PERVASIVE SOFTWARE INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999

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

Commission file number 000-23043

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

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

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

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

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

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

Common Stock, $.001 par value

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

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

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

As of September 24, 1999 the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $325,229,789 Shares of
Common Stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

As of September 24, 1999 there were 15,612,385 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's Annual Meeting of Stockholders to be held
on November 3, 1999.
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PERVASIVE SOFTWARE INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
JUNE 30, 1999

TABLE OF CONTENTS

Page

PART I................................................................................................ 1
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 23
Item 3. Legal Proceedings..................................................................... 23
Item 4. Submission Of Matters To A Vote Of The Security Holders............................... 23
Item 4a. Executive Officers of the Registrant.................................................. 24
PART II............................................................................................... 26
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 26
Item 6. Selected Consolidated Financial Data.................................................. 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 7a Quantitative and Qualitative Disclosures About Market Risk............................ 37
Item 8. Consolidated Financial Statements and Supplementary Data.............................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 37
PART III.............................................................................................. 37
Item 10. Directors and Executive Officers of the Registrant.................................... 37
Item 11. Executive Compensation................................................................ 37
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 37
Item 13. Certain Relationships and Related Transactions........................................ 38
PART IV............................................................................................... 39
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
SIGNATURES............................................................................................ 40

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PART I

ITEM 1. BUSINESS

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

Overview

Pervasive Software Inc. is a leading provider of application development and
deployment software designed to power the next generation of pervasive computing
and deliver to developers worldwide the freedom to easily create applications
for everyone, everywhere. Our Tango Web application development environment,
application server and application template products enable software developers
to rapidly develop and deploy robust and scalable e-business and other Web-based
applications with ''point-and-click'' simplicity. Our Pervasive.SQL data
management products enable software developers to create sophisticated yet low
maintenance applications that reach beyond the desktop to easily share
information across everything from hand-held devices and smart cards to
information appliances and the Internet. Combined, these products provide a
unique solution that dramatically simplifies the development, deployment and
maintenance of Web-based applications, lowers the cost of ownership of Web-based
computing environments, and can be extended to new devices, operating systems,
and markets. Enhancing this unique solution is our value-added sales channel of
over 10,000 software developers, application service providers ("ASPs"), Web and
systems integrators, consultants, and value-added resellers. We develop,
market, sell and support our products worldwide through our principal office in
Austin, Texas, through field sales offices throughout the U.S. and through
international offices in Toronto, Frankfurt, Paris, Brussels, Dublin, London,
Hong Kong and Tokyo.

Industry Background

Today, the dramatic growth in the use of the Internet as a new distributed
computing environment is driving fundamental changes in business practices
around the world. Web-based applications are proliferating as organizations
conduct electronic commerce, dynamically link partners, suppliers and vendors
and generate other online business, or e-business, opportunities. The evolution
of Web-based development, from simple, static Web pages to dynamic, data-driven
Web-based applications, has given rise to the Web application server, which has
emerged as the platform of choice for enabling Web users to interact with
underlying database systems.

Despite the many benefits of the Web as a distributed computing environment,
the increasing sophistication of Web-based applications and their interactions
with underlying databases present many of the same complexities as client/server
computing, as well as additional challenges relating to security, user access
and data integrity. These complexities, along with the competitive need to
develop, deploy and modify applications in ''Internet time,'' has created even
more pressure on already strained IT professionals. As a result of these
factors, organizations need Web-based solutions with zero administration
features similar to those deployed in complex client/server environments.

A robust, high-performance Web application server is only one piece of a
comprehensive solution to this problem. A complete solution for enabling
dynamic, data-driven Web-based applications must seamlessly integrate the Web
application server with a powerful and scalable underlying database that has
zero administration features. The need for such zero administration solutions
will continue to grow as the cost of bandwidth and computing power decreases. We
believe these market forces will give rise to the proliferation of the next
generation of distributed computing environments and devices, such as mobile
computing, smart cards, and information appliances, creating a dramatic increase
in new Web-based applications used by a much broader set of end users.

To take advantage of these opportunities and capitalize on our skills and
expertise in simplifying distributed computing, we purchased EveryWare
Development Inc. and its Tango line of Web development and deployment solutions
in November 1998. We believe the combination of our Tango Application Server
with the zero administration functionality of our Pervasive.SQL database offers
a unique, comprehensive solution that dramatically simplifies the development,
deployment and maintenance of Web-based applications, lowers the cost of
ownership of Web-based computing environments and can be extended to new
devices, operating systems and markets.

The Pervasive Solution

Pervasive Software is a leading provider of application development and
deployment software that dramatically simplifies the development, deployment and
maintenance of Web-based and client/server applications. Our software enables
developers to design applications that reach beyond the desktop and easily share
information across everything from hand-held devices and smart cards to
information appliances and the Internet. Our comprehensive, integrated suite of
software includes Web development and deployment products and high-performance,
zero-administration databases. Our products:

. Enhance developer productivity by reducing the time to develop and deploy
Web-based applications, reducing time to market;

. Simplify application development to appeal to a broader range of software
developers, including Web application developers, application service
providers, webmasters, desktop publishers and end users;

. Offer a single vendor solution that provides seamless integration of the
Web application server, the underlying database and a broad range of
distributed devices and operating systems; and

. Minimize the cost of ownership throughout the lifecycle of an application
by reducing reliance on scarce and expensive database administrators and
other IT professionals.

Our Pervasive.SQL database products, which combine the high performance
associated with enterprise-class databases with zero administration features,
are uniquely suited for embedding in Web-based and client/server applications
deployed on a wide variety of operating systems and devices. Today, over 10,000
independent software developers, value-added resellers and systems integrators
have developed or deployed applications that use our databases.

Our Tango products simplify the development and deployment of Web-based
applications and allow a broad range of Web developers to:

. Create dynamic, sophisticated, e-business and other Web-based applications,
such as e-commerce, customer support and document management applications,
with ''point and click'' simplicity and faster time to market;

. Integrate Web-based applications seamlessly with Pervasive.SQL or other
databases that are compliant with open database connectivity standards;

. Deploy highly scalable, easily modifiable Web-based applications capable of
handling high traffic volumes; and

. Leverage our worldwide marketing, training, professional services and
support organizations, as well as those of our channel partners.

