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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, 1998.

[ ]  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 CORPORATION
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             (Exact name of registrant as specified in its charter)

                  DELAWARE                                  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
--------------------------------------------------------------------------------
  (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, PAR VALUE $0.001 PER SHARE

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,
1998 as reported on the Nasdaq National Market, was approximately $48,684,603.
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, 1998, there were 15,919,082 shares of the Registrant's Common
Stock outstanding.

                             DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1998 Annual Meeting of Stockholders to be held on September 15, 1998 are
incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof.


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                                    GEOWORKS

                                TABLE OF CONTENTS

<TABLE>
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<S>         <C>                                                                         <C>
                                        PART 1

Item 1.     Business                                                                     5
Item 2.     Properties                                                                  28
Item 3.     Legal Proceedings                                                           28
Item 4.     Submission of Matters to a Vote of Security Holders                         28
Item 4A.    Executive Officers of the Registrant                                        28


                                        PART II

Item 5.     Market for the Registrant's Common Equity and Related Stockholder Matters   31
Item 6.     Selected Financial Data                                                     32
Item 7.     Management's Discussion and Analysis of Financial Condition and Results
             of Operations                                                              35
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                  39
Item 8.     Financial Statements and Supplementary Data                                 40
Item 9.     Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure                                                       61


                                       PART III

Item 10.    Directors and Executive Officers of the Registrant                          61
Item 11.    Executive Compensation                                                      61
Item 12.    Security Ownership of Certain Beneficial Owners and Management              61
Item 13.    Certain Relationships and Related Transactions                              61


                                        PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K            62
             Signatures                                                                 69
</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 for Geoworks Corporation
("Geoworks" or the "Company") are forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 ( the "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 software as a standard solution for
the smart phone market; the Company's intention to fund and complete ongoing
research and development projects, including the ongoing development and
improvement of the latest version of its operating system software; the
Company's intention to attract new OEM licensees and to develop additional
devices with existing licensees; the Company's intention to expand the market
for its software by leveraging its existing licensees; the development of a
market for wireless content and services and the Company's intention to
integrate and market such wireless content and service technologies for use by
wireless mobile operators.

        Actual results may vary materially from such forward-looking statements,
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 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; (iv)
widespread adoption of mobile communicating devices may depend upon the
commercial availability of complementary relationships and technologies, such as
wireless mobile network infrastructure; (v) the Company anticipates the
emergence and potential impact of competitive products and services; (vi) the
Company does not control the development, timing or commercial distribution of
its licensees' products, and there can be no assurance that such devices will be
released to the public or that the Company will receive any significant revenue
therefrom; and (vii) 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
19.

   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 


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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.

ITEM 1.        BUSINESS

   Geoworks was incorporated in the state of California on September 27, 1983
and was reincorporated in the state of Delaware on October 7, 1997. Geoworks
develops and markets operating system and application software for the emerging
market of mobile communicating devices. Mobile communicating devices comprise
lightweight, portable computerized devices with communications capabilities,
such as smart phones, pagers, handheld PCs, communicating electronic organizers,
global positioning devices and wireless mobile phones. The Company is focusing
principally on the smart phone segment of the mobile communicating device
market. Smart phones include a range of products from enhanced phones to
all-in-one smart communicators. Enhanced phones provide a Graphical User
Interface (GUI) and incremental ease-of-use for the current digital wireless
mobile phones on the market. Such features provide easier user access to
existing network services such as voicemail and easy customization of the user
interface and product branding by the manufacturers and vendors of such digital
wireless mobile phones. Smart communicators are next-generation, digital
wireless mobile telephones that integrate voice and data capabilities--such as
electronic mail, facsimile, paging and access to Internet-based content and
services. Smart communicators have been distributed in Europe since 1996, and in
the U.S. and Japan since 1997.

   The Company's primary objective is to establish its operating system and
related software as leading software solutions for the mobile communicating
device market. To advance this objective, Geoworks has licensed its operating
system platform to a number of leading manufacturers of mobile communicating
devices, including Nokia Mobile Phones Ltd. ("Nokia"), Ericsson Mobile
Communications AB ("Ericsson"), NEC Corporation ("NEC"), Toshiba Corporation
("Toshiba"), and Mitsubishi Electric Corporation ("Mitsubishi"). Nokia and
Toshiba have also made equity investments in Geoworks. Although Nokia and
Toshiba are currently distributing smart phones incorporating the Company's
operating system, there can be no assurance that they will continue to do so,
that the Company's other licensees will commercialize products containing the
Company's software or that the Company will derive revenue therefrom.

   The Company has plans to leverage its position as a software 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,
Geoworks intends to work directly or indirectly with wireless operators, content
providers, hardware vendors and integrated service vendors to enable a complete,
end-to-end solution for users of mobile communicating devices (particularly
smart phones), either through the licensing of software technology and products
developed by the Company, or by performing services 


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for the solution provider. These products and services are intended to enable
wireless operators to provide mobile communicating device users with access to
the rapidly growing stream of electronic content and services, including the
Internet, World-Wide Web ("WWW"), electronic mail, paging and targeted
interactive content.

   To advance such objectives, Geoworks has established a licensing relationship
with Telecom Finland Oy, now known as Sonera. 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(R) 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"). In the past, the Company has also 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").



INDUSTRY BACKGROUND

The Mobile Communicating Device Market

   The Company believes that there is now emerging a significant new market
based upon mobile communicating devices, which are lightweight, portable
computerized devices with communications capabilities, such as smart phones,
pagers, handheld PCs, communicating electronic organizers, global positioning
devices and wireless mobile phones. The Company is focusing principally on the
smart phone segment of the mobile communicating device market. Smart phones
include enhanced phones, which add a GUI and ease-of-use features to existing
digital wireless mobile phones, and smart communicators, 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
expects these products to be designed to provide the user with greater ease of
use, greater mobility and greater access to information from a variety of
sources, including wireless mobile 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 wireless mobile
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 in an
effort to 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 only
the fixed functionality found in standard wireless mobile 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, many current operating systems allow for only limited customization of
the user interface as defined by the OS provider. The Company believes that
consumer electronics manufacturers 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.

   Ease of Use Extensions To Today's Digital Wireless Mobile Phones. The Company
believes that some manufacturers of today's digital wireless mobile telephones
will wish to enhance such devices without needing to modify the real time
operating systems (RTOS) or upgrade to a 32-bit CPU architecture from the 16-bit
CPU platforms on which such devices are currently based. The Company believes
that enhanced phones will emerge as a solution for such manufacturers, enabling
them to provide a progression from the digital wireless mobile phones currently
on the market to the enhanced data capability of smart communicators running on
a 32-bit CPU platform. Software enhancements and ease-of-use applications will,
therefore, need to run on the existing RTOS operating on 16-bit CPUs. Ideally,
such enhancement and applications will require minimal changes to the
configuration of such phones, with the exception of the display screen, which
will need to support bitmapped images required for a graphical user interface.

   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


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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. Further, even though many wireless
mobile operators have started to subsidize the cost of mobile phones for the
general public, such subsidies vary by geography and by the amount of
competition found in the market.

   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, over time, 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 software 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 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, intranets and commercial online services has
demonstrated the need for up-to-date information access. While to date this
trend has, for the most part, been limited to wired devices, 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
the perceived value of mobile communicating devices.

THE GEOWORKS SOLUTION

   Geoworks develops and markets operating system, applications and related
software for the emerging mobile communicating device market. Since its
inception, the Company has developed, optimized and enhanced software which
excels in environments with limited microprocessor power and limited memory and
storage capacity. Within the mobile communicating device market, the Company is
principally focused on the emerging market segment of smart phones, with the
goal of creating the preferred software solution for these products. The result
of these efforts, the Company's GEOS(R) and GEOS-SC(TM) operating systems and
related technologies, have been specifically designed to be key underlying and
enabling technologies in this market. The Company believes that its system
software provides the functionality and efficiency that can enable hardware
manufacturers to provide the desired features and pricing structure for
successful mobile communicating devices.

   The Company believes that there are three primary points of differentiation
which make both the GEOS and GEOS-SC system software well suited operating
systems for mobile communicating devices. First, the system software
incorporates a patented, 


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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. Second, the integration
of standard communication protocols is designed to allow user access to wireless
networks, corporate databases, the Internet and WWW, and personal desktop
computer systems. These communications protocols can be used to enable wireless
mobile operators, content providers, and corporate MIS managers to deliver
information services to mobile communicating device users. Third, the efficient
design of the system software provides functionality comparable to that of other
advanced operating systems but with significantly lower microprocessor, memory
and storage requirements. The Company's 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.

   The Company's GEOS technology has been shipping in smart phones since August
1996 and, until recently, only operated on microprocessors based upon the Intel
x86 architecture. The Company's latest version of GEOS, GEOS-SC, is processor
independent, retains the key features found in GEOS, and has been designed
specifically for the mobile communicating device market. The Company believes
that GEOS-SC, with its modularity, scalability and processor-independence will
allow hardware manufacturers to deliver a broader range of devices, provide a
wider variety of functionality and price points, and reduce their development
cycle time. The Company has also licensed Sun Microsystem's PersonalJava(TM)
technology and has developed a Java(TM) virtual machine that runs on the GEOS-SC
system software. The Company's version of the Java virtual machine was developed
to enable Java developers to create applications that enhance the functionality
of GEOS-SC-based devices.

