PERVASIVE SOFTWARE INC, 424B4, 1997-09-26

PERVASIVE SOFTWARE INC
424B4, 1997-09-26
PREPACKAGED SOFTWARE

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Filed pursuant to Rule 424(b)(4)
SEC File No. 333-32199

PERVASIVE SOFTWARE

4,000,000 SHARES

COMMON STOCK

Of the 4,000,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by Pervasive Software Inc. ("Pervasive" or the "Company") and
2,000,000 shares are being sold by the Selling Stockholders. See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. Prior to this offering,
there has been no public market for the Common Stock of the Company. See
"Underwriting" for information relating to the method of determining the
initial public offering price.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................... $10.00 $0.70 $9.30 $9.30
- --------------------------------------------------------------------------------
Total(2)..................... $40,000,000 $2,800,000 $18,600,000 $18,600,000
- --------------------------------------------------------------------------------
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</TABLE>
(1) Before deducting expenses payable by the Company estimated at $1,150,000.
(2) The Selling Stockholders have granted to the Underwriters a 30-day option
to purchase up to an additional 600,000 shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Selling Stockholders will be $46,000,000,
$3,220,000 and $24,180,000, respectively.

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

The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about October 1, 1997.

ROBERTSON, STEPHENS & COMPANY

UBS SECURITIES

FIRST ALBANY CORPORATION

The date of this Prospectus is September 25, 1997
<PAGE>

Embedded Database for Packaged Applications

[Graphic of shrinkwrap packaged application software boxes labeled Accounting,
Document Imaging, Sales Force Automation, Network Administration and
Manufacturing, with colored cross sections graphically illustrating how each
application consists of a client/server database engine, application code and
a graphical user interface.]

Pervasive Software's Btrieve and Scalable SQL database engines form the
foundation for many of the industry's leading packaged applications.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

<PAGE>

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

UNTIL OCTOBER 20, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 26
Management............................................................... 38
Certain Transactions..................................................... 46
Principal and Selling Stockholders....................................... 48
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 56
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by its independent public
accountants and quarterly reports containing unaudited financial statements
for each of the first three quarters of each fiscal year.

Pervasive Software, Scalable SQL, MicroKernel Database Architecture and
MicroKernel Database Engine are trademarks of the Company and Btrieve is a
registered trademark of the Company. Trade names, service marks or trademarks
of other companies appearing in this Prospectus are the property of their
respective holders.

The Company was incorporated in Delaware in January 1994 under the name
Btrieve Technologies, Inc. and changed its name to Pervasive Software Inc. in
June 1996. The Company's principal executive offices are located at 8834
Capital of Texas Highway, Austin, Texas 78759, and its telephone number is
(512) 794-1719. Unless otherwise indicated, all references in this Prospectus
to "Pervasive" or the "Company" refer to Pervasive Software Inc. and its
subsidiaries.

3
<PAGE>

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors."

THE COMPANY

Pervasive is a leading provider of embedded database software designed to
enable the cost-effective development, deployment and support of low-
maintenance, packaged client/server applications. The Company's database
engines, Btrieve and Scalable SQL, are well suited for integration by software
developers into business-critical applications that are reliable and scalable
and can be rapidly deployed. These products enable independent software vendors
("ISVs") and value added resellers ("VARs") to develop, deploy and support
packaged client/server applications that provide robust functionality and low
overall cost of ownership to end users. In addition, the Company's
comprehensive approach to selling, marketing and supporting its products is
designed to address the specific needs of ISVs, VARs, in-house development
organizations and their end users.

Organizations are increasingly recognizing the importance of collecting,
analyzing and disseminating information to obtain competitive advantage. This
information is increasingly generated by sophisticated client/server
applications and managed by underlying database software that allow for
decentralized decision making and broader access to critical business
information. However, client/server computing environments are inherently
complex, typically involving a variety of hardware, operating systems,
networking protocols, applications and database software. As a result of this
complexity, large and costly information technology departments, typically
found in large organizations, are required to develop, deploy and support
client/server applications built on enterprise-scale database software.

Many small and mid-sized organizations, including departments of large
organizations, also face competitive pressures to achieve the benefits
associated with client/server computing. These organizations typically do not
have the information technology budgets, infrastructure, personnel or computing
expertise required to deploy and support client/server applications built on
enterprise-scale database software and consequently have been slow to adopt
client/server computing environments. Because of the relatively low penetration
of client/server applications in small and mid-sized organizations, ISVs and
VARs have a significant market opportunity to develop, deploy and support
packaged client/server applications that meet their customers' robust
functionality needs and run in environments that often lack a well developed
information technology infrastucture. Accordingly, there is a need for
reliable, high-performance, low-maintenance database software that enables ISVs
and VARs to cost-effectively develop, deploy and support robust client/server
applications targeted at small and mid-sized organizations and departments of
larger organizations.

The Company's sales and marketing organization focuses exclusively on
indirect channels by targeting ISVs that build packaged client/server
applications and VARs that sell and deploy the applications. The Company's
sales, marketing, training and licensing programs are designed to encourage
ISVs to embed the Company's databases into their own software products and to
stimulate the sales of the applications by VARs to end users. The Company
believes its strong relationships with ISVs and VARs provide the Company with
market visibility and multiple sales opportunities and offer end users
additional sources of service and technical support.