Many organizations with scarce IT resources rely on our channel of software
developers, application service providers, or ASPs, Web and systems integrators,
consultants, and value-added resellers to help them develop,

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

The Pervasive Strategy

Pervasive's goal is to be the leading provider of application development and
deployment products to software developers, application service providers, Web
and systems integrators, consultants, and value-added resellers worldwide. Key
elements of our strategy to attain this goal include:

Leveraging the combination of Tango and Pervasive.SQL into e-business. We
have developed e-commerce application templates based on Tango and Pervasive.SQL
that we license to Web software developers and integrators to quickly develop
and deploy e-business applications for their end-user customers. We believe
that the market for e-business applications is growing rapidly. To take
advantage of these opportunities, we intend to:

. Build an e-business alliance of software developers, Web integrators and
consultants designed to enable the rapid development and broad deployment
of e-business applications based on our products;

. Develop and license to our alliance partners and their end users additional
application templates designed to enable the rapid deployment of a broad
range of e-business applications;

. Develop and license to our alliance partners and their end users software
tools, such as connectors and objects, that connect Tango-based Web
applications to back-end accounting and legacy systems; and

. Aggressively invest in the market development activities surrounding our e-
business alliance initiative.

Leveraging Our Technology Leadership into New Markets. We have excelled in
providing small memory footprint and zero administration data management
technologies that provide the foundation for thousands of client/server
applications. We have expanded our product offering with the Tango suite of
solutions that simplify the development, deployment and maintenance of Web-based
applications. We believe that the proliferation of mobile computing and embedded
and smart devices will dramatically increase the number of new software
applications used by an even broader set of end users. To exploit these new
market opportunities, we intend to:

. Deploy our small memory footprint databases and related technologies on a
wide range of devices, enabling applications to be deployed and share
information across everything from handheld devices and smart cards to
information appliances and the Internet;

. Extend our technologies to next generation operating systems, including
Solaris, Linux, Palm OS, Windows CE, Wind River VxWorks, QNX Neutrino and
other operating systems as they grow in market share; and

. Deliver the leading Web application development and deployment solution by
further integrating Tango with our Pervasive.SQL database technologies.

Investing in Lead Generation and Brand Awareness Programs. In conjunction with
our e-business and new market strategies, we intend to significantly invest in
lead generation and brand awareness programs. Our lead generation programs

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target the wide range of software developers worldwide that are building Web-
based applications, and are designed to encourage the developers to build their
applications using our application development products and deploy their
applications using our server products. Our brand awareness programs target the
end users of Web-based applications, and are designed to create awareness of our
Pervasive and Tango brands so that end users demand Web-based applications that
are based on our products.

Leveraging and Expanding our Worldwide Channel Partners. We believe that our
investments in training and educating our channel partners worldwide and our
success in encouraging them to deploy applications using Pervasive products have
given us a competitive advantage in the marketplace. In conjunction with our e-
business strategies, we intend to leverage our channel expertise by continuing
to develop new and additional relationships with Web application developers, Web
integrators and other Web consultants that build and implement e-business
applications using our Web application development and deployment products. We
intend to build partner loyalty by providing significant product and consulting
revenue opportunities to these channel partners via marketing and lead sharing
programs.

Expanding Our Strategic Partnerships. We intend to build upon the
relationships we have formed with current strategic partners, while expanding
our alliances to include new partners with complementary products, technologies
or business models. Our partnerships provide us with many benefits, including:

. Increased market recognition and visibility;

. Access to new customers, sales channels and consulting services; and

. Valuable improvements to our product line.

In particular, we intend to build and enhance relationships with Schlumberger,
Red Hat, Wind River, IBM, Novell, Apple, Macromedia and 3COM to further enable
the development of applications for the next generation of pervasive computing.
We also intend to build complementary marketing and technology relationships
with other industry partners.

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Products

Pervasive offers and is developing a wide range of application development and
deployment products that enable software developers, application service
providers, Web and systems integrators, consultants and value-added resellers to
quickly and easily develop, deploy and maintain Web-based and client/server
applications. The resulting applications enable organizations in multiple
industries to automate a wide range of business critical functions. The
following tables describe our Tango Web development and deployment solutions and
our high performance, zero administration databases:

Product Name Description Platforms
- -----------------------------------------------------------------------------------------------------------

Tango Web-based application server that enables the Windows NT/98/95
Application Server deployment of high performance Web-based applications Sun Solaris
across multiple platforms while supporting industry MacOS
standards such as ODBC, Java, HTML, XML, SQL, CGI,
JavaScript, JavaBeans and Com Objects.
- -----------------------------------------------------------------------------------------------------------
Tango Integrated environment to create dynamic Web-based Windows NT/98/95
Development Studio applications, which includes the Tango Editor for MacOS
development and a personal version of the Tango
Application Server for testing and validation.
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL High performance transactional and relational Windows NT/98/95/3.1
Server database engine targeted at high volume transaction NetWare
applications and optimized for reporting, ad hoc Sun Solaris
query and decision support systems. Linux
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Single user version of Pervasive.SQL that allows Windows NT/98/95
Workstation migration from single user to client/server with
little or no code changes.
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Multi-user configuration of Pervasive.SQL for Windows NT/98/95
Workgroup environments without a dedicated network server.
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Developer kit for Pervasive.SQL that provides tight Windows NT/98/95
Software integration with leading development tools such as
Developer Kit Microsoft's Visual Basic and Visual C++, Symantec's
Visual Cafe, and Inprise's Delphi.
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Server that provides for the Internet enabling of Windows NT
I*net Data Server existing Pervasive.SQL and Btrieve applications with
little or no code changes.
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Ultra small foot-print (~8k) engine enabling the Java Card (beta)
for Smart Cards development and deployment of reliable, secure
applications for multi-function Java smart cards
- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Very small footprint (~50K) engine providing Windows CE (beta)
for Embedded Systems in-memory and file data storage suitable for Wind River VxWorks
applications built for real-time operating systems. (beta)
QNX Neutrino (beta)
PharLap (beta)

- -----------------------------------------------------------------------------------------------------------
Pervasive.SQL Small footprint (~50k to ~400k) engine suitable for Windows CE (beta)
For Mobile applications running on devices such as handheld Palm OS (beta)
Devices computers, PDAs, Internet screen phones and other
Internet appliances
- -----------------------------------------------------------------------------------------------------------

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In November 1998, we expanded our product offerings to include solutions for
Web-based application development and deployment through the acquisition of
EveryWare Development, Inc. and their Tango suite of products. Together, the
Tango Application Server and the Tango Development Studio form a comprehensive
Web development and deployment environment for the creation of robust, business
critical, e-business and other Web-based applications. Our Tango products and
associated services provide professional Web developers with the ability to
create and deploy high-volume, high-performing Web-based applications and Web
sites quickly, easily and cost-effectively. Tango's ease of use further provides
the ability to accept customer or corporate requests to make changes ''on the
fly.'' In addition, we believe Tango provides the lowest total cost of
ownership for creating and maintaining Web-based applications on the market.