GEOWORKS' STRATEGY

   The Company's primary objective is to establish its operating system and
software applications as leading solutions for the mobile communicating device
market. The Company also intends, to the extent that the smart phone market
becomes more established, to develop technology and services to facilitate
messaging, content delivery 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 computing devices that have limited memory, processor
capacity and storage. 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 broad range of
smart phones within the mobile communicating 


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device market, from the enhanced phone to the smart communicator segments of
this market.

   The Company believes its technology is well suited for a variety of smart
phones. However, the Company believes that the enhanced phone segment will be
the first to realize significant volume sales, with the more advanced features
of the smart communicator segment to follow, and therefore is concentrating on
developing solutions for those markets. The Company believes that the key to
delivering successful products in these segments lies in developing client-based
solutions that enable easy-to-use functionality at competitive prices, as well
as complementary server-based solutions that will enable the delivery of
targeted content and services to extend the functionality of such devices.

   Establish Alliances To Penetrate The Mobile Communicating Device Market.
Geoworks has established alliances and OEM license relationships with leading
manufacturers that it believes are capable of expanding the mobile communicating
device market. The Company's goal is 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 incorporating
the Company's operating system software and applications. However, some existing
licensees have also licensed operating system software from the Company's
competitors, and there can be no assurance that the Company's licensees will
continue to license the Company's software solutions in the future. Further,
there can be no assurance that the Company's licensees will develop and release
products based on the Company's software or that the Company will receive any
significant revenue therefrom.

   The Company has developed relationships with a number of leading hardware
manufacturers, including the following:

        Nokia. Nokia made a significant equity investment in Geoworks in 1995
and has licensed the Company's system software to design intelligent
communications products. The first product that incorporated the GEOS software
was the Nokia 9000 Communicator, which was introduced in August 1996. This
product has been followed by the 9000i, which was introduced in the U.S. in
October 1997. Most recently, Nokia introduced the 9110 in March of 1998 targeted
at the European Global Systems for Mobile Communications (GSM) markets,
scheduled for shipment in August 1998. Nokia is a leading supplier of wireless
mobile phones worldwide.

        Toshiba. Toshiba made a significant equity investment in Geoworks in
1995 and 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 


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the Japanese market, based on GEOS system software. Toshiba is a leading
worldwide supplier of computing and electronic products.

        Mitsubishi. Mitsubishi Electric Company is the first handset
manufacturer to license the Company's GEOS-SC operating system. Mitsubishi
intends to develop a family of smart phones for the Japanese domestic market and
distribute the Company's software in its first mobile communicating device.
Mitsubishi is a leading consumer products manufacturer.

        Brother. Brother licensed GEOS for a family of information appliances,
including the Ensemble personal desktop publishing systems. Brother included the
GEOS operating system and the Company's browser technology in its
recently-released GeoBook, a notebook computer that allows users to send e-mail,
access the Internet, and send and receive faxes. The GeoBook also contains a
number of PC-type applications, such as word processing, spreadsheet, address
book, and calendaring. Brother is a leading supplier in the home office
equipment market.

        During fiscal year 1998, the following companies accounted for more than
10% of the Company's net revenues: Nokia accounted for approximately 29%;
Ericsson accounted for approximately 18%; Mitsubishi accounted for approximately
16%; and Brother accounted for approximately 11% of the Company's net revenues.

   Continue To Evolve The Company's Operating System Technologies. The Company
has developed the technology underlying the GEOS family of operating systems
over a period of thirteen years. It has been incorporated in a number of
electronic organizers and smart phones. In order to provide support for
microprocessors other than those based on the Intel x86 architecture, the
Company has developed GEOS-SC, a next-generation operating system that is able
to run on an array of RISC processors.

   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.

   Develop Additional Technologies To Address the Enhanced Phone Market. The
Company commenced development of ease-of-use applications that run directly on
real time operating systems using 16-bit CPUs found in most of today's digital
wireless mobile telephones. The Company believes that there will be a demand for
such applications, which will make it easier for users to use the digital
cellular phones currently on the market. There can be no assurance that the
Company will successfully execute its development strategy. These and other
risks are discussed under Risk Factors, elsewhere in this Form 10-K.

   Facilitate Information Access And Use. The Company believes that information
access will be a key component of a total mobile communicating device product
offering, and over time will be a reason for product purchases. The Company
recognizes 


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that information access by the mobile communicating device user depends upon
more than the distribution of devices incorporating the Company's software.
Technology and infrastructure for the creation, transmission and receipt of
electronic content by mobile communicating devices must be established.

   The Company believes that users of wireless mobile communicating devices have
fundamentally different information needs than users of wired desktop PCs.
Mobile users are restricted by time and space, needing more compact devices that
allow quick access to highly personalized information. The Company believes
users of wireless mobile communicating devices will require rapid connections to
essential information that can be viewed on compact communication devices. As a
result, content will need to be tailored to the delivery mechanisms and viewing
capabilities of such mobile devices. In addition, the volume of such information
will need to be filtered to ensure reasonable delivery time over wireless
connections. To help meet these needs, the Company is developing server software
and establishing relationships with operators and content providers to enable
the deployment of usable content for mobile communicating devices via digital
wireless networks.

   Internally Developed Applications. The Company's strategy is to establish
relationships with a limited number of independent software developers and to
continue to develop and offer mobile communicating device applications and
services for the Company's operating system platform.


THE GEOWORKS OPERATING SYSTEM

   The following discussion summarizes some of the key technologies embodied in
the Company's GEOS technology, which has been developed over the last thirteen
years, as well as the Company's enhanced GEOS-SC operating system. The original
GEOS technology operates on microprocessors based upon the Intel x86
architecture. The Company has also developed and is continuing to develop
GEOS-SC, a processor-independent operating system that is able to run on an
array of RISC processors and is designed specifically for the mobile
communicating device market. GEOS-SC was developed over the past three years and
incorporates the same design elements as the original GEOS, i.e., it is compact,
efficient, modular and flexible. The Company believes that GEOS-SC will allow
hardware manufacturers to deliver a broader range of functionality and price
points as well as reduce development cycle time. GEOS-SC is compact, with each
component designed to be small and efficient; open, with a published application
programming interface (API) that is not expected to vary from platform to
platform, thereby allowing Geoworks, licensees and third parties to reuse code
and adopt alternative silicon solutions; modular, allowing licensees to omit or
replace components as required for their specific devices; written in C++, to
allow portability and the production of compact code; and
communications-focused.


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   Compact, High Performance Code. The compact, efficient software code of GEOS
and GEOS-SC incorporates advanced system software design features into operating
systems suitable for the full range of Intel x86-based devices and a broad array
of 32-bit RISC-based devices, respectively.

   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 Company's 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. Geoworks has emphasized
compact code, in contrast to a number of software developers who 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-SC system software (including the
operating system kernel, the user interface, drivers and standard class
libraries) occupies less than 2 Mb of storage. Further, the extensive set of
features built into the system software allows mobile communicating device
applications to be small, without sacrificing functionality.

   Flexible Graphical User Interface. For the GEOS and GEOS-SC operating
systems, Geoworks has developed its patented flexible graphical user interface
as a solution for a market with diverse products and consumers. The flexible
graphical user interface offers mobile 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, push buttons or remote control, to achieve the desired
functionality.

   Communications Capabilities. GEOS and GEOS-SC have a broad array of
communications capabilities. These include: an integrated messaging architecture
to handle the sending, receiving and management of communications; interfaces to
support 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- and
GEOS-SC-based mobile communicating devices and users' homes and offices, as well
as access to the Internet, WWW and information service providers.


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   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 Company's system software has an 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 system software's
preemptive multi-tasking and multi-threaded execution allow 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 SERVER-BASED TECHNOLOGIES

   The Company currently has under development 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 users. The Company also
expects to license to handset manufacturers client technologies that will reside
on the devices, designed to operate in conjunction with the mobile information
services. To enable access to the WWW from mobile communicating devices, 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 solutions 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 three industrial
customers: manufacturers of mobile communicating devices, wireless mobile
operators, and chipset manufacturers. 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.
Additionally, it is the Company's goal to secure licensing relationships with
key wireless mobile operators in primary markets. The Company also focuses on
developing relationships with select chipset manufacturers to supplement and
enhance the Company's software offerings. The Company attempts to leverage the
greater resources, experience and market presence of its industrial customers to
establish the Company's operating system and related software as accepted
solutions for mobile communicating devices.


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<PAGE>   15

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 ability to develop and release, on a timely basis, new operating
system software and associated products and upgrades.

   As of March 31, 1998, the Company employed 214 full-time employees, of whom
162 were employed in research and development activities. The Company's research
and development expenses during fiscal years 1998, 1997 and 1996 were $18.5
million, $13.7 million, and $9.1 million, respectively. The Company expects to
expend significant resources on research and development activities in the
future. (See Note 1 to Consolidated Financial Statements in Item 8 of this 10-K
for information regarding funds provided to the Company by the Company's
licensees for research and development.)

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, such as Psion, Microsoft, Sun
Microsystems, Microware, and 3COM (through its Palm Computing division), 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. Further, developers of real-time operating systems and low-end
operating system software may attempt to adapt their products for the smart
phone market, thus providing operating systems that compete 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 gives the GEOS and GEOS-SC system software an
advantage in mobile communicating devices over competing operating systems.
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 lower prices than those of the Company or that
achieve greater market acceptance than those of the Company.


                                                                              15
<PAGE>   16

   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 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, Microsoft's introduction
of 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.

