------
                                             $  4,364         851
                                           ============
   Less amount representing interest                          132
                                                         -----------
                                                              719
   Amounts due within one year                                330
                                                         -----------
                                                           $  389
                                                         ===========
</TABLE>

Lease obligations in the accompanying consolidated balance sheet also include
deferred rent expense relating to the Company's facilities leases totaling
$105,000 and $140,000 in amounts due within one year and amounts due after one
year, respectively, at March 31, 1997.

Also included in lease obligations in the accompanying balance sheet is
approximately $210,000 due under a mortgage for a building owned in the U.K.

8. ACQUISITION OF EDEN GROUP LTD.

In February 1997, the Company acquired Eden Group, Ltd. ("Eden"), a U.K.
publisher of operating system and application software for mobile computing and
communications products. The Company issued approximately 1,282,000 shares of
its common stock to Eden in exchange for all outstanding shares of capital stock
and stock options of Eden. The transaction was accounted for as a
pooling-of-interests. The Company's historical consolidated financial statements
for prior periods have been restated to reflect the financial position, results
of operations and cash flows of Eden.

The consolidated statements of operations for the year ended March 31, 1997
include the results of operations of Eden for the same period. The consolidated
statements of operations for the years ended March 31, 1996 and 1995 include the
results of operations of Eden for the years ended June 30, 1996 and 1995,
respectively. Accordingly, an adjustment in the amount of $601,000 has been made
to the accumulated deficit to eliminate the effect of twice reporting the net
loss of Eden for the three months ended June 30, 1996. 


                                                                              55
<PAGE>   56
Components of the consolidated results of operations of Geoworks and Eden for
periods prior to the merger are as follows:

<TABLE>
<CAPTION>
                    NINE MONTHS ENDED
                       DECEMBER 31           YEAR ENDED MARCH 31
                          1996             1996              1995
                   ---------------------------------------------------
<S>                  <C>              <C>               <C>        
Net revenues:
   Geoworks          $     7,664      $     4,999       $     3,949
   Eden                    1,501            1,280             1,378
                   ---------------------------------------------------
Total                $     9,165      $     6,279       $     5,327
                   ===================================================

Net loss:
   Geoworks          $    (6,924)     $    (8,693)      $   (10,193)
   Eden                     (729)          (1,018)             (359)
                   ---------------------------------------------------
Total                $    (7,653)     $    (9,711)      $   (10,552)
                   ===================================================
</TABLE>


                                                                              56
<PAGE>   57
9. INFORMATION BY GEOGRAPHIC AREA

Information regarding operating information and identifiable assets at the end
of each year presented by geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
                                                          YEAR ENDED MARCH 31
                                               1997             1996           1995
                                          ----------------------------------------------
<S>                                          <C>             <C>            <C>      
Revenues:
U.S. Operations:
    Domestic revenues                        $   4,843       $   2,249      $   2,805
    Export revenues:
       Japan                                     2,684           2,500          1,119
       Europe                                    1,543             250             25
Foreign Operations (principally Europe)          2,026           1,280          1,378
                                          ----------------------------------------------
                                             $  11,096       $   6,279      $   5,327
                                          ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED MARCH 31
                                               1997             1996           1995
                                          ----------------------------------------------
<S>                                          <C>             <C>            <C>      
Operating loss:
U.S. Operations                              $ (14,054)      $  (9,464)     $  (9,489)
Foreign Operations                              (1,438)         (1,252)        (1,006)
                                          ----------------------------------------------
                                             $ (15,492)      $ (10,716)     $ (10,495)
                                          ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED MARCH 31
                                               1997             1996           1995
                                          ----------------------------------------------
<S>                                          <C>             <C>            <C>      
Identifiable assets:
U.S. Operations                              $  37,900       $  52,898      $  18,325
Foreign Operations                               3,493           1,142            760
                                          ----------------------------------------------
                                             $  41,393       $  54,040      $  19,085
                                          ==============================================
</TABLE>


                                                                              57
<PAGE>   58

10. INVESTMENT IN WINK COMMUNICATIONS INCORPORATED

In October 1994, Geoworks transferred certain technology and rights to Wink
Communications Incorporated ("Wink") in exchange for a minority equity interest
in Wink. The costs of developing this technology were previously charged to
operations; accordingly, no value has been attributed to this minority equity
interest in the accompanying consolidated financial statements. The former
Chairman of Geoworks serves as Chairman of Wink.


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

         None.


PART III

ITEM 10.

   
    The information required by this Item with respect to executive officers is
incorporated herein by reference from Item 4A of Part I of this Form 10-K. The
information required by this Item with respect to directors and compliance with
the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934 is incorporated herein by reference from the Company's definitive proxy
statement filed in connection with its 1997 Annual Meeting of Shareholders.
    