The Tango Application Server enables developers to deploy Web-based
applications on Windows NT, Macintosh or Solaris and enables end users to
utilize Web browsers to access dynamic content in an underlying database. The
Tango Development Studio provides an efficient visual programming environment
for prototyping and developing Web-based applications. The Tango Development
Studio features include a visual ''drag-and-drop'' editor for easy development,
JavaScript integration - an industry-standard scripting language - and
integration with a wide range of back-end corporate information systems, such as
databases, mainframes, and even other servers, for easy, efficient data
management. Our Tango products have been integrated with the zero administration
functionality of our Pervasive.SQL database, personalization technology and e-
business development templates.

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

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

In June 1999, we announced our development of the Pervasive.SQL 2000 family of
database engines for non-PC applications. The new family of engines will extend
the Pervasive.SQL 2000 product offering to meet the specific footprint size and
functionality requirements of three market segments that we believe are rapidly
emerging: smart cards, embedded systems and mobile devices. Pervasive.SQL 2000
for Smart Cards is designed to integrate with the Java Card environment,
providing both on-card and off-card interfaces that allow data to be
decentralized, secured, shared and managed between multiple stations and
multiple applications. Pervasive.SQL 2000 for Embedded Systems is designed to
be well suited for use in non-PC information and Internet appliances like set-
top boxes and other applications built for real-time operating systems. Finally,
Pervasive.SQL 2000 for Mobile Devices is a data storage engine designed for
Windows CE and Palm OS deployments that will allow synchronization of data from
handheld devices, such as Internet screen phones and Web-enabled PDA's, to the
corporate server for use in nomadic applications. The Pervasive.SQL 2000
database engines for Smart Cards, Embedded Systems and Mobile Devices are
expected to ship in the fall of 1999.

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Product Characteristics

The following table describes the principal characteristics and benefits of
our Web application development and deployment product offerings.

Product Characteristics Description Benefits
- -------------------------------------------------------------------------------------------------------------
Rapid Development Tango is a standards-based environment Allows broad development and
using non-proprietary languages and deployment of complex Web-based
offering an extensive library of pre- applications into environments with
built meta-tags and business application scarce IT resources.
files for common functions.

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Turnkey Solution Tango and Pervasive.SQL offer a Provides tools and templates
fully integrated environment that necessary to effectively develop,
includes complete development tools test and deploy simple to complex
and templates, a powerful application Web-server, high performance database
server and robust reporting tools. based solutions.

- -------------------------------------------------------------------------------------------------------------------
Zero Administration Tango uses a visual language to Requires low level of IT support
Features represent the underlying logic of the making complex and cost effective
application, separating out the Web-based applications easily
business, presentation and database adaptable to meet ever-changing
logic. Pervasive.SQL automates business
administrative functions, such as demands.
disk space allocation, memory and
index management, which significantly
reduces the need for ongoing
maintenance.
- -------------------------------------------------------------------------------------------------------------------
Multi-Platform Deployment Tango runs across multiple platforms Provides flexibility and leverages
including Windows NT/98/95, Sun existing company standards and
Solaris and Mac OS. Pervasive.SQL infrastructures, decreasing
supports a broad range of operating training time and increasing
systems including Windows NT/98/95, productivity, while allowing the
NetWare, Sun Solaris, Linux,Windows user to use the best tool for the
CE (beta) and Palm OS (beta). job.
- -------------------------------------------------------------------------------------------------------------------
Portability Deployments of both Tango and Allows development and
Pervasive.SQL can be easily migrated deployment to be done on the most
to any supported platform. optimal platform that meets the
business and resource requirements.

- -------------------------------------------------------------------------------------------------------------------
Extensibility Tango works with any Web server that Leverages current technology
supports CGI. Dynamically investments as well as developer
generates all HTML for the user. expertise, while supporting the
Java, JavaScript, VRML, integration of new technologies as
QuickTime and other multimedia business and technical requirements
tools can all be integrated easily dictate.
into Tango applications.
- -------------------------------------------------------------------------------------------------------------------
Application Scalability Applications can run in any Offers cost savings for developers
configuration from single and end users because a single
machine/single application server application can be deployed in
deployments, to very large, multiple multiple configurations without
machine/multiple application server modification.
configurations on Windows and UNIX.
- -------------------------------------------------------------------------------------------------------------------
Reliability Based on industry-proven Provides high degree of data
technology. integrity and stability to business
applications.
- -------------------------------------------------------------------------------------------------------------------

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Sales and Marketing

Pervasive's sales and marketing organization focuses on our worldwide
channels by targeting software developers that build Web-based and client/server
applications and the ASPs, Web and solutions integrators, consultants and value-
added resellers that sell and implement the applications to end users. In
addition, with the expansion of our product suite to the Internet platform, we
have continued to launch a variety of significant marketing and promotional
campaigns designed to broaden recognition of our Pervasive and Tango brands. Our
marketing organization has primary responsibility for product direction and has
developed a number of programs utilized by the sales organization to support our
channel partners, such as the OEM program for independent software vendors and
partner programs for Web and solutions integrators, consultants and value-added
resellers. These programs are worldwide in scope and capture leads from a
variety of additional marketing programs including direct response marketing and
advertising, joint marketing and public relations.

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

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

Our sales and marketing organization utilizes seeding strategies designed
to stimulate high-volume deployment of Web-based and client/server products. Our
database products seeding strategy enables our customers to develop client-based
applications and to deploy them broadly with minimal incremental cost. We then
support our channel partners through a combination of promotional and lead
referral programs to upgrade these applications to client/server environments.
As a result, we generate upgrade revenues while enabling independent software
vendors and value-added resellers to sell higher margin server products to end
users upgrading from single user workstation, or peer-to-peer networks to
client/server environments. We also support our channel partners to identify
customers ready to deploy applications into a three-tier Web application server
environment resulting in licenses of our Tango Development Studio and Tango
Application Server.

The international sales organization utilizes more than 70 distribution
partners covering more than 80 countries worldwide. The distribution partners
implement sales and marketing programs for a particular region, typically using
our business alliance, distributor or master distributor programs. In addition
to managing these distributor relationships, the international sales group
recruits and supports channel partners with the same programs as the domestic
sales groups. We currently have international sales offices in Frankfurt,
Paris, Brussels, London, Hong Kong and Tokyo.

Customer Service and Technical Support

We offer multiple levels of worldwide customer services, including
technical support, professional consulting services, training, and product
maintenance. First level, or front line, support responds to most customer
inquiries that are routine in scope via telephone and email. Second level, or
back line, support responds to escalated technical issues and supports our large
partners with specialized technical expertise. Self-help support is also
available via our Web site, which includes a searchable knowledge base, answers
to frequently asked questions and technical

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white papers. Customer service is provided at no charge for the first 30 days
after initial purchase and at any time via email or our Web site. After 30 days,
we offer contract and fee-based premium support programs.