   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 created a separate operating system business and
has licensed its technology to hardware manufacturers, including smart phone
manufacturers. On June 24, 1998, Psion, Ericsson and Nokia announced a joint
venture called Symbian that will license Psion's EPOC operating system to smart
phone manufacturers. This joint venture could have a material adverse effect on
the Company's business and results of operations.

   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-SC system
software is its ability to operate in computing systems which require limited
microprocessor power, memory (RAM) and storage (ROM), as well as its patented
flexible UI technology. However, 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 Company's system software.

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.


                                                                              16
<PAGE>   17

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 marked increase in the number
of software patents being issued by the United States Patent and Trademark
Office can increase the risk of infringement claims. Patents have been granted
in recent years 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 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 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


                                                                              17
<PAGE>   18

   As of March 31, 1998, Geoworks employed 214 full-time employees, of whom 162
were employed in research and development, 23 in sales and marketing, and 29 in
administration. Of these employees, 13 were 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'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. The loss of key employees could have a material adverse effect on the
Company's business, operating results and financial condition.


                                                                              18
<PAGE>   19

RISK FACTORS

   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, 1998, the
Company had an accumulated deficit of $73.2 million, and had incurred operating
losses of approximately $16.0 million, $15.5 million, and $10.7 million, in the
fiscal years ended March 31, 1998, 1997, and 1996, respectively. The Company
expects to continue to incur substantial annual operating losses at least
through its fiscal year ending March 31, 1999, 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 and
reducing its operating expenses. 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 these markets, the Company's ability
to establish licensing relationships with leading hardware manufacturers, the
introduction by those manufacturers of successful products, the emergence of
wireless content and services for smart phones to spur demand for the smart
phone market and generate additional revenues, and the Company's ability to
achieve and maintain a competitive advantage should such market develop.

        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, from enhanced phones to the higher end of
smart communicators. The Company's success depends upon the emergence of a new
market for these products. Although the market for wireless mobile 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. The product
began shipping in North America in December 1997. In July 1997, Toshiba released
a smart phone for the Japanese market that incorporates the Company's operating
system software. Although these devices have received positive reviews and
several awards, the market acceptance of these products has not yet been fully
established, and they have yet to make a meaningful contribution to the
Company's royalty revenues or operating results. More generally, the failure,
delay in shipment, or cancellation of any product in this new category, 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 commercial
release or 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. Further, there can be 


                                                                              19
<PAGE>   20

no assurance that the market for smart communicators will emerge, but the
Company believes that such market will in any case not emerge before the year
2000.

    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 maintenance and support 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 be affected by the success
of the market for 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.

   Risks of Software Product Development and Risk of Delays. 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 for
smart communicators, new applications for enhanced phones, and new aftermarket
products and services. Geoworks has recently introduced a new generation of its
operating system software called GEOS-SC that, unlike its predecessor GEOS
technology, is processor-independent, i.e., not limited to processors based upon
the Intel x86 architecture. Further, Geoworks is currently developing software
technologies for enhanced phones. 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' future success. Geoworks has made significant progress toward this
development goal, but acceptance of its newly developed products in the market
is uncertain and the 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 continuing to market and sell products developed for non-Intel
microprocessors, or will be successful in future development efforts.

   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


                                       20
<PAGE>   21

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, but not limited to, 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, complex software products often
contain 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.

   Acceptance Of Geoworks Technology. The Company's success in establishing its
current or its anticipated future operating system software and applications
software as leading software solutions 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 software as accepted solutions. 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 software 


                                                                              21
<PAGE>   22

will be accepted 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 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 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 wireless mobile
telephones for data transfer in the United States or other regions may depend
upon the development of a wireless mobile 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.

   Disappointing Revenue from Previous Generation 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 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, achieved only modest unit
sales. With the exception of the Palm Pilot product from 3COM (which does not
incorporate the Company's software), products in these device categories have
experienced low adoption rates. 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. Several of the Company's
previous licensees have canceled products prior to introduction or discontinued
them after experiencing disappointing sales. Collectively, these third-party
product cancellations, terminations and disappointments have resulted in the
Company recognizing lower-than-expected recurring license revenues in the
current fiscal year and previous fiscal years.

   Adequacy of Capital Resources to Execute Business Plan. The Company
anticipates that its existing capital resources will be adequate to satisfy its
operating and capital requirements at least through March 31, 1999. The Company
expects to incur additional substantial losses at least through the fiscal year
ending March 31, 1999, and may require substantial additional capital beyond
that time to successfully execute its business plan 


                                                                              22
<PAGE>   23

and achieve profitability. The Company's long-term capital requirements will
depend upon many factors, including, but not limited to, revenue from
operations, working capital requirements, investment in product development and
sales and marketing activities, and capital expenditures. Historically, the
Company has relied upon the sale of equity securities, advance payments of
license revenue and engineering fees, and short-term loans as sources of
funding. In the event the Company requires additional financing to execute its
business plan, there can be no assurance that such additional financing will be
available or that, if available at all, the terms of such financing would be
favorable to the Company or to its stockholders without substantial dilution of
their ownership and rights. If adequate funds are not available to satisfy
either short-term or long-term requirements, the Company may be required to
significantly curtail the scale of its operations, forego market opportunities,
or obtain funds through arrangements with strategic partners or others that may
require the Company to relinquish material rights to certain of its technologies
or potential markets.

   Dependence On Limited Number Of Manufacturers. 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 software. The Company is dependent upon the actions of its
customers concerning the development and release of their products, and there
can be no assurance that the Company's licensees will commercialize such
products or that the Company will derive revenues therefrom. During fiscal year
1998, three licensees of the Company's software accounted collectively for
greater than half of the Company's total net revenues, and four licensees each
accounted individually for greater than 10% of the Company's total net revenues.
In August 1996, Nokia released in selected geographic markets a smart phone
which incorporates the Company's GEOS software. In July 1997, Toshiba introduced
the GENIO, a mobile communicating device for the Japanese market incorporating
Company's operating system software. These products have yet to generate
significant royalty revenue or make material, favorable contributions to the
Company's operating results. It is unclear what effect in the long term these
products 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 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 


                                                                              23
<PAGE>   24

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 software becomes a leading software solution for hardware devices, the
Company believes its 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 integration by the Company of
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 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 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 wireless distribution
of content and services 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 wireless distribution will prove to be feasible or that the
Company's technology will be suitable for the distribution infrastructure as it
develops. 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.


                                                                              24
<PAGE>   25

   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 phones based upon the Company's
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 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, Japanese and global
economies. The Company believes that 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.

   International Operations. International revenue has accounted for the
majority of the Company's revenue in each of the last three fiscal years. The
Company anticipates that international revenue will continue to represent a
significant portion of the Company's future revenue. Revenue from international
sources is subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, potential difficulties in the collection of
accounts receivable, and unfavorable tax consequences. Although the Company's
revenue is generally denominated in U.S. dollars, fluctuations in currency
exchange rates and changes in local economic conditions could have adverse
consequences on the Company's ability to license its technology to international
customers, and as a result could adversely affect the Company's ability to
generate revenue from technology licensing and from research and development
fees. Additionally, royalty income from licensees in certain countries, such as
Japan and Finland, is subject to the withholding of income taxes. The amount and
mix of the Company's revenue derived from such licensees will impact the
Company's provision for income taxes. Differences in the amount and mix of the
Company's revenue actually derived from licensees subject to foreign withholding
taxes as compared to amounts forecast by the Company may adversely impact the
Company's income tax rate.


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<PAGE>   26

   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 software to mobile communicating device hardware manufacturers may
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 smart phones and
other 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.

   Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, sales, and management
personnel, and on its ability to attract and retain qualified employees,
particularly highly skilled software design engineers involved in the
development of new products. The competition in the high technology industry 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 any employment contracts in place for key employees. The
loss of key employees could have a material adverse effect on the Company's
business, operating results, and financial condition.

    Dependence on Year 2000 Compliance. Without modifications, many currently
installed computer systems and applications are not capable of adequately
responding to the change from the 20th century to the 21st century, potentially
resulting in operating difficulties ("Year 2000"). To the extent such Year 2000
issues cause significant delay in, or cancellation of, decisions to purchase the
Company's products or product support, the Company's business, results of
operations and financial condition could be materially adversely affected. The
Company's software products operate as a conduit for data from smart phones and
other mobile communicating devices to application software developed by third
parties. The Company has no control as to whether such hardware devices and


                                                                              26
<PAGE>   27

software will accurately process Year 2000 data. The Company faces additional
risk to the extent that suppliers of products, services and systems purchased by
the Company and others with whom the Company transacts business are not Year
2000 compliant. Based on its assessment to date, the Company believes that the
current versions of its products, as well as its internal management information
and other systems, are either Year 2000 compliant or will not require
substantial effort or cost to make them Year 2000 compliant. Further, the total
cost of these Year 2000 compliance activities has not been material to date.
However, there can be no assurance that the Company will identify and remedy all
significant Year 2000 problems in a timely fashion, that remedial efforts in
this regard will not involve significant time and expense, or that such problems
will not have a material adverse effect on the Company's business, results of
operations and financial condition.

   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.


                                                                              27
<PAGE>   28
\
ITEM 2.        PROPERTIES

        Geoworks' corporate headquarters are located in Alameda, California, in
a 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 six additional years. The Company leases an additional 9,640
square feet of office space in Berkeley, California and 11,026 square feet of
office space 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 1999 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, 1998.