ITEM 11.

    The information required by this Item is incorporated herein by reference
from the Company's definitive proxy statement filed in connection with its 1997
Annual Meeting of Shareholders.

ITEM 12.

    The information required by this Item is incorporated herein by reference
from the Company's definitive proxy statement filed in connection with its 1997
Annual Meeting of Shareholders.

ITEM 13.

    The information required by this Item is incorporated herein by reference
from the Company's definitive proxy statement filed in connection with its 1997
Annual Meeting of Shareholders.


                                                                              58
<PAGE>   59
PART IV

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

(a)      FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

         1.       Financial Statements. The following Consolidated Financial
                  Statements of Geoworks and Report of Independent Auditors are
                  included in Item 8

                           Report of Independent Auditors

                           Consolidated Balance Sheets - March 31, 1997 and 1996

                           Consolidated Statements of Operations - Years Ended
                           March 31, 1997, 1996 and 1995

                           Consolidated Statements of Shareholders' Equity Years
                           Ended March 31, 1997, 1996 and 1995

                           Consolidated Statements of Cash Flows Years Ended
                           March 31, 1997, 1996 and 1995

                           Notes to Consolidated Financial Statements

         2.       Financial Statement Schedules All schedules for which
                  provision is made in the applicable accounting regulation of
                  the Securities and Exchange Commission are not required under
                  the related instructions or are inapplicable and have
                  therefore been omitted.


         3.       Exhibits

                  Exhibit Description of Document

                  2.1      Recommended Offer to Purchase the Entire Issued Share
                           Capital of Eden Group Limited (formerly filed as 
                           Exhibit 2.1 with the Registrant's report on Form 8-K
                           March 10, 1997)

                  2.2      Warranty and Covenant Agreement in relation to 


                                                                              59
<PAGE>   60
                           Eden Group Limited (formerly filed as Exhibit 2.2
                           with the Registrant's report on Form 8-K filed March
                           10, 1997)

                  2.3      Escrow Agreement (formerly filed as Exhibit 2.3 with
                           the Registrant's report on Form 8-K filed March 10,
                           1997)


                  3.1      Articles of Incorporation of Registrant (formerly
                           filed as Exhibit 3.1 with the Registrant's
                           Registration Statement on Form S-1 (File No.
                           33-78104), effective June 22, 1994)

                  3.2      Bylaws of Registrant (formerly filed as Exhibit 3.2 
                           with the Registrant's Registration Statement on Form
                           S-1 (File No. 33-78104), effective June 22, 1994)


                  10.1     Form of Indemnification Agreement (formerly filed as
                           Exhibit 10.1 with the Registrant's Registration
                           Statement on Form S-1 (File No. 33-78104), effective
                           June 22, 1994)

                  10.2     1987 Stock Option Plan (formerly filed as Exhibit
                           10.2 with the Registrant's Registration Statement on
                           Form S-1 (File No. 33-78104), effective June 22,
                           1994)*

                  10.3     1994 Stock Plan and Form of Stock Option Agreement
                           (formerly filed as Exhibit 10.3 with the Registrant's
                           report on Form 10-Q for the quarter ended September
                           30, 1996)*

                  10.4     Employee Stock Purchase Plan and Form of Subscription
                           Agreement (formerly filed as Exhibit 10.4 with the
                           Registrant's Registration Statement on Form S-1 (File
                           No. 33-78104), effective June 22, 1994)*

                  10.5     Software License Agreement between Canon Business
                           Machines, Inc. and Geoworks dated April 5, 1993
                           (formerly filed as Exhibit 10.10 with the
                           Registrant's report on Form 10-Q for the quarter
                           ended December 31, 1996)

                  10.6     Corporate Technology Agreement between Toshiba
                           Corporation and Geoworks dated March 17, 1993
                           (formerly 


                                                                              60
<PAGE>   61
                           filed as Exhibit 10.12 with the Registrant's
                           Registration Statement on Form S-1 (File No.
                           33-78104), effective June 22, 1994)###

                  10.7     Third Amended and Restated Registration Rights
                           Agreement dated March 4, 1994 between Geoworks and
                           certain Holders of Common Stock and Preferred Stock
                           (formerly filed as Exhibit 10.15 with the
                           Registrant's Registration Statement on Form S-1 (File
                           No. 33-78104), effective June 22, 1994)

                  10.8     Lease dated December 30, 1993 for facilities located
                           at 960 Atlantic Avenue, Alameda, California (formerly
                           filed as Exhibit 10.16 with the Registrant's
                           Registration Statement on Form S-1 (File No.
                           33-78104), effective June 22, 1994)