In June 1999, we formed a specialized professional services group to fulfill
demand for fee-based training and consulting services from our developer
customers and channel partners. This group combines traditional technical
support expertise with a team of professionals focused on providing customer-
driven, fee-based training and consulting services. Major consulting
opportunities are referred to our channel partners to strengthen channel
loyalty, build the channel's technical ability and increase the resource base
available for future growth.

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

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

Research and Development

We have made substantial investments in research and development through both
internal development and technology acquisition. As of June 30, 1999, we had 131
employees in research and development, and our research and development
expenditures for fiscal 1997, 1998 and 1999 were $6.0 million, $9.6 million and
$15.1 million, respectively. We will continue to invest considerable research
and development resources to further our vision of software development
environments that dramatically simplify the development, deployment and
maintenance of Web-based and client/server applications, enabling applications
to reach beyond the desktop and easily share information across everything from
hand-held devices and smart cards to information appliances and the Internet.

We have devoted the majority of our research and development activity to
developing feature extensions to our Pervasive.SQL and Tango product lines. Our
development efforts consist primarily of adding new competitive product
features, expanding the number of computer and network operating systems and
device platforms on which the products can be installed and maintaining the
ability to run in multiple operating system environments. We continue to focus
development activities on enhancing Pervasive.SQL as database software
characterized by a small memory footprint, high-performance and zero
administration requirements, and extending these technologies to support hand-
held devices, smart cards and information appliances. For Tango, our efforts
center on improving the rapid development capabilities of the Tango Development
Studio, increasing extensibility by augmenting support for industry-standard
interfaces and extending multi-platform support and maintenance features for the
Tango Application Server.

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

Technology

Tango

Tango is a Web application server development and deployment environment for
generating dynamic Web-based applications and for accessing databases. Tango
consists of two main components: the Tango Development Studio, which is a
sophisticated editing environment that features a complete graphical user
interface for developing Web application files, and the Tango Application
Server, which is an application server that executes application files created
with the Tango Development Studio.

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The Tango Application Server, a multi-threaded engine, works in conjunction
with an HTTP (Web) server to execute the business logic and database
interactions of a Web application and return HTML to a Web browser. Web pages
viewed in a Web browser can contain forms or links that point to Tango
application files created with the Tango Development Studio. When the user
submits a form or clicks a link, the Web server receives the request and passes
it to Tango CGI or one of the plug-ins that, in turn, sends it to the Tango
Application Server. The Tango Application Server then executes the application
file, which could involve performing multiple actions and interactions with a
database server. A series of action results are merged by the Tango Application
Server to create an HTML page. When execution is complete, the HTML results are
returned through the CGI or plug-in to the Web server, and then to the user
browser.

The Tango Development Studio provides a point-and-click, drag-and-drop
interface in which application files are created for use specifically in the
Tango Application Server. The Development Studio works by querying the database
schema and noting the tables and columns of the database. Columns can be
dragged into specific actions within the application, thus defining the way in
which the database is accessed. No knowledge of SQL or database specifics is
required. Actions can include file access, mail, and general external actions
(e.g., launching applications, accessing Java components, triggering events).
Tango application files are built using a series of custom meta tags that
describe control flow, data, and actions for dynamically generating HTML pages.

Plug-ins supported by the Tango Application Server include NSAPI, an
application programming interface used in conjunction with Netscape Web servers
such as FastTrack or Enterprise server, and ISAPI, an application programming
interface that is the plug-in interface supported by Microsoft's Internet
Information Server. Plug-in access to the Tango Application Server is more
efficient than CGI access as the plug-in runs as part of the Web server process
and does not require starting up a separate process. Databases supported
include Pervasive.SQL, Oracle, Microsoft Access, Microsoft SQL Server, and ODBC
data sources.

Pervasive.SQL

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

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

. Smart components for simplified installation and configuration;

. Expanded programming language interfaces;

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

. Enhanced automatic tuning designed to increase performance;

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

. Built-in recovery capabilities.

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

The configuration options for our database products include the following:

. Single-User Workstation. The single-user workstation configuration provides
mobile and stand-alone operation. All access modules and MKDE components
reside locally, and data files are stored on the

10

workstation's disk drive. This configuration is used when the workstation is
not connected to a network or when data files do not need to be shared.

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

. Client/Server. In a client/server configuration, database requests made by
an application are typically processed on a server. A small requester module
on the workstation routes requests from the application to a server database
engine. Since all data processing and data files reside on the server, this
configuration minimizes both network traffic and the use of workstation
resources.

. Smart Cards. The smart card configuration is an ultra-small (~8K) engine
enabling the development and deployment of reliable, secure applications for
multi-function Java smart cards.

. Embedded Systems. The embedded systems configuration is a small foot-print
(~50K) engine providing in-memory and file data storage suitable for
applications built for real-time operating systems, such as Wind River VX
Works and QNX Neutrino.

. Mobile Devices. The mobile device configuration is a small foot-print (~50K
to ~400K) engine that supports platforms such as Windows CE and Palm OS and
is suitable for applications running on devices such as hand held computers,
PDAs, Internet screen phones, and other Internet appliances.

Competition

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

The Web development and deployment market is an emerging, intensely
competitive environment, subject to rapidly changing products and new market
participants. The market is also undergoing significant consolidation, which
could result in the creation of a relatively few dominant players. In the last
two years, Netscape acquired Kiva Software, Sun Microsystems acquired
NetDynamics, and BEA Systems acquired WebLogic. Oracle, Microsoft and IBM have
each entered the Web development and deployment market with internally developed
solutions. The primary competitor for Tango is Allaire's Cold Fusion product.
Additional competitors include HAHT Software, SilverStream and Bluestone.
Another set of competitors could arise as traditional online transaction
processing and database vendors expand their application server solutions to
include Web-based application development software. We believe that, given the
projected size of the market and strong trend towards distributed computing, it
is likely that additional competitors may enter the market. This could lead to
intense pricing pressure, particularly on front-end development tools, and
result in higher research and development costs to compete on a feature-for-
feature basis.

Most of our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition, a larger installed base of customers and in some cases, a
demonstrated willingness to invest so heavily as to be in a loss position. As a
result, our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of competitive products, than
we can. There is also a substantial risk that announcements of competing
products by large competitors such as Microsoft, Oracle or IBM could result

11

in the cancellation of customer orders in anticipation of the introduction of
such new products. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs and which may limit our ability to sell our products through particular
distribution partners. Accordingly, new competitors or alliances among current
and new competitors may emerge and rapidly gain significant market share in our
current or anticipated markets. We also expect that competition will increase as
a result of software industry consolidation. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins and loss of
market share, any of which could materially adversely affect our business. We
cannot be certain that we will be able to compete successfully against current
and future competitors or that the competitive pressures that we face will not
materially adversely affect our business, operating results and financial
condition.