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           40    Chairman
David A. Thatcher         43    Chief Executive Officer, President, and Chief
                                Financial Officer
Jordan J. Breslow         42    Vice President, General Counsel
Leland J. Llevano         40    Vice President, Strategic Partnerships
Dave Grannan              34    Vice President, Marketing and Business Development
Donald L. Reeves, III     30    Vice President, Engineering
Daniel L. Sicotte         37    Treasurer
</TABLE>


                                                                              28
<PAGE>   29

Mr. Mayer became Chairman of the Board of Directors of the Company in May 1997.
Mr. Mayer served as President from July 1993 to January 1998, and as Chief
Executive Officer from March 1994 to June 1998. 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 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. Thatcher joined the Company in March 1997 as Vice President, Administration
and Chief Financial Officer. He became President in January 1998 and Chief
Executive Officer in June 1998. Prior to joining the Company, Mr. Thatcher was
Chief Financial Officer, Vice President of Finance and Operations with Diba,
Inc. from May 1996 to January 1997, Chief Financial Officer, Vice President of
Finance and Operations with the McKinley Group from December 1995 to May 1996,
and Chief Financial Officer, Vice President of Finance and Administration at
Peregrine Systems, Inc. from March 1993 to December 1995. Mr. Thatcher holds a
B.S. degree in Accounting from San Diego State University.

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. from San Francisco State University
and a J.D. from Hastings College of the Law.

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. in 1983 from
the University of California, Berkeley.

Mr. Grannan joined the Company in March 1998 as Vice President, Marketing and is
responsible for driving the marketing research and implementation of the
Company. Prior to joining the Company, he was Area Vice President of Sales &
Marketing at Sprint PCS from June 1997 to March 1998 . Prior to his position at
Sprint PCS, Mr. Grannan worked at Andersen Consulting in the Communications
Industry Group from April 1994 to June 1997, where he provided strategic
marketing services for many organizations. Mr. Grannan began his career as a
Data Communications Officer in the United States Marine Corps. He holds a BA
from Indian State University and an MBA from the University of California,
Berkeley.

Mr. Reeves has been with the Company since 1989. He was named Director of
Engineering in 1994, responsible for managing the development of GEOS. In
September 1997, Mr. Reeves assumed the responsibilities of Vice President,
Engineering. Mr. 


                                                                              29
<PAGE>   30

Reeves received his B.S. in Electrical Engineering and Computer Science from the
University of California, Berkeley.

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 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.


                                                                              30
<PAGE>   31

PART II

ITEM 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER 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, 1998
Common stock price per share        $ 5.5625- 8.6250    $ 5.7825-17.5000    $ 8.7500-16.5000    $5.8125- 9.8750

FISCAL YEAR ENDED MARCH 31, 1997
Common stock price per share        $29.0000-46.2500    $19.0000-35.7500    $19.0000-26.5000    $6.6250-26.0000
</TABLE>



There were approximately 299 registered stockholders as of May 31, 1998, and the
Company believes there are in excess of 8,100 beneficial holders as of May 31,
1998. The Company has not paid or declared cash dividends and has no present
plans to do so.

                                                                              31
<PAGE>   32
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>
                                                                  QUARTER ENDED
                                               30-JUN-97     30-SEP-97     31-DEC-97     31-MAR-98
<S>                                             <C>           <C>           <C>           <C>     
Year Ended March 31, 1998

Net revenues                                    $  1,898      $  3,364      $  4,023      $  3,632
Gross margin
                                                   1,851         3,325         3,993         3,593
Net loss
                                                 (5,784)       (2,716)       (2,583)       (3,786)
Net loss per share-
    basic and diluted                             (0.37)        (0.17)        (0.16)        (0.24)
</TABLE>


<TABLE>
<CAPTION>
                                                                QUARTER ENDED
                                               30-JUN-96     30-SEP-96     31-DEC-96     31-MAR-97
<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-
    basic and diluted                             (0.17)        (0.18)        (0.16)        (0.38)
</TABLE>


                                                                              32
<PAGE>   33

CONSOLIDATED BALANCE SHEET SUMMARIES
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  MARCH 31
                                            1998        1997        1996        1995        1994
<S>                                        <C>         <C>         <C>          <C>        <C>    
Working capital (deficiency)               20,095      33,626      43,585       7,122      (2,553)

Total assets                               27,463      41,868      54,040      19,085       9,377

Deferred revenue                              778       1,919       5,529       8,311       6,737

Long-term
obligations                                   231         739       2,927       2,527       1,400

Redeemable convertible preferred stock         --          --          --       1,626      12,526

Accumulated deficit                       (73,241)    (58,372)    (44,896)    (35,491)    (25,101)

Stockholders' equity (deficit)             23,392      36,553      43,312       6,757     (13,204)
</TABLE>


                                                                              33
<PAGE>   34

CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                       YEAR ENDED MARCH 31
                                              1998         1997         1996         1995         1994
<S>                                         <C>          <C>          <C>          <C>          <C>     
    Total net revenues                      $ 12,917     $ 11,096     $  6,279     $  5,327     $  5,803

    Cost of revenues
                                                 155          624          122          473        1,022
    Sales and marketing
                                               6,613        7,108        4,510        5,272        5,297
    Research and development
                                              18,543       13,698        9,109        6,520        5,042
    General and administrative
                                               3,596        3,708        3,254        3,557        2,826
    Cost of merger                                --        1,450           --           --           --
                                             -------      -------       ------      -------       ------ 
 
    Total operating expenses                  28,907       26,588       16,995       15,822       14,187
                                             -------      -------       ------      -------       ------ 
 
    Operating loss                           (15,990)     (15,492)     (10,716)     (10,495)      (8,384)

    Other income (expense)                     1,269        2,080        1,005          118         (688)
                                             -------      -------       ------      -------       ------ 
 
    Loss before income taxes                 (14,721)     (13,412)      (9,711)     (10,377)      (9,072)
                                             -------      -------       ------      -------       ------ 
 
    Provision for income taxes                   148           64           --          175          234
                                             -------      -------       ------      -------       ------ 
 
    Net loss                                $(14,869)    $(13,476)    $ (9,711)    $(10,552)    $ (9,306)
                                             -------      -------       ------      -------       ------ 
 
    Net loss per share-
      basic and diluted                     $  (0.95)    $  (0.88)    $  (0.75)    $  (1.09)    $  (1.54)


    Shares used in per share computation      15,687       15,234       13,032        9,674        6,051
</TABLE>


                                                                              34
<PAGE>   35

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 1998 increased $1,821,000, or 16%, in
comparison with fiscal year 1997. This increase occurred as growth in research
and development fee revenue and service revenue more than offset declines in
license revenue in the current fiscal year. Net revenues consist of license
revenue, research and development fees and service revenue.

        License revenue in fiscal year 1998 decreased $1,423,000, or 21%, in
comparison with the previous fiscal year. Greater non-recurring license revenue
in the previous fiscal year from the termination or restructuring of certain OEM
license agreements was the primary reason for this decline. During fiscal year
1997, the Company recognized revenue upon the termination or restructuring of
four OEM license agreements. At the time these four agreements were terminated
or restructured, a non-refundable prepaid royalty balance related to each
agreement had been recorded as deferred revenue but was not yet fully amortized.
Revenue recognized upon the termination or restructuring of these license
agreements accounted for $3,535,000, or 53%, of the Company's license revenue
for fiscal year 1997. By contrast, revenue in fiscal year 1998 related to the
restructuring of license agreements or to the termination of products by OEM
licensees accounted for $1,883,000, or 36% of license revenue.

        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 licensees. Source code license fees
in fiscal year 1998 accounted for only $665,000 in license revenue.

        Historically, license revenue has consisted principally of royalties on
units sold by OEM licensees, source code license fees and other one-time
payments, amounts recognized upon the termination of products by OEM licensees,
and amounts recognized upon the termination or restructuring of license
agreements with OEM licensees. 


                                                                              35
<PAGE>   36

Revenues associated with source code license fees, one-time payments, product
terminations, and the termination or restructuring of license agreements are
non-recurring. Accordingly, revenues for all periods presented are not
indicative of revenues to be recognized in future periods. Further, the Company
may not realize previously anticipated license revenue from one or more of its
current OEM licensees, due to potential delays and uncertainties in the
commercial release and acceptance of new products.

        Revenue related to research and development fees increased $3,090,000,
or 74%, during fiscal year 1998 in comparison with fiscal year 1997. Research
and development fees represent amounts earned pursuant to contracts with OEM
licensees 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 licensee as certain project milestones
are achieved. Revenue under these research and development arrangements is
recognized under the percentage-of-completion method. The amount of such revenue
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 during fiscal year 1998 in research and
development fees resulted from higher reimbursement levels specified in the
Company's contracts with OEM licensees, and from the fact that there was a
greater number of projects in process for which such fees are charged. As of
March 31, 1998, the Company had approximately $2,125,000 of potential additional
revenue to earn in research and development fees under the terms of current
contracts with OEM licensees. There can be no assurance that the Company will
meet the milestones required to earn such fees.

        Service revenue of $454,000 during fiscal year 1998 represents amounts
earned for the support and maintenance of software licensed by OEM customers and
fees earned in connection with software workshops sponsored by the Company for
the benefit of current and prospective OEM licensees. The increase of $154,000,
or 51%, in service revenue over the previous fiscal year related to fees earned
in connection with software workshops sponsored by the Company, as such
workshops were offered for the first time by the Company in the current fiscal
year.