4
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THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company........... 2,000,000 shares
Common Stock Offered by the Selling Stockhold-
ers.......................................... 2,000,000 shares
Common Stock to be Outstanding after the Of-
fering....................................... 13,104,743 shares(1)
Use of Proceeds............................... For working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................. PVSW
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
PRO
ACTUAL FORMA(3) AS ADJUSTED(4)
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<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................ $ 1,560 $ 1,560 $19,010
Total assets................................... 10,445 10,445 27,895
Redeemable convertible preferred stock......... 4,026 -- --
Total stockholders' equity (deficit)........... (394) 3,632 21,082
</TABLE>
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(1) Based on the number of shares outstanding as of June 30, 1997. Excludes
2,259,697 shares subject to outstanding options as of June 30, 1997 at a
weighted exercise price of $0.59 per share; and 1,168,914 shares reserved
for issuance under the Company's stock plans. See "Management--1997 Stock
Incentive Plan," "--Employee Stock Purchase Plan" and Note 6 of Notes to
Consolidated Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing pro
forma net income per share.
(3) Reflects the conversion of outstanding Preferred Stock into Common Stock
upon the completion of the offering.
(4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company at the initial public offering price of $10.00 per share and the
application of the estimated net proceeds. See "Use of Proceeds" and
"Capitalization."

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

Unless otherwise indicated, the information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option and (ii) except in the
Consolidated Financial Statements, reflects the conversion of all outstanding
shares of Preferred Stock into Common Stock upon completion of the offering.

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Prospectus.

5
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; MARGINAL PROFITABILITY; FUTURE OPERATING RESULTS
UNCERTAIN

The Company was founded in January 1994. Accordingly, the Company's
prospects must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments,
continue to attract, retain and motivate qualified personnel and continue to
improve its products. Although the Company has been profitable for the five
most recent fiscal quarters, this profitability has been marginal and, except
for the quarters ended September 30, 1994 and December 31, 1994, the Company
incurred net losses in each quarter from inception through the quarter ended
March 31, 1996 and as of June 30, 1997, the Company had an accumulated deficit
of approximately $4.5 million. The Company's operating losses and marginal
profitability have been due in part to the commitment of significant resources
to the Company's technical support, research and development and sales and
marketing organizations. The Company expects to continue to devote substantial
resources to these areas and as a result will need to recognize significant
quarterly revenues to maintain profitability. In particular, the Company
intends to hire a significant number of sales and research and development
personnel in fiscal 1998 and beyond, which the Company believes is required if
the Company is to achieve significant revenue growth in the future. Although
the Company's revenues have increased in recent periods, there can be no
assurance that the Company's revenues will grow in future periods, that they
will grow at past rates or that the Company will remain profitable on a
quarterly or annual basis in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS; SEASONALITY

The Company's quarterly revenues, expenses and operating results have varied
significantly in the past and are likely to vary significantly in the future
due to a variety of factors, such as demand for the Company's products, the
size and timing of significant orders and their fulfillment, the number,
timing and significance of product enhancements and new product announcements
by the Company and its competitors, changes in pricing policies by the Company
or its competitors, customer order deferrals in anticipation of enhancements
or new products offered by the Company or its competitors, the ability of the
Company to develop, introduce and market new and enhanced versions of its
products on a timely basis, changes in the Company's level of operating
expenses, budgeting cycles of its customers, product life cycles, software
defects and other product quality problems, the Company's ability to attract
and retain qualified personnel, changes in the Company's sales incentive
plans, changes in the mix of domestic and international revenues, the level of
international expansion, foreign currency exchange rate fluctuations,
performance of indirect channel partners, changes in the mix of indirect
channels through which the Company's products are offered, the impact of
acquisitions of competitors and indirect channel partners, the Company's
ability to control costs and general domestic and international economic and
political conditions. The Company operates with virtually no order backlog
because its software products are shipped shortly after orders are received,
which 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 unlikely
that the Company will be able to meet its revenue targets for that quarter. In
addition, the Company is substantially reliant upon indirect sales channels
over which the Company has little or no control. Moreover, the Company's
expense levels are based to a significant extent on the Company's expectations
of future revenues and therefore are relatively fixed in the short term. If
revenue levels are below expectations, operating results are likely to be
adversely and disproportionately affected because only a small portion of the
Company's expenses vary with its revenues.

6
<PAGE>

The Company's business has experienced and is expected to continue to
experience seasonality, largely due to customer buying patterns. In recent
years, the Company has had relatively stronger demand for its products during
the quarters ending December 31 and June 30 and demand has been relatively
weaker in the quarters ending March 31 and September 30. The Company believes
that this pattern will continue. To the extent future international operations
constitute a greater percentage of the Company's revenues, the Company
anticipates that the weaker demand in the quarter ending September 30 could be
even more pronounced as a result of reduced sales activity in Europe and Japan
during the summer months.