Proprietary Rights

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

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

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

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

12

Employees

As of June 30, 1999, we employed 358 full-time employees, including 107 in
sales and marketing, 131 in research and development, 70 in technical support
and 50 in general and administrative. We believe that our future success will
depend in large part upon our continuing ability to attract and retain highly
skilled managerial, sales, marketing, customer support and research and
development personnel. Like other software companies, we face intense
competition for such personnel, and we have at times experienced and continue to
experience difficulty in recruiting qualified personnel. There can be no
assurance that we will be successful in attracting, assimilating and retaining
other qualified personnel in the future. We are not subject to any collective
bargaining agreement and we believe that our relationships with our employees
are good.

Facilities

In October 1998 we moved our headquarters to a new facility in Austin, Texas,
and now occupy approximately 87,000 square feet. The new facility provides
additional space and expansion options at rental rates per square foot
consistent with our previous facility. This new facility is leased through
September 2008. We currently lease other domestic offices in San Francisco, Los
Angeles, Chicago, Boston and Nashville, as well as international offices in
Toronto, Frankfurt, Paris, Brussels, Dublin, London, Hong Kong and Tokyo. We
continue to be obligated under two leases for our prior headquarters facility in
Austin, Texas. We have leased all space in our prior facility to two
subtenants. The first lease and corresponding sublease expires in August 2000,
and the second lease and corresponding sublease expires in December 2000.

13

RISK FACTORS

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

Our Financial Results May Vary Significantly from Quarter to Quarter

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

. Demand for our products;

. Seasonality and the timing of product sales;

. Unexpected delays in introducing new products and services;

. New product releases or pricing policies by our competitors;

. Lack of order backlog;

. Loss of a significant customer or distributor;

. A reduction in the number of independent software vendors ("ISVs") who
embed our products;

. Increased expenses, whether related to sales and marketing, product
development or administration; and

. The mix of domestic and international sales.

In recent quarters, we have derived an increasing percentage of our
revenues from relatively larger orders. The sales cycles for these transactions
tends to be longer than the sale cycle on smaller orders. Accordingly, to the
extent that this trend continues, our operating results may fluctuate from
quarter to quarter based on the timing of larger orders.

In addition, we may experience fluctuations based on our past and future
acquisitions of businesses and product lines. For example, we incurred a loss in
the quarter ended December 31, 1998 as a result of a charge for purchased
research and development associated with our acquisition of EveryWare
Development Inc.

We will continue to determine our investment and expense levels based on
our expected future revenues, which may not grow at historical rates in future
periods, if at all. A significant portion of our expenses are not variable in
the short term and cannot be quickly reduced to respond to decreases in
revenues. Therefore, if our revenues are below our expectations, our operating
results and net income are likely to be adversely and disproportionately
affected. In addition, we may reduce our prices or accelerate our investment in
research and development, sales or marketing efforts in response to competitive
pressures or to pursue new market opportunities. Any one of these activities may
further limit our ability to adjust spending in response to revenue
fluctuations.

Seasonality May Contribute to Fluctuations in Our Quarterly Operating Results

Our business has experienced, and is expected to continue to experience,
seasonal customer buying patterns. In recent years, we have had relatively
stronger demand for our products during the quarters ending December 31 and June
30, and relatively weaker demand in the quarters ending March 31 and September
30. We believe that this pattern may continue. In addition, to the extent
international operations constitute a greater percentage of our

14

revenues in future periods, we anticipate that demand for our products in Europe
and Japan will decline in the summer months because of reduced corporate buying
patterns during the vacation season.

We Currently Operate Without a Backlog

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

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

We have expanded our operations rapidly since inception, resulting in new and
increased responsibilities for management and placing a strain upon our
financial and other resources. During this period, we have experienced revenue
growth, an increase in the number of our employees, an expansion in the scope of
our operating and financial systems and an expansion in the geographic area of
our operations. In particular, we had a total of 358 employees at June 30, 1999,
as compared to 220 at June 30, 1998. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely basis. If we fail to implement and improve these systems, our business,
operating results and financial condition will be materially adversely affected.

Our Performance Depends on Market Acceptance of Pervasive.SQL

We derive a significant portion of our revenues from the license of our
Pervasive.SQL products. Accordingly, our future operating results are
substantially dependent on continued market acceptance of Pervasive.SQL and
future enhancements. We cannot be certain that future sales of Pervasive.SQL
will continue at current rates. Continued market acceptance of Pervasive.SQL may
be influenced heavily by factors outside of our control such as new product
offerings or promotions by competitors and the product development cycles of
developers and resellers who embed our products into packaged software
applications. Although we recognized increased revenue from Pervasive.SQL in
each quarter in fiscal 1999, one-time upgrades from earlier versions of our
products, our favorable upgrade pricing, or other factors may have contributed
to such sales.

Our Future Success Will Depend on Our Ability to Successfully Market and Support
Tango

We acquired the technology for our Tango products in November 1998 and we
began to market the Tango Application Server and Tango Development Studio both
as stand-alone products and integrated with Pervasive.SQL during the third
quarter of fiscal 1999. To date, we have not derived significant revenues from
the Tango products. Our performance depends on our ability to generate demand
for, gain market acceptance of and effectively support our Tango products in the
near future. As a result, we expect to devote significant resourses to our sales
and marketing efforts relating to Tango. Because of our limited experience
marketing the Tango products, we cannot be certain that we will achieve market
acceptance for or generate significant revenue from the Tango products. Our
ability to rapidly gain market acceptance and to effectively support our Tango
products is subject to a number of factors, including:

. Our ability to further integrate Pervasive.SQL with the Tango products;

. Our ability to recruit and train new and existing developers, value-added
resellers, systems integrators, Web integrators and consultants;

. The success of promotions involving our Tango development environment and
our ability to ultimately receive Tango Application Server revenue from
past and future promotions;

. The time lag between adoption and deployment of the Tango product line;

15

. Our ability to successfully market Tango products to our installed base of
customers, independent software vendors and value-added resellers;

. The extent of competitive pricing pressure from companies in our markets
that are willing to accept losses in an attempt to gain market share; and

. Continued growth in the market for Web-based development products.

We Must Successfully Manage Our Acquisition of EveryWare Development Inc.

Our failure to successfully address the risks associated with our acquisition
of EveryWare Development Inc. of Toronto, Canada and the management of this
office could have a material adverse affect on our business, operating results
and financial condition. We acquired EveryWare in November 1998. The success of
this acquisition will depend on our continued ability to:

. Successfully manage EveryWare's operations, which are based in Canada;

. Retain EveryWare's software developers; and

. Implement our business strategy.