        Net revenues increased $4,817,000, or 77%, during fiscal year 1997 in
comparison with fiscal year 1996. License revenue increased between the two
periods by $1,971,000, or 42%, primarily as a result of increases in revenue
from source code licenses and from the termination or restructuring of OEM
license agreements. Revenue related to research and development fees increased
$2,546,000, or 156%, during fiscal year 1997 in comparison with fiscal year
1996.


                                                                              36
<PAGE>   37

Operating Expenses

        Cost of License Revenue. The Company's gross margin percentage on
license revenue was 97% in fiscal year 1998, 91% in fiscal year 1997, and 97% in
fiscal year 1996. Cost of license revenue during the current fiscal year
consisted of license payments to third parties for software that is incorporated
into the Company's software. Cost of license revenue during fiscal year 1997, in
addition to third party software licenses, included a one-time charge of
$320,000 to terminate a technology contract which had been entered into during a
prior fiscal year. Without this one-time charge, the Company's gross margin
percentage on license revenue would have been 95% during fiscal year 1997.

         Sales and Marketing. Sales and marketing expense decreased $495,000, or
7%, during fiscal year 1998 in comparison with fiscal year 1997. Cost savings
from reductions in domestic staffing and marketing programs offset the Company's
expanded emphasis on international sales activities in the current fiscal year.

        Sales and marketing expense increased $2,598,000, or 58%, during fiscal
year 1997 in comparison with fiscal year 1996. The Company dedicated additional
resources towards the design and marketing of products and services for wireless
devices, and also broadened its services to VARs and other outside developers of
smart phones and mobile communication devices. To support these activities,
staffing and related costs for travel, benefits, and facilities increased during
fiscal year 1997 over fiscal year 1996.

        Research and Development. Research and development expense increased
$4,845,000, or 35%, during fiscal year 1998 in comparison with fiscal year 1997.
This increase was due primarily to the continuing expansion of the Company's
engineering staff, which resulted in higher compensation costs and related
increases in costs for employee benefits and facilities overhead. Additionally,
the increase during the current fiscal year in the number of joint development
projects with OEM licensees in Europe and Asia resulted in significant increases
in travel expenses for the Company's engineering staff. The Company also made
payments of $630,000 during the current fiscal year to outside developers for
the license of software to be incorporated into future products. As the
technological feasibility of the future products had yet to be established,
these payments were charged to research and development expense.

        Research and development expense increased $4,589,000, or 50%, during
fiscal year 1997 in comparison with fiscal year 1996, as a result of increases
in staffing and travel costs.

        General and Administrative. General and administrative expense decreased
$112,000, or 3%, during fiscal year 1998 in comparison with fiscal year 1997.
This decrease was attributable primarily to a reduction in staffing costs, as
certain duplicate functions were eliminated following the business combination
of Geoworks and Eden in February 1997.


                                                                              37
<PAGE>   38

        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 reasons for this
increase.

        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 declined $897,000, or 39%, during fiscal year 1998 in
comparison with fiscal year 1997. The decrease was attributable to lower
balances available to the Company for short-term investment in the current
period as a direct result of the Company's operating deficit over the preceding
12 months. Interest expense decreased $86,000, or 35%, during fiscal year 1998
in comparison with fiscal year 1997. This decrease resulted from the repayment
in the fourth quarter of fiscal year 1997 of interest-bearing notes payable to
stockholders of Eden which had been outstanding throughout the first eleven
months of fiscal year 1997.


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, 1998, the Company had net operating loss carryforwards
for U.S. income tax purposes of approximately $67,000,000, for U.K. income tax
purposes of approximately $7,000,000, and for state income tax purposes of
approximately $14,000,000. The Company also had research and development credit
carryforwards for federal income tax purposes of approximately $2,000,000 and
for state income tax purposes of approximately $780,000. 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 $20.0 million at March 31, 1998 from $36.8 million at March 31, 1997,
principally as a result of the use of cash for operating activities. The Company
expects to incur additional substantial operating losses at least through its
fiscal year ending March 31, 1999, but 


                                                                              38
<PAGE>   39

anticipates that its existing capital resources will be adequate to satisfy its
operating and capital requirements at least through March 31, 1999.

        At March 31, 1998, the Company had a balance in accounts receivable of
$3,412,000, an increase of $2,937,000 from the corresponding balance at March
31, 1997. The balance consisted principally of amounts billed by the Company for
research and development fees, or accrued by the Company under the
percentage-of-completion method. As revenue from research and development fees
has increased significantly during the current fiscal year, the balances in
accounts receivable for both billed and accrued research and development fees
has increased as well. At March 31, 1998, the balance in accounts receivable
consisted of $1,546,000 in billed revenues and $1,866,000 in accrued but
unbilled revenues. Prepaid expenses and other current assets decreased $365,000
from March 31, 1997 to March 31, 1998 due primarily to a reduction in the
amounts recoverable by the Company for prepaid taxes and various cost
reimbursements from outside third parties. Furniture and equipment, net of
depreciation, decreased $245,000 from March 31, 1997 to March 31, 1998, as
depreciation of existing furniture and equipment exceeded purchases of new
furniture and equipment during fiscal year 1998.

        Accounts payable and accrued liabilities increased $41,000 at March 31,
1998 in comparison with March 31, 1997, due to increases in the current portion
of the Company's capital lease obligations. Deferred revenue decreased
$1,141,000 from March 31, 1997 to March 31, 1998, as the Company recognized as
revenue certain advance royalty payments collected in previous periods under
contracts with OEM licensees. The amount of such advance royalty payments
recognized as revenue during fiscal year 1998 exceeded the amount of payments
collected during the period, causing the balance in deferred revenue to decline.
Other current liabilities increased $364,000 from March 31, 1997 to March 31,
1998 primarily as a result of accrued severance costs and higher accrual
balances for certain employee benefit programs. Other liabilities decreased
$508,000 from March 31, 1997 to March 31, 1998, as monthly payments reduced
outstanding principal balances on capital lease obligations, and certain balloon
payments due at the conclusion of the equipment leases became payable within 12
months and therefore were classified as current liabilities.

Factors Affecting Future Operating Results

    Please see the Risk Factors discussion in Part I, Item 1, beginning on page
19.

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.


                                                                              39
<PAGE>   40

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         Report of Independent Auditors

The Board of Directors and Stockholders
Geoworks

We have audited the accompanying consolidated balance sheets of Geoworks as of
March 31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.


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

San Francisco, California
April 17, 1998


                                                                              40
<PAGE>   41

                           Consolidated Balance Sheets
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                   MARCH 31
                                                               1998         1997
                                                             --------     --------
<S>                                                          <C>          <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                  $  8,738     $  6,319
  Marketable securities                                        11,243       30,501
  Accounts receivable:
    Billed                                                      1,546           --
    Unbilled                                                    1,866          475
  Prepaid expenses and other current assets                       542          907
                                                             --------     --------
Total current assets                                           23,935       38,202

Property and equipment, net                                     3,301        3,546
Other assets                                                      227          120
                                                             --------     --------
Total assets                                                 $ 27,463     $ 41,868
                                                             ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
  Accounts payable and accrued liabilities                   $  1,165     $  1,193
  Accrued compensation and related expenses                     1,393        1,029
  Lease and facility obligations due within one year              504          435
  Deferred revenue                                                778        1,919
                                                             --------     --------
Total current liabilities                                       3,840        4,576

Lease and facility obligations due after one year                 231          739

Commitments and contingencies

Stockholders' equity:
  Common stock, no par value; 40,000,000 shares
    authorized; 15,856 shares issued and outstanding
    (1997 - 15,471 shares)                                     96,518       94,851
  Accumulated deficit                                         (73,241)     (58,372)
  Notes receivable from stockholders                              (67)         (68)
  Deferred compensation                                            --          (32)
  Cumulative foreign currency translation adjustment              182          174
                                                             --------     --------
Total stockholders' equity                                     23,392       36,553
                                                             --------     --------
Total liabilities and stockholders' equity                   $ 27,463     $ 41,868
                                                             ========     ========
</TABLE>

See accompanying notes.


                                                                              41
<PAGE>   42

                      Consolidated Statements of Operations
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                  YEAR ENDED MARCH 31
                                            1998         1997         1996
                                          --------     --------     -------- 
<S>                                       <C>          <C>          <C>     
Revenues:
   License revenue                        $  5,197     $  6,620     $  4,649
   Research and development fees             7,266        4,176        1,630
   Service revenue                             454          300           --
                                          --------     --------     -------- 
Total net revenues                          12,917       11,096        6,279

Operating expenses:
   Cost of license revenue                     155          624          122
   Sales and marketing                       6,613        7,108        4,510
   Research and development                 18,543       13,698        9,109
   General and administrative                3,596        3,708        3,254
   Cost of merger                               --        1,450           --
                                          --------     --------     -------- 
Total operating expenses                    28,907       26,588       16,995
                                          --------     --------     -------- 
Operating loss                             (15,990)     (15,492)     (10,716)

Other income (expense):
   Interest income                           1,427        2,324        1,377
   Interest expense                           (158)        (244)        (372)
                                          --------     --------     -------- 
Total other income (expense)                 1,269        2,080        1,005
                                          --------     --------     -------- 
Loss before income taxes                   (14,721)     (13,412)      (9,711)
Provision for income taxes                     148           64           --
                                          --------     --------     -------- 
Net loss                                  $(14,869)    $(13,476)    $ (9,711)
                                          ========     ========     ======== 

Net loss per share - basic and diluted    $   (.95)    $  (0.88)    $  (0.75)
                                          ========     ========     ======== 
Shares used in per share computation        15,687       15,234       13,032
                                          ========     ========     ======== 
</TABLE>

See accompanying notes.