                  10.9     Amendment Number One to Corporate Technology
                           Agreement between the Company and Toshiba Corporation
                           (formerly filed as Exhibit 10.17 with the
                           Registrant's report on Form 10-Q for the quarter
                           ended June 30, 1994)###

                  10.10    Geoworks - Brother Technology License Agreement,
                           effective as of September 30, 1994 (formerly filed as
                           Exhibit 10.18 with the Registrant's report on Form
                           10-Q for the quarter ended September 30, 1994)###

                  10.11    Geoworks - Hewlett-Packard Company Technology License
                           Agreement, effective as of September 21, 1994
                           (formerly filed as Exhibit 10.20 with the
                           Registrant's report on Form 10-Q for the quarter
                           ended September 30, 1994)###


                                                                              61
<PAGE>   62
                  10.12    Lease dated September 30, 1994 for facilities located
                           at 2001 Center Street, Berkeley, California (formerly
                           filed as Exhibit 10.22 with the Registrant's original
                           Annual Report on Form 10-K or amendments thereto on
                           Form 10-KA for the year ended March 31, 1995)

                  10.13    Software Development and Licensing Agreement between
                           Nokia Mobile Phones Ltd. and Geoworks dated December
                           2, 1994 (formerly filed as Exhibit 10.23 with the
                           Registrant's original Annual Report on Form 10-K or
                           amendments thereto on Form 10-KA for the year ended
                           March 31, 1995) ###

                  10.14    Master Lease Agreement between LINC Capital
                           Management Services, LTD. and Geoworks dated December
                           8, 1994 (formerly filed as Exhibit 10.24 with the
                           Registrant's original Annual Report on Form 10-K or
                           amendments thereto on Form 10-KA for the year ended
                           March 31, 1995)

                  10.15    Amendment No. 1 to Software License Agreement dated
                           June 15, 1995 between Geoworks and Tandy Corporation
                           (formerly filed as Exhibit 10.25 with the
                           Registrant's Registration Statement on Form S-3 (File
                           No. 33-97060))

                  10.16    Agreement to Purchase and Sell Common Stock dated
                           November 3, 1995 between Toshiba and Geoworks
                           (formerly filed as Exhibit 10.26 with the
                           Registrant's Form 8-K or amendments thereto on Form
                           8-KA on November 6, 1995)

                  10.17    Amendment Number Three to Corporate Technology
                           Agreement between the Company and Toshiba Corporation
                           (formerly filed as Exhibit 10.27 with the
                           Registrant's report on Form 10-Q for the quarter
                           ended December 31, 1995) ###

                  10.18    Technology License Agreement dated January 12, 1996
                           between Geoworks and Ericsson Mobile Communications
                           (formerly filed as Exhibit 10.28 with Registrant's
                           report on Form 10-K for the year ended March 31,
                           1996)###


                                                                              62
<PAGE>   63
                  10.19    Amendment Number Five to lease for facilities located
                           at 960 Atlantic Avenue, Alameda, CA, dated March 15,
                           1996 (formerly filed as Exhibit 10.29 with
                           Registrant's report on Form 10-K for the year ended
                           March 31, 1996)

                  10.20    Amendment Numbers One and Two to lease for facilities
                           located at 2001 Center Street, Berkeley, CA, dated
                           January 18, 1996 and February 29, 1996, respectively
                           (formerly filed as Exhibit 10.30 with Registrant's
                           report on Form 10-K for the year ended March 31,
                           1996)

                  10.21    Addendum Number One to Technology License Agreement
                           between Geoworks and Brother, dated March 29, 1996
                           (formerly filed as Exhibit 10.31 with Registrant's
                           report on Form 10-K for the year ended March 31,
                           1996) ###

                  10.22    International Business Machines Corporation, Letter
                           Agreement dated April 16, 1996 (formerly filed as
                           Exhibit 10.33 with the Registrant's report on Form
                           10-Q for the quarter ended June 30, 1996)###

                  10.23    Addendum Number Two to Technology License Agreement
                           between Geoworks and Brother International
                           Corporation, dated June 28, 1996 (formerly filed as
                           Exhibit 10.34 with the Registrant's report on Form
                           10-Q for the quarter ended June 30, 1996)###

                  10.24    Supplemental Stock Option Plan (formerly filed as
                           Exhibit 10.35 with the Registrant's report on Form
                           10-Q for the quarter ended September 30, 1996)*