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

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

We Have Significant Product Concentration

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

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

We believe that developing and maintaining awareness of the "Pervasive" and
"Tango" brand names is critical to achieving widespread acceptance of our
products. The importance of brand recognition will increase as competition in
the market for Web-based development and deployment products increases. A key
element of our business strategy is to commit significant resources to promote
our brands. We have not obtained a United States registration for all of these
names, and we are aware of other companies that use the word "Pervasive" or
"Tango" either in their marks alone or in combination with other words. We
expect that it may be difficult or impossible to prevent third-party usage of
these names and variations of these names for competing goods and services.
Competitors or others that use marks that are similar to our brand names may
cause confusion among actual and potential customers, which could prevent us
from achieving significant brand recognition. If we fail to promote and

16

maintain our brands or incur significant related expenses, our business,
operating results and financial condition could be materially adversely
affected.

A Small Number of Distributors Account For a Significant Percentage of Our
Revenues

The loss of a major distributor or any reduction in orders by such
distributor, including reductions due to market or competitive conditions,
combined with the inability to replace the distributor on a timely basis, could
materially adversely affect our business, operating results and financial
condition. Many of our independent software vendors, value-added resellers and
end users place their orders through distributors. A relatively small number of
distributors have accounted for a significant percentage of our revenues. In the
year ended June 30, 1999, one distributor accounted for 12% of revenues, and in
the year ended June 30, 1998, a second distributor accounted for 10% of
revenues. We expect that we will continue to be dependent upon a limited number
of distributors for a significant portion of our revenues in future periods.
Moreover, we expect that such distributors will vary from period to period. Our
distributors have not agreed to any minimum order requirements. Although we
forecast demand and plan accordingly, if a distributor purchases excess product,
we may be obligated to accept the return of some products.

We Depend on Our Indirect Sales Channel

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

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

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

. Our failure to adequately support the sales channel; and

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

We cannot be certain that we will be able to continue to attract additional
indirect channel partners or retain our current partners. In addition, we cannot
be certain that our competitors will not attempt to recruit certain of our
current or future partners.

We May Not Be Able to Develop Strategic Relationships

Our current collaborative relationships may not prove to be beneficial to us,
and they may not be sustained. In addition, market acceptance of new product
releases, including our recently announced Pervasive.SQL 2000 for smart cards,
hand-held computers and nomadic devices, may be substantially dependent on
strategic relationships with device manufacturers. We may not be able to enter
into successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Schlumberger, Oracle, Red Hat, Wind River, IBM, Novell, Apple and
Macromedia, in areas such as product development, marketing, distribution and
implementation. Maintaining these and other relationships is a meaningful part
of our business strategy. However, many of our current and potential strategic
partners are either actual or potential competitors with us. In addition, many
of our current relationships are informal or, if written, terminable with little
or no notice.

17

We Depend on Third-Party Technology in Our Products

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

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

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

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

We Must Adapt to Rapid Technological Change

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

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

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

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

18

We May be Affected by Unexpected Year 2000 Problems

We are subject to potential "Year 2000" problems affecting our products, our
internal systems and the systems of our vendors and distributors, any of which
could have a material adverse effect on our business, operating results and
financial condition. Many existing computer systems and software products do not
properly recognize dates after December 31, 1999. This "Year 2000" problem could
result in miscalculations, data corruption, system failures or disruptions of
operations.

The latest versions of Pervasive.SQL and Btrieve are designed to be Year 2000
compliant. An earlier release of the predecessor to Pervasive.SQL, Scalable SQL
v3.0, and certain other discontinued products were not designed to be Year 2000
compliant; however, the product documentation described how to utilize the
products in a manner that would support four digit date entries. We cannot be
certain that our software products that are designed to be Year 2000 compliant
contain all necessary date code changes. In addition, third-party applications
in which our products are embedded, or for which our products are separately
licensed, may not comply with Year 2000 requirements, which may have an adverse
impact on demand for our products. As a result, we may incur increased expenses
and lose customers to competing products.

Tango, when installed alone, does not involve data storage. Thus, the ability
of a Web-based application built with Tango to comply with Year 2000
requirements is largely dependent on whether the database underlying the
application is Year 2000 compliant. Therefore, we cannot ensure that Web-based
applications developed using our products will comply with Year 2000
requirements. For example, if Tango, when installed alone, is connected to a
database that is not Year 2000 compliant, the information received by a Tango
application may be incorrect.

Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced funds available for our products.

In addition, there can be no assurance that Year 2000 errors or defects will
not be discovered in our internal software systems and, if such errors or
defects are discovered, there can be no assurance that the costs of making such
systems Year 2000 compliant will not be material.

Year 2000 errors or defects in the internal systems maintained by our vendors
or distributors could require us to incur significant unanticipated expenses to
remedy any problems or replace affected vendors and could reduce our revenue
from our distribution channel.

Our Software May Contain Undetected Errors

Errors or defects in our products may result in loss of revenues or delay in
market acceptance, and could materially adversely affect our business, operating
results and financial condition. Software products such as ours may contain
errors or defects, sometimes called "bugs," particularly when first introduced
or when new versions or enhancements are released. In the past, we have
discovered software errors in certain of our new products after their
introduction. Despite our testing, current versions, new versions or
enhancements of our products may still have defects and errors after
commencement of commercial shipments.

We May Become Subject to Product Liability Claims

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

We Compete with Microsoft while Simultaneously Supporting Microsoft Technologies

We currently compete with Microsoft in the market for data management and Web
development and deployment products while simultaneously maintaining a working
relationship with Microsoft. Microsoft has a

19

longer operating history, a larger installed base of customers and substantially
greater financial, distribution, marketing and technical resources than the
Company. As a result, we may not be able to compete effectively with Microsoft
now or in the future, and our business, operating results and financial
condition may be materially adversely affected.

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

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

We Face Significant Competition From Other Companies

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

The Web development and deployment market is an emerging, intensely
competitive environment, subject to rapidly changing products and new market
participants. The market is also undergoing tremendous consolidation, which
could result in the creation of a relatively few dominant players. In the last
two years, Netscape acquired Kiva Software, Sun Microsystems acquired
NetDynamics and BEA Systems acquired WebLogic. Oracle, Microsoft and IBM have
each entered the Web development and deployment market with internally developed
solutions. The primary competitor for Tango is Allaire's Cold Fusion product.
Additional competitors include Silverstream, HAHT Software, and Bluestone.
Another set of competitors could arise as traditional online transaction
processing and database vendors expand their application server solutions to
include Web-based application development software. We believe that, given the
projected size of the market and strong trend towards distributed computing, it
is likely that additional competitors may enter the market. This could lead to
intense pricing pressure, particularly on front-end development tools, and
result in higher research and development costs to compete on a feature-for-
feature basis.