                                                                              42
<PAGE>   43

                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                       CUMULATIVE
                                                                             NOTES                      FOREIGN
                                          COMMON STOCK                     RECEIVABLE                   CURRENCY        TOTAL
                                       ------------------     ACCUMULATED     FROM         DEFERRED    TRANSLATION   STOCKHOLDERS'
                                       SHARES      AMOUNT       DEFICIT    STOCKHOLDERS  COMPENSATION   ADJUSTMENT      EQUITY
                                       ------     --------    -----------  ------------  ------------  -----------   -------------
<S>                                    <C>        <C>          <C>           <C>           <C>           <C>           <C>     
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

Issuance of common stock in
  private placement                       122          400           --            --            --            --           400
Unrealized loss on marketable
  securities                               --           --           (4)           --            --            --            (4)

Payments received from
   stockholders                            --           --           --             2            --            --             2

Foreign currency translation
  adjustment                               --           --           --            --            --            67            67

Amortization of deferred
  compensation                             --           --           --            --           311            --           311

Adjustment for  pooling-of-interests       --           --          601            --            --            --           601

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 purchase plans         318        1,341           --            --            --            --         1,341

Issuance of common stock in
  private placement                       444        3,043           --            --            --            --         3,043
Conversion of notes payable to
  stockholders to common stock             85        2,019           --            --            --            --         2,019
Payments received from
  stockholders                             --           --           --            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
Common stock issued under stock
  option and stock purchase plans         385        1,667           --            --            --            --         1,667

Payments received from stockholder         --           --           --             1            --            --             1

Foreign currency translation
  adjustment                               --           --           --            --            --             8             8

Amortization of deferred
  compensation                             --           --           --            --            32            --            32

Net loss                                   --           --      (14,869)           --            --            --       (14,869)
                                       ------     --------     --------      --------      --------      --------      --------
Balances at March 31, 1998             15,856     $ 96,518     $(73,241)     $    (67)     $      -      $    182      $ 23,392
                                       ======     ========     ========      ========      ========      ========      ========
</TABLE>

See accompanying notes.


                                                                              43
<PAGE>   44

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         YEAR ENDED MARCH 31
                                                                   1998          1997         1996
                                                                ---------     ---------     --------- 
<S>                                                             <C>           <C>           <C>       
OPERATING ACTIVITIES
Net loss                                                        $ (14,869)    $ (13,476)    $  (9,711)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization                                     1,415         1,221           821
  Amortization of deferred compensation                                32           143           311
  Other                                                                --           264            --
  Changes in operating assets and liabilities:
    Accounts receivable                                            (2,937)         (475)           --
    Other assets                                                      258          (158)         (332)
    Deferred revenues                                              (1,141)       (3,610)       (2,782)
    Other current liabilities                                         336           255           670
                                                                ---------     ---------     --------- 
Net cash used in operating activities                             (16,906)      (15,836)      (11,023)

INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements       (1,269)       (2,292)       (1,317)
Purchases of marketable securities                                (13,449)      (62,655)     (119,070)
Sales of marketable securities                                     20,912        52,383        78,377
Maturities of marketable securities                                11,795        19,396        15,550
Other                                                                  --            --           329
                                                                ---------     ---------     --------- 
Net cash provided by (used in) investing activities                17,989         6,832       (26,131)

FINANCING ACTIVITIES
Proceeds from issuance of notes payable to stockholders                --            --           409
Proceeds from sale/leaseback of equipment                              --            --           288
Payment of obligations under capital leases                          (340)         (284)         (225)
Proceeds from issuance of common stock                              1,667         4,384        45,602
Proceeds from notes receivable from stockholders                        1            54             2
                                                                ---------     ---------     --------- 
Net cash provided by financing activities                           1,328         4,154        46,076

Foreign currency translation adjustments                                8           117            67
                                                                ---------     ---------     --------- 
Net increase (decrease) in cash and cash equivalents                2,419        (4,733)        8,989
Cash and cash equivalents, beginning of year                        6,319        11,052         2,063
                                                                ---------     ---------     --------- 
Cash and cash equivalents, end of year                          $   8,738     $   6,319     $  11,052
                                                                =========     =========     =========

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

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments                                               $     158     $     244     $     372
                                                                =========     =========     =========
Income tax payments                                             $     148     $      64     $       -
                                                                =========     =========     =========
</TABLE>

See accompanying notes.


                                                                              44
<PAGE>   45

                   Notes to Consolidated Financial Statements


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY

Geoworks Corporation (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 was 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.

Certain fiscal year 1997 and 1996 balances have been reclassified to conform to
the fiscal year 1998 presentation.

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 stockholders'
equity.

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.


                                                                              45
<PAGE>   46

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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. Unbilled accounts
receivable result when research and development fees recognized as revenue under
the percentage-of-completion method exceed amounts invoiced to date to OEMs
under the terms of the contracts. Amendments to or changes in the original
contract terms as well as adjustments to estimated contract costs can affect
amounts ultimately realized by the Company. As a result, actual gross profit
realized on research and development arrangements may differ from estimates used
by the Company in recording gross profit on contracts in progress and such
differences could be material to the financial statements.

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

In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). The
Company will be required to adopt this standard in its first quarter of fiscal
1999 and restatement of prior financial statements is prohibited. SOP 97-2
supersedes SOP 91-1, and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific implementation
guidance. Detailed implementation guidelines have not yet been issued. However,
the Company does not believe that the implementation of SOP 97-2 will have a
significant effect on its revenue recognition practices.


                                                                              46
<PAGE>   47

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 amounts which approximate fair
value. 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.


                                                                              47
<PAGE>   48

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 on
projects for which OEM funding was received were $7,590,000, $7,439,000 and
$3,639,000 for fiscal years 1998, 1997 and 1996, respectively, of which
$7,266,000, $4,176,000 and $1,630,000 was funded and recognized as revenue in
fiscal years 1998, 1997 and 1996, respectively.

MAJOR CUSTOMERS

Revenues from four major customers accounted for 29%, 18% and 16% and 11% of net
revenues for fiscal year 1998. 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.

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. A summary of the pro forma effects on
reported net loss and net loss per share for fiscal years 1998, 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.


                                                                              48
<PAGE>   49

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PER SHARE DATA

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("FAS 128") which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share and includes the dilutive effect of
the assumed exercise of stock options using the treasury stock method. Shares
used in computing basic and diluted net loss per share are based on the
weighted-average shares outstanding in each period. The effect of outstanding
stock options (Note 5) is excluded from the calculation of diluted net loss per
shares as their inclusion would be antidilutive. Net loss per share amounts for
all periods have been presented in conformity with the requirements of FAS 128.

RECENT ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("FAS 131"). The
Company is required to adopt these statements in fiscal year 1999. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. Adoption of these statements is expected to have no impact on
the Company's consolidated financial position, results of operations or cash
flows.


                                                                              49
<PAGE>   50

2. MARKETABLE SECURITIES

The Company's available-for-sale debt and equity securities consist of the
following (in thousands):

<TABLE>
<CAPTION>
                                                                 MARCH 31
                                                            1998          1997
                                                           -------       -------
<S>                                                        <C>           <C>    
U.S. Agency bonds                                          $    --       $10,993
U.S. Treasury securities                                        --         6,886
U.S. commercial paper and corporate bonds                       --         1,950
                                                           -------       -------
                                                                --        19,829
Equity securities (mutual funds)                            11,243        10,672
                                                           =======       =======
                                                           $11,243       $30,501
                                                           =======       =======
</TABLE>

Unrealized gains and losses at March 31, 1998 and 1997, and realized gains and
losses for the year then ended were not significant.


3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                   MARCH 31
                                                               1998        1997
                                                              ------      ------
<S>                                                           <C>         <C>   
Equipment                                                     $4,590      $3,999
Furniture and fixtures                                         1,444         976
Leasehold improvements                                           838         823
Land and buildings                                               484         467
                                                              ------      ------
                                                               7,356       6,265
Less accumulated depreciation and amortization                 4,055       2,719
                                                              ------      ------
                                                              $3,301      $3,546
                                                              ======      ======
</TABLE>


                                                                              50
<PAGE>   51

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
                                                          1998           1997
                                                        --------       --------
<S>                                                     <C>            <C>     
Operating loss carryforwards                            $ 26,855       $ 21,809
Tax credit carryforwards                                   2,507          2,178
Deferred revenue                                             319            592
Capitalized research expenditures                          1,958          1,269
Other, net                                                   290            331
                                                        --------       --------
Total deferred tax assets                                 31,929         26,179
Valuation allowance on deferred tax assets               (31,929)       (26,179)
                                                        --------       --------
Net deferred tax assets                                 $     --       $     --
                                                        ========       ========
</TABLE>

The income tax provisions of $148,000 and $64,000 for fiscal years 1998 and
1997, 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 1998 and 1997 were
$5,750,000 and $6,702,000, respectively.

Deferred tax assets relating to net operating loss carryforwards as of March 31,
1998 include approximately $4,560,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
stockholders' equity.