Based upon all of the factors described above, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its
operating results are not necessarily meaningful and that, in any event, such
comparisons should not be relied upon as indications of future performance.
The Company has limited ability to forecast future revenues, and it is likely
that in some future quarter the Company's operating results will be below the
expectations of public securities analysts and investors. In the event that
operating results are below expectations, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to
the Company's business, the price of the Company's Common Stock would likely
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

DEPENDENCE ON INDIRECT SALES CHANNEL; DISTRIBUTOR CONCENTRATION

The Company derives substantially all of its revenues from its indirect
sales channel, consisting of ISVs, VARs, system integrators, consultants and
distributors. The Company has invested, and intends to continue to invest,
significant resources to develop this channel, which could adversely affect
the Company's operating margins. There can be no assurance that the Company
will be able to attract additional indirect channel partners that will be able
to market and support the Company's products. In addition, many of the
Company's indirect channel partners offer competing product lines. Therefore,
there can be no assurance that any of the Company's current indirect channel
partners will continue to represent or recommend the Company's products.
Further, the inability to recruit new indirect channel partners, or the loss
of, or a significant reduction in revenues from, any particular indirect
channel partner could materially adversely affect the Company's business,
operating results and financial condition.

Some of the Company's ISVs, VARs and end users place their orders through
distributors. A relatively small number of distributors have accounted for a
significant percentage of the Company's revenues. In fiscal 1996 and 1997, two
distributors accounted for 27% and 29% of revenues, respectively. In
particular, Tech Data Corporation, a U.S. distributor, accounted for 9% and
19% of revenues in fiscal 1996 and 1997, respectively, and AG Tech Corporation
("AG Tech"), a Japanese distributor, accounted for 18% and 10% of revenues in
fiscal 1996 and 1997, respectively. The Company expects that it will continue
to be dependent upon a limited number of distributors for a significant
portion of its revenues in future periods, and such distributors are expected
to vary from period to period. 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 have a material adverse effect on the Company's
business, operating results and financial condition. The Company's operating
results may in the future be subject to substantial period-to-period
fluctuations as a consequence of such distributor concentration. See
"Business--Sales and Marketing."

SIGNIFICANT COMPETITION

The market for the Company's products is intensely competitive and subject
to rapid change. The Company primarily encounters competition from large,
public companies, including Microsoft Corporation ("Microsoft"), Oracle
Corporation ("Oracle"), Informix Corporation ("Informix"), Sybase, Inc.
("Sybase") and International Business Machines Corporation ("IBM"). Each of
these companies offers database software

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products competitive with the Company's products. In particular, Sybase offers
a small memory footprint database software product, SQL Anywhere, which
directly competes with the Company's Scalable SQL product. In addition,
because there are relatively low barriers to entry in the software market, the
Company may encounter additional competition from other established and
emerging companies. Most of the Company's competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than the Company, significantly greater name recognition and a large
installed base of customers. As a result, the Company's 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 can the Company. There is
also a substantial risk that announcements of competing products by large
competitors such as Microsoft or Oracle 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
the Company's ability to sell its products through particular distribution
partners. Accordingly, new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share. The Company
also expects 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 the Company. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors or that the competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.

RELIANCE ON INSTALLED BASE

In connection with the acquisition of certain software and related
technology from Novell in April 1994, the Company entered into a license
agreement permitting, among other things, the then-current version of Btrieve
to be reproduced and distributed on a royalty-free basis as part of or
together with current and future versions of any Novell products, including
Novell's NetWare operating system ("NetWare"). The Company derives significant
revenues from upgrade sales into the NetWare installed base and sales of the
Company's software operating on NetWare represented approximately 60% of the
Company's revenues in fiscal 1997. As a result, sales of the Company's
products have been and will continue to be influenced by the market acceptance
of NetWare. NetWare faces substantial competition from other operating
systems, including Microsoft's Windows NT, which the Company believes has a
large and growing share of the worldwide market for client/server operating
systems. If sales of NetWare decrease, Novell discontinues NetWare or
discontinues bundling Btrieve with NetWare or if ISVs, VARs or their end users
migrate to competing client/server operating system platforms, and the Company
is not able to substantially increase sales of its products that run on
competing client/server operating systems, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Strategy."

PRODUCT CONCENTRATION

Substantially all of the Company's revenues to date have been attributable
to the sale and license of its Btrieve and Scalable SQL products, and these
products are currently expected to account for substantially all of the
Company's revenues for the foreseeable future. The Company's future operating
results are dependent upon continued market acceptance of its Btrieve and
Scalable SQL products and enhancements to these products. Consequently, a
decline in the demand for, or market acceptance of, the Company's Btrieve and
Scalable SQL products as a result of competition, technological change or
other factors, would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Products."

DEPENDENCE ON CONTINUED GROWTH OF THE MARKET FOR CLIENT/SERVER APPLICATIONS
AND EMBEDDED DATABASES

Although demand for client/server applications and embedded databases has
grown in recent years, this market is still emerging and there can be no
assurance that it will continue to grow or that, even if the market

8
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does grow, organizations will continue to adopt the Company's products. The
Company has spent, and intends to continue to spend, considerable resources
educating potential