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

20

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

We have derived substantially all of our historical revenues from the use of
our products in client/server applications. We expect to rely on continued
market demand for client/server applications indefinitely. Although the market
for client/server applications has been growing in recent years, other
application platforms are emerging. In particular, we may see market demand
shift from client/server applications to Web-based applications. This shift may
occur before our Web-based product line achieves market acceptance. In addition,
we cannot be certain that should such a platform shift occur, developers of Web-
based applications would select our Web-based products. Further, this shift may
result in a change in revenue models from licensing of client/server and web-
based applications to renting of applications from application service
providers. A decrease in client/server application sales coupled with an
inability to derive revenues from the Web-based application market could have a
material adverse effect on our business, operating results and financial
condition.

We Increasingly Depend on the Growth of International Sales and Operations

We anticipate that for the foreseeable future we will derive a significant
portion of our revenues from sources outside North America. In fiscal 1999, we
derived 43% of our revenues outside North America. Our international operations
are generally subject to a number of risks. These risks include:

. Costs of translating and localizing products for foreign languages;

. Foreign laws and business practices favoring local competition;

. Dependence on local channel partners;

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

. Longer sales cycles;

. Greater difficulty or delay in collecting payments from customers;

. Difficulties in staffing and managing foreign operations;

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

. Increased tax rates in certain foreign countries;

. Difficulties with financial reporting in foreign countries;

. Quality control of certain development activities; and

. Political and economic instability.

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

We expect that planned expansion of international operations will lead to
increased financial and administrative demands on us and our management,
including increased operational complexity associated with expanded facilities,
administrative burdens associated with managing an increasing number of
relationships with foreign partners and expanded treasury functions to manage
foreign currency risks.

21

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

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

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

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

Our Executive Officers and Directors' Substantial Influence Over Stockholder
Voting

As of June 30, 1999, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 31% of
our outstanding common stock. These stockholders may be able to exercise
substantial influence over matters requiring approval by our stockholders, such
as the election of directors and approval of significant corporate transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control of our Company.

We Have Anti-Takeover Provisions

The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including provisions:
authorizing the issuance of "blank check" preferred stock; establishing advance
notice requirements for stockholder nominations for elections to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings; eliminating the ability of stockholders to act by written consent;
requiring super-majority voting to approve certain amendments to the Restated
Certificate of Incorporation; limiting the persons who may call special meetings
of stockholders; and providing for a Board of Directors with staggered, three-
year terms. In addition, certain provisions of Delaware law and the Company's
1997 Stock Incentive Plan (the "1997 Plan") may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.

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

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

22

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

ITEM 2. PROPERTIES

In October 1998 we moved our headquarters to a new facility in Austin, Texas
of approximately 70,000 square feet. The new facility provides additional space
and expansion options at rental rates per square foot consistent with our
previous facility. This new facility is leased through September 2008. We
currently lease other domestic offices in California, Illinois, Massachusetts
and Tennessee, as well as international offices in Toronto, Frankfurt, Paris,
Brussels, Dublin, London, Hong Kong and Tokyo. We continue to be obligated under
two leases for our prior headquarters facility in Austin, Texas. We have leased
all space in our prior facility to two subtenants. The first lease and
corresponding sublease expires in August 2000, and the second lease and
corresponding sublease expires in December 2000.

ITEM 3. LEGAL PROCEEDINGS

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

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

The Company did not submit any matters to a vote of security holders during
the fiscal year ended June 30, 1999.

23

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the biographical summaries of the executive officers of
the Company as of September 28 1999:

The executive officers and directors of the Company, and their ages as of
September 28, 1999, are as follows:

Name Age Position
- ------------------------------ ------- ----------------------------------------------------------

Ron R. Harris................ 46 President, Chief Executive Officer and Director
James R. Offerdahl........... 43 Chief Operating Officer and Chief Financial Officer
Ramon D. Acosta, Ph.D........ 40 Vice President, Development
Robert M. Arn, Ph.D.......... 57 Vice President, Advanced Technology
Scott J. Bleakley............ 43 Senior Vice President, Corporate Strategy & Development
John E. Farr................. 39 Vice President, Finance
Casey G. A. Leaman........... 52 Vice President, Worldwide Sales
Marcus D. Marshall........... 47 Vice President, Professional Services and Training
B. Hayden Stewart............ 40 Vice President, Customer Engineering

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

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

Ramon D. Acosta, Ph.D., has served as our Vice President, Development since
December 1998. Previously, Dr. Acosta served as Director of Desktop and Server
Products from June 1997 to November 1998, and as Engineering Project Manager
from October 1995 to May 1997. Prior to joining us in 1995, Dr. Acosta held
research, development and management positions with Scientific and Engineering
Software, a system simulation company, International Software Systems
Incorporated, a software development company and integrated systems solution
provider, and Microelectronics and Computer Technology Corporation, a high
technology consortium and small company incubator. Dr. Acosta received a B.S. in
Computer and Systems Engineering from Renssalaer Polytechnic Institute and an
M.S. and Ph.D. in Electrical Engineering from Cornell University.

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

Scott J. Bleakley has served as our Senior Vice President, Corporate Strategy
and Development since July 1999. He also served as our Vice President,
Marketing from December 1998 to June 1999 and served as Vice

24

President, Corporate Development from April 1998 to December 1998. Prior to
joining us, Mr. Bleakley served as Vice President of Business Development of
Tivoli Systems, Inc. Prior to Tivoli, Mr. Bleakley served in a number of
positions at IBM over a 6 year period where he most recently served as the Sales
Operations Executive for the RS/6000 product line in the U.S. and Canada. Mr.
Bleakley received a B.A. in Economics from Ohio Wesleyan University and an
M.B.A. from Miami University.

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

Casey G. A. Leaman has served as our Vice President, Worldwide Sales since
January 1998. Previously, Mr. Leaman served as Vice President, International
Sales from February 1997 to January 1998. Prior to joining us, Mr. Leaman served
as Vice President of International Sales of CenterLine Software, Inc., a
developer of compilers and software testing tools, from October 1995 to October
1996. Prior to that time, Mr. Leaman served as a director of Kanishka Systems
PTE Ltd. (Singapore), a developer of document management software, from March
1994 to May 1995 and as President and Chief Operating Officer from January 1995
to May 1995. From August 1992 to January 1994, Mr. Leaman served as Regional
Managing Director-Asia for a division of ASK Computer Systems Inc., a software
developer. Mr. Leaman received a B.S. in Agricultural Business Management from
Penn State University and an M.S. in Agricultural Economics from Purdue
University.