                                                                              51
<PAGE>   52

4. INCOME TAXES (CONTINUED)

The Company has a July 31 year end for income tax purposes. As of March 31,
1998, the Company has net operating loss carryforwards for U.S. federal income
tax purposes of approximately $67,000,000, U.K. income tax purposes of
approximately $7,000,000, and state income tax purposes of $14,000,000. The
Company also has federal and state research and development credit carryforwards
of approximately $2,000,000 and $780,000, respectively. The net operating loss
and the research and development tax credit carryforwards expire in various
years from 1999 through 2013.

Utilization of the Company's U.S. net operating loss and tax 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 tax credit
carryforwards before utilization.


5. STOCKHOLDERS' 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 stockholders.


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 5,959,000 common shares. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant and 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.


                                                                              52
<PAGE>   53

5. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLANS (CONTINUED)

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, 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
   Granted                                           1,767,000            7.77
   Exercised                                          (303,000)           3.78
   Forfeited                                        (1,603,000)          17.43
                                                     ---------       ---------
Balance at March 31, 1998                            3,033,000           
                                                     =========
Outstanding  options exercisable and vested at
   March 31, 1998                                    1,065,000       $    7.85
                                                     =========       =========

Options available for grant at March 31, 1998        1,066,000           
                                                     =========
</TABLE>

The weighted average fair value at grant date of options granted during fiscal
years 1998, 1997 and 1996 was $8.51, $12.15, and $10.38 per share, respectively.


                                                                              53
<PAGE>   54

5. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLANS (CONTINUED)

The following table summarizes information concerning currently outstanding and
exercisable options:

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                  ----------------------------------------     -----------------------
                                   WEIGHTED
                                   AVERAGE        WEIGHTED                    WEIGHTED
                                  REMAINING       AVERAGE                     AVERAGE
 EXERCISABLE                     CONTRACTUAL      EXERCISE                    EXERCISE
    PRICES          SHARES           LIFE          PRICE         SHARES        PRICE
------------      ---------      -----------      --------     ----------     --------
<C>                 <C>             <C>              <C>         <C>          <C>     
$ .27- 4.00         358,000         5.00             .62         352,000      $    .62
 5.81- 9.00       1,688,000         9.08            6.79         303,000          6.77
 9.59-16.63         717,000         8.08           14,08         323,000         12.96
17.75-19.50         189,000         8.92           17.75          60,000         17.75
20.50-29.00          81,000         8.26           24,56          27,000         23.61
                  ---------                                    ---------
                  3,033,000                                    1,065,000
                  =========                                    =========
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

Under the Company's employee stock purchase plan, employees meeting certain
eligibility criteria 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 1998, 1997 and 1996, 83,000 shares, 26,000 shares and
44,000 shares, respectively, were issued under the plan at average prices of
$6.32, $18.83 and $7.93 per share. At March 31, 1998, a total of 33,000 shares
were available for issuance under the plan.


                                                                              54
<PAGE>   55

5. STOCKHOLDERS' EQUITY (CONTINUED)

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. 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 1998, 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
                                                           1998            1997            1996
                                                        ----------      ----------      ----------
<S>                                                     <C>             <C>             <C>
Net loss, as reported                                   $  (14,869)     $  (13,476)     $  (9.711)
Net loss, pro forma                                        (17,698)        (17,851)       (10.792)

Net loss per share - basic and diluted, as reported           (.95)           (.88)          (.75)
Net loss per share - basic and diluted, pro forma            (1.13)          (1.17)          (.83)
</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 as of date of grant has been estimated using the
Black-Scholes option-pricing model with the following assumptions used for
fiscal years 1998, 1997, and 1996: expected volatility calculations based on
historical data (.996, .893, and .893, respectively) 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 (6.12%, 6.27%, and 5.75%,
respectively). No dividends are assumed.


                                                                              55
<PAGE>   56

5. STOCKHOLDERS' EQUITY (CONTINUED)

NOTES RECEIVABLE FROM STOCKHOLDERS

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

<TABLE>
<CAPTION>
                                                                     MARCH 31
                                                               1998           1997
                                                               ----           ----
<S>                                                            <C>           <C>  
Note receivable from officer, with interest at 5.0%
   payable semiannually, due October 4, 1998                   $  67         $  67
Other notes receivable from officers and employees                 -             1
                                                               =====         =====
                                                               $  67         $  68
                                                               =====         =====
</TABLE>

The notes receivable from stockholders 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.


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 1998, 1997 or 1996.


7. COMMITMENTS AND CONTINGENCIES

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. Rent expense was
$1,287,000, $1,207,000 and $849,000 for fiscal years 1998, 1997 and 1996,
respectively.


                                                                              56
<PAGE>   57

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 at March 31, 1998 and 1997. The related accumulated
amortization was approximately $1,104,000 and $919,000 at March 31, 1998 and
1997, 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.

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>      
    1999                                                    $    1,239     $     389
    2000                                                           566            30
    2001                                                           499             -
    2002                                                            91             -
    2003 and thereafter                                            662             -
                                                            ----------     ---------
                                                            $    3,057           419
                                                            ==========
    Less amount representing interest                                             26
                                                                           ---------
                                                                                 393
    Amounts due within one year                                                  364
                                                                           ---------
                                                                           $      29
                                                                           =========
</TABLE>


                                                                              57
<PAGE>   58

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Lease and facility obligations in the accompanying consolidated balance sheet
also include deferred rent expense relating to the Company's facilities leases
totaling $140,000 and $8,000 in amounts due within one year and amounts due
after one year, respectively, at March 31, 1998.

Also included in lease and facility obligations in the accompanying balance
sheet is approximately $194,000 due under a mortgage for a building owned in the
U.K.

The Company has received purported termination notices from an OEM licensee
pertaining to a license agreement under which it has received non-refundable
research and development fees. The OEM licensee has alleged a material breach of
the agreement by the Company, and has demanded that the Company return
approximately $1 million previously paid under the agreement and forego
collection of future scheduled milestone payments in the approximate amount of
$900,000.

The Company believes that it has meritorious defenses to the assertions made by
the OEM licensee and intends to defend its position vigorously. The Company
further believes that resolution of the dispute will not have a material effect
on its financial position. However, depending upon the amount and timing, an
unfavorable resolution of this claim could have a material effect on the
Company's future results of operations or cash flows in a particular period.


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 consolidated financial statements 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.

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.


                                                                              58
<PAGE>   59

8. ACQUISITION OF EDEN GROUP LTD. (CONTINUED)



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               YEAR ENDED
                                               DECEMBER 31             MARCH 31
                                                   1996                  1996
                                                 -------                -------
                                               (UNAUDITED)
<S>                                              <C>                    <C>    
Net revenues:
  Geoworks                                       $ 7,664                $ 4,999
  Eden                                             1,501                  1,280
                                                 -------                -------
Total                                            $ 9,165                $ 6,279
                                                 =======                =======

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


                                                                              59
<PAGE>   60

9. INFORMATION BY GEOGRAPHIC AREA

Information regarding operating information and identifiable assets by
geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
                                                        YEAR ENDED MARCH 31
                                                  1998          1997          1996
                                               ---------     ---------     --------- 
<S>                                            <C>           <C>           <C>      
Revenues:
U.S. Operations:
   Domestic revenues                           $   3,226     $   4,843     $   2,249
   Export revenues:
      Japan                                        3,603         2,684         2,500
      Europe                                       5,843         1,543           250
Foreign Operations (principally Europe)              245         2,026         1,280
                                               ---------     ---------     --------- 
                                               $  12,917     $  11,096     $   6,279
                                               =========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                        YEAR ENDED MARCH 31
                                                  1998          1997          1996
                                               ---------     ---------     --------- 
<S>                                            <C>           <C>           <C>      
Operating loss:
U.S. Operations                                $ (12,562)    $ (14,054)    $  (9,464)
Foreign Operations                                (3,428)       (1,438)       (1,252)
                                               ---------     ---------     --------- 
                                               $ (15,990)    $ (15,492)    $ (10,716)
                                               =========     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                              MARCH 31
                                                 1998          1997           1996
                                               ---------     ---------     --------- 
<S>                                            <C>           <C>           <C>      
Identifiable assets:
U.S. Operations                                $  27,206     $  38,375     $  52,898
Foreign Operations                                   257         3,493         1,142
                                               ---------     ---------     --------- 
                                               $  27,463     $  41,868     $  54,040
                                               =========     =========     =========
</TABLE>


                                                                              60
<PAGE>   61

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

        None.


PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        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 1998 Annual Meeting of Stockholders.

ITEM 11.       EXECUTIVE COMPENSATION

        The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1998 Annual Meeting of Stockholders.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT

        The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1998 Annual Meeting of Stockholders.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1998 Annual Meeting of Stockholders.