                  10.25    Technology License Agreement between Geoworks and NEC
                           Corporation, dated April 26, 1996 (formerly filed as
                           Exhibit 10.36 with the Registrant's report on Form
                           10-Q for the quarter ended September 30, 1996)###

                  10.26    Amendment Number One to Technology License Agreement
                           between Sharp Corporation and Geoworks, dated
                           September 13, 1996 (formerly filed as Exhibit 10.37
                           with the Registrant's report on Form 10-Q for the
                           quarter ended September 30, 1996)


                                                                              63
<PAGE>   64
                  10.27    Amendment Number One to Software License Agreement
                           dated December 5, 1996 between Casio Computer Co.,
                           Ltd. and Geoworks (formerly filed as Exhibit 10.38
                           with the Registrant's report on Form 10-Q for the
                           quarter ended December 31, 1996)

                  10.28    Addendum to Corporate Technology Agreement between
                           Geoworks and Toshiba, dated December 16, 1996
                           (formerly filed as Exhibit 10.39 with the
                           Registrant's report on Form 10-Q for the quarter
                           ended December 31, 1996)###

                  10.29    1997 Supplemental Stock Plan (formerly filed as
                           Exhibit 4.1 with the Registrant's Registration
                           Statement on Form S-8 filed March 25, 1997)*

                  10.30    Form of Stock Option Agreement under the 1997
                           Supplemental Stock Plan (formerly filed as Exhibit
                           4.2 with the Registrant's Registration Statement on
                           Form S-8 filed March 25, 1997)*


                  21.1     List of subsidiaries

                  23.1     Consent of Independent Auditors (see Page 68)

                  24.1     Power of Attorney (see Page 66)

                  27.1     Financial Data Schedule

                           ### Confidential treatment has been granted as to
                                   portions thereof

                           * Management contract for compensatory plan or
                                   arrangement


                                                                              64
<PAGE>   65
(b)      REPORTS ON FORM 8-K

         The Company filed a Form 8-K on March 10, 1997, in connection with the
Company's acquisition by the Company of the Eden Group, Ltd.

(c)      EXHIBITS

         See Item 14(a)3 above.

(d)      FINANCIAL STATEMENT SCHEDULES

         See Item 14(a)2 above.


                                                                              65
<PAGE>   66
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.


Date: June ___, 1997

                                     GEOWORKS



                                     by:  /s/ Gordon E. Mayer
                                     -----------------------------------------
                                     Gordon E. Mayer
                                     President, Chief Executive Officer and
                                     Chairman of the Board


                                POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gordon E. Mayer and David A. Thatcher and
each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his or her substitutes, may do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Security 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/ Gordon E. Mayer         President, Chief Executive Officer    June 25, 1997
---------------------       and Chairman of the Board
Gordon E. Mayer             (Principal Executive Officer)
                            
</TABLE>


                                                                              66
<PAGE>   67

<TABLE>
<S>                         <C>                                   <C>
/s/ David A. Thatcher       Chief Financial Officer               June ___, 1997
---------------------
David A. Thatcher

/s/ Clive G. Smith          Director                              June ___, 1997
---------------------
Clive G. Smith

/s/ Bruce W. Dunlevie       Director                              June ___, 1997
---------------------
Bruce W. Dunlevie

/s/ Eric Schmidt            Director                              June ___, 1997
---------------------
Eric Schmidt

/s/ Reijo Pajaanen          Director                              June ___, 1997
---------------------
Reijo Pajaanen

/s/ Daniel L. Sicotte       Controller                            June ___, 1997
---------------------
Daniel L. Sicotte
</TABLE>


                                                                              67
<PAGE>   68
                         CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statements
pertaining to the 1994 Stock Plan (Form S-8 No. 333-84152), the Supplemental
Option Plan (Form S-8 No. 333-09569), and the 1997 Supplemental Plan (Form S-8
No. 333-23901), and the Registration Statement, including Amendment No. 1
thereto (Form S-3 No. 333-24097) and in the related prospectus of Geoworks, of
our report dated April 23, 1997, with respect to the consolidated financial
statements of Geoworks included in the Annual Report on Form 10-K for the year
ended March 31, 1997.


                                          /s/ Ernst & Young LLP
                                          -------------------------
                                              Ernst & Young LLP




San Francisco, California
June 25, 1997



                                                                              68
<PAGE>   69
                                    GEOWORKS

                           ANNUAL REPORT ON FORM 10-K
                                INDEX OF EXHIBITS


<TABLE>
<CAPTION>
Exhibit No.                  Description 
-----------                  ----------- 
<S>                          <C>

Exhibit 21.1                 List of Subsidiaries

Exhibit 27.1                 Financial Data Schedule

</TABLE>