Marcus D. Marshall has served as our Vice President, Professional Services
and Training, since July 1999. Mr. Marshall served as our Vice President,
Customer Engineering, from May 1997 to July 1999. He served as our Vice
President, Development, from November 1995 to May 1997 and as Vice President,
Engineering and Technical Support, from June 1995 to November 1995. Prior to
joining us, Mr. Marshall served as Director of Engineering (U.S.) of Computer
Resources International, a developer of software engineering environments, from
February 1994 to June 1995. From November 1991 to February 1994, Mr. Marshall
served as Vice President of Development of International Software Systems, Inc.,
a developer of software engineering environments and software productivity
enhancement tools. Mr. Marshall received a B.S. and an M.S. in Electrical
Engineering from Rice University.

B. Hayden Stewart has served as our Vice President, Customer Engineering,
since July 1999. He served as our Director of Information Systems from
September 1997 to July 1999. Prior to joining Pervasive, Mr. Stewart served as
Director of Applications at Tivoli Systems from January 1997 to September 1997.
From October 1994 to January 1997, Mr. Stewart served as Customer Contact
Manager for Intel Corporation. From February 1994 to October 1994, he served as
Applications Development Manager at Tivoli Systems. Prior to that, from March
1988 to January 1994, Mr. Stewart served in various positions at Dell Computer
Corporation.

25

PART II

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

The common stock of the Company is traded on the Nasdaq National Market under
the symbol PVSW. The Company completed its initial public offering and commenced
trading on September 26, 1997. The following tables set forth the high and low
closing sales prices of the Company's common stock from September 26, 1997 to
June 30, 1999.

Fiscal 1998 High Low
- --------------------------------- ------------------- ------------------
First Quarter* $11.63 $11.00
Second Quarter $11.50 $ 7.00
Third Quarter $14.63 $ 6.75
Fourth Quarter $14.50 $10.38

*Commencing September 26, 1997

Fiscal 1999 High Low
- --------------------------------- ------------------- ------------------
First Quarter $12.75 $ 7.50
Second Quarter $19.25 $ 7.13
Third Quarter $21.00 $16.00
Fourth Quarter $24.88 $13.31

As of September 24, 1999, there were approximately 137 stockholders of record
(which number does not include the number of stockholders whose shares are held
by a brokerage house or clearing agency, but does include such brokerage house
or clearing agency as one record holder). The company believes it has in excess
of 2,800 beneficial owners of its common stock.

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

26

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this Form 10-K. The consolidated
statements of operations data for the fiscal years ended June 30, 1997, 1998 and
1999 and the consolidated balance sheet data at June 30, 1998 and 1999 are
derived from audited consolidated financial statements included elsewhere in
this Form 10-K. The consolidated statements of operations data for the periods
ended June 30, 1995 and 1996 and the consolidated balance sheet data at June 30,
1995, 1996 and 1997 are derived from audited consolidated financial statements
not included herein.

Year Ended June 30,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------------------
(in thousands, except per share data)

Consolidated Statements of Operations Data:
Revenues .......................................... $8,601 $13,476 $24,481 $36,700 $59,407
Costs and expenses:
Cost of revenues and technical support............. 1,997 2,605 3,310 5,292 8,814
Sales and marketing .............................. 3,864 6,998 10,034 15,438 22,899
Research and development ......................... 2,399 4,477 5,996 9,556 15,123
General and administrative ....................... 996 2,505 2,886 3,057 4,851
Amortization of excess of cost over
fair value of net assets acquired.................. -- -- -- 13 710
Charge for purchased research and development...... -- -- -- -- 1,800
--------- ---------- ---------- ---------- ---------
Total costs and expenses............................ 9,256 16,585 22,226 33,356 54,197
--------- ---------- ---------- ---------- ---------

Operating income (loss)............................. (655) (3,109) 2,255 3,344 5,210
Interest and other income.......................... 86 99 55 573 825
Provision for income taxes......................... (129) (170) (593) (1,101) (2,421)
Minority interest in (earnings) loss
of subsidiary...................................... 89 (25) (127) (94) (36)
--------- ---------- ---------- ---------- ---------
Net income (loss) .................................. $ (609) $(3,205) $ 1,590 $ 2,722 $ 3,578
--------- ---------- ---------- ---------- ---------
Basic earnings per share............................ $ (305) $(1,603) $ 1.90 $ 0.26 $ 0.26
--------- ---------- ---------- ---------- ---------
Diluted earnings per share.......................... $ -- $ -- $ 0.12 $ 0.18 $ 0.22
--------- ---------- ---------- ---------- ---------
Shares used in computing basic earnings per share... 2 2 835 10,468 13,960
--------- ---------- ---------- ---------- ---------
Shares used in computing diluted earnings per share. -- -- 13,080 14,741 15,998
--------- ---------- ---------- ---------- ---------

Supplemental Operations Data:
Operating income (loss), excluding certain charges*. $ (655) $(3,109) $ 2,255 $ 3,344 7,720
--------- ---------- ---------- ---------- ---------

Net income (loss), excluding certain charges*....... $ (609) $(3,205) $ 1,590 $ 2,722 $ 6,088
--------- ---------- ---------- ---------- ---------
Diluted earnings per share, excluding certain
charges*........................................... $ -- $ -- $ 0.12 $ 0.18 $ 0.38
--------- ---------- ---------- ---------- ---------

______________________
* Amounts for the year ended June 30, 1999 exclude a charge for purchased
research and development of $1.8 million and amortization of excess of cost
over fair value of net assets acquired of $710,000, which combined have the
effect of $0.16 per diluted share.

June 30,
----------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------

(in thousands)
Consolidated Balance Sheet Data:
Working capital......................................... $5,740 $ 1,768 $ 1,560 $19,815 $40,461
Total assets............................................ 8,480 7,471 10,445 32,643 72,873
Long-term liabilities, net of current portion........... 1,006 621 -- -- 565
Redeemable convertible preferred stock.................. 4,026 4,026 4,026 -- --
Total stockholders' equity (deficit).................... 1,061 (2,083 ) (394 ) 23,979 59,086

27

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

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

Overview

Pervasive Software Inc. is a leading provider of application development and
deployment software that dramatically simplifies the development, deployment and
maintenance of Web-based and client/server applications. Our comprehensive,
integrated suite of software products includes development and deployment
products, and high performance zero administration databases, combined, these
products offer a unique solution that simplifies the development, deployment and
maintenance of Web-based and client/server applications and lowers the cost of
ownership of Web-based and client/server distributed computing environments. Our
business model leverages a channel of software developers, application service
providers, Web and systems integrators, and value-added resellers around the
world.

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

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

Historically, we have derived substantially all of our revenues from our
Pervasive.SQL and Btrieve data management products. On June 30, 1999, we
discontinued general availability of our Btrieve products to consolidate our
development, marketing and technical support resources behind our current Tango
and Pervasive.SQL products. Accordingly, we expect that our revenue from the
license of Tango and Pervasi