                                                                              61
<PAGE>   62

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, 1998 and
                             1997

                             Consolidated Statements of Operations -
                             Years Ended March 31, 1998, 1997 and 1996

                             Consolidated Statements of Stockholders' Equity
                             Years Ended March 31, 1998, 1997 and 1996

                             Consolidated Statements of Cash Flows -
                             Years Ended March 31, 1998, 1997 and 1996

                             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

<TABLE>
<CAPTION>
                      Exhibit       Description of Document

<S>                                 <C>                                                                
                      2.1           Recommended Offer to Purchase the Entire Issued Share
                                    Capital of Eden Group Limited (incorporated by reference
                                    to Exhibit 2.1 to Registrant's report on Form 8-K
                                    filed March 10, 1997)
</TABLE>


                                                                              62
<PAGE>   63
<TABLE>
<S>                                 <C>
                      2.2           Warranty and Covenant Agreement in relation
                                    to Eden Group Limited (incorporated by
                                    reference to Exhibit 2.2 to Registrant's
                                    report on Form 8-K filed March 10, 1997)

                      2.3           Escrow Agreement (incorporated by reference
                                    to Exhibit 2.3 to Registrant's report on
                                    Form 8-K filed March 10, 1997)

                      2.4           Agreement of Merger dated October 7, 1997,
                                    between Registrant and Registrant's
                                    predecessor corporation, Geoworks, a
                                    California corporation (incorporated by
                                    reference to Exhibit 2.01 to Registrant's
                                    report on Form 8-K filed October 27, 1997)

                      3.1           Certificate of Incorporation of Registrant
                                    (incorporated by reference to Exhibit 3.01
                                    to Registrant's report on Form 8-K filed
                                    October 27, 1997)

                      3.2           Bylaws of Registrant (incorporated by
                                    reference to Exhibit 3.02 to Registrant's
                                    report on Form 8-K filed October 27, 1997)

                      10.1          Form of Indemnification Agreement
                                    (incorporated by reference to Exhibit 10.1
                                    to Registrant's report on Form 10-Q for the
                                    quarter ended September 30, 1997)

                      10.2          1987 Stock Option Plan (incorporated by
                                    reference to Exhibit 10.2 to Registrant's
                                    Registration Statement on Form S-1 (File No.
                                    33-78104), effective June 22, 1994)*
</TABLE>


                                                                              63
<PAGE>   64

<TABLE>
<S>                                 <C>                                     
                      10.3          1994 Stock Plan, as amended through May 27,
                                    1997 (incorporated by reference to Exhibit
                                    4.03 to Registrant's Registration Statement
                                    on Form S-8 (File No. 333-39863)*

                      10.4          Employee Stock Purchase Plan and Form of
                                    Subscription Agreement (incorporated by
                                    reference to Exhibit 10.4 to Registrant's
                                    Registration Statement on Form S-1 (File No.
                                    33-78104), effective June 22, 1994)*

                      10.5          Lease dated December 30, 1993 for facilities
                                    located at 960 Atlantic Avenue, Alameda,
                                    California (incorporated by reference to
                                    Exhibit 10.16 to Registrant's Registration
                                    Statement on Form S-1 (File No. 33-78104),
                                    effective June 22, 1994)

                      10.6          Amendment Number Five to lease for
                                    facilities located at 960 Atlantic Avenue,
                                    Alameda, CA, dated March 15, 1996
                                    (incorporated by reference to Exhibit 10.29
                                    to Registrant's report on Form 10-K for the
                                    year ended March 31, 1996)

                      10.7          Lease dated September 30, 1994 for
                                    facilities located at 2001 Center Street,
                                    Berkeley, California (incorporated by
                                    reference to Exhibit 10.22 to Registrant's
                                    original Annual Report on Form 10-K or
                                    amendments thereto on Form 10-KA for the
                                    year ended March 31, 1995)

                      10.8          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
                                    (incorporated by reference to Exhibit 10.30
                                    to Registrant's report on Form 10-K for the
                                    year ended March 31, 1996)
</TABLE>


                                                                              64
<PAGE>   65

<TABLE>
<S>                                 <C>                                     
                      10.9          Master Lease Agreement between LINC Capital
                                    Management Services, LTD. and Geoworks dated
                                    December 8, 1994 (incorporated by reference
                                    to Exhibit 10.24 to Registrant's original
                                    Annual Report on Form 10-K or amendments
                                    thereto on Form 10-K/A for the year ended
                                    March 31, 1995)

                      10.10         Corporate Technology Agreement between
                                    Toshiba Corporation and Geoworks dated March
                                    17, 1993 (incorporated by reference to
                                    Exhibit 10.12 to Registrant's Registration
                                    Statement on Form S-1 (File No. 33-78104),
                                    effective June 22, 1994)###

                      10.11         Amendment Number One to Corporate Technology
                                    Agreement between the Company and Toshiba
                                    Corporation dated June 30, 1994
                                    (incorporated by reference to Exhibit 10.17
                                    to Registrant's report on Form 10-Q for the
                                    quarter ended June 30, 1994)###

                      10.12         Amendment Number Three to Corporate
                                    Technology Agreement between the Company and
                                    Toshiba Corporation dated September 29, 1995
                                    (incorporated by reference to Exhibit 10.27
                                    to Registrant's report on Form 10-Q for the
                                    quarter ended December 31, 1995) ###

                      10.13         Addendum to Corporate Technology Agreement
                                    between Geoworks and Toshiba, dated December
                                    16, 1996 (incorporated by reference to
                                    Exhibit 10.39 to Registrant's report on Form
                                    10-Q for the quarter ended December 31,
                                    1996)###

                      10.14         Geoworks - Brother Technology License
                                    Agreement, effective as of September 30,
                                    1994 (incorporated by reference to Exhibit
                                    10.18 to Registrant's report on Form 10-Q
                                    for the quarter ended September 30, 1994)###

                      10.15         Addendum Number One to Technology License
                                    Agreement between Geoworks and Brother,
                                    dated March 29, 1996 (incorporated by
                                    reference to Exhibit 10.31 to Registrant's
                                    report on Form 10-K for the year ended March
                                    31, 1996) ###
</TABLE>


                                                                              65
<PAGE>   66

<TABLE>
<S>                                 <C>                                     
                      10.16         Addendum Number Two to Technology License
                                    Agreement between Geoworks and Brother
                                    International Corporation, dated June 28,
                                    1996 (incorporated by reference to Exhibit
                                    10.34 to Registrant's report on Form 10-Q
                                    for the quarter ended June 30, 1996)###

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

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

                      10.19         Supplemental Stock Option Plan (incorporated
                                    by reference to Exhibit 10.35 to
                                    Registrant's report on Form 10-Q for the
                                    quarter ended September 30, 1996)*

                      10.20         Technology License Agreement between
                                    Geoworks and NEC Corporation, dated April
                                    26, 1996 (incorporated by reference to
                                    Exhibit 10.36 to Registrant's report on Form
                                    10-Q for the quarter ended September 30,
                                    1996)###

                      10.21         1997 Supplemental Stock Plan (incorporated
                                    by reference to Exhibit 4.1 to Registrant's
                                    Registration Statement on Form S-8 filed
                                    March 25, 1997) *

                      10.22         Form of Stock Option Agreement under the
                                    1997 Supplemental Stock Plan (incorporated
                                    by reference to Exhibit 4.2 to Registrant's
                                    Registration Statement on Form S-8 filed
                                    March 25, 1997) *

                      10.23         Separation Agreement and General Release
                                    between the Registrant and David Edward John
                                    Crisp dated March 16, 1998*


                      21.1          List of subsidiaries (incorporated by
                                    reference to Exhibit 21.1 to Registrant's
                                    Form 10-K for the year ended March 31, 1997)
</TABLE>


                                                                              66
<PAGE>   67

<TABLE>
<S>                                 <C>                                     
                      23.1          Consent of Independent Auditors (see Page
                                    71)

                      24.1          Power of Attorney (see Page 70)

                      27.1          Financial Data Schedule

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

                                    *   Management contract or compensatory plan
                                        or arrangement
</TABLE>


                                                                              67
<PAGE>   68

(b)            REPORTS ON FORM 8-K

        No reports on Form 8-K were filed for the quarter ended on March 31,
1998, 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.


                                                                              68
<PAGE>   69

                                   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 19, 1998
                                           GEOWORKS CORPORATION


                                           by:  /s/David A. Thatcher
                                           ------------------------------------
                                           David A. Thatcher
                                           President and Chief Executive Officer


                                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.


                                                                              69
<PAGE>   70

<TABLE>
<CAPTION>
     Signature                         Title                          Date
     ---------                         -----                          ----
<S>                        <C>                                   <C> 
/s/ David A. Thatcher      Chief Executive Officer, President,   June 19, 1998
---------------------      Chief Financial Officer and Director
David A. Thatcher          (Principal Executive Officer)


/s/ Gordon E. Mayer        Chairman of the Board                 June 19, 1998
-------------------
Gordon E. Mayer


/s/ Eric Schmidt           Director                              June 19, 1998
-------------------
Eric Schmidt


/s/ Daniel L. Sicotte      Controller                            June 19, 1998
---------------------      (Principal Financial Officer)
Daniel L. Sicotte
</TABLE>


                                                                              70
<PAGE>   71

                         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. 333-39863), the Supplemental
Option Plan (Form S-8 No. 333-09569), 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 Corporation
of our report dated April 17, 1998, with respect to the consolidated financial
statements of Geoworks included in the Annual Report on Form 10-K for the year
ended March 31, 1998.

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




San Francisco, California
June 25, 1998


                                                                              71
<PAGE>   72

                                    GEOWORKS

                           ANNUAL REPORT ON FORM 10-K
                                INDEX OF EXHIBITS


<TABLE>
<CAPTION>
                                                                               Sequential
Exhibit No.                         Description                               Page Number
-----------                         -----------                               -----------
<S>                                <C>                                         <C>    

Exhibit 10.23                      Separation Agreement and General Release
                                   between the Registrant and David Edward
                                   John Crisp dated March 16, 1998*

Exhibit 27.1                       Financial Data Schedule
</TABLE>

                                                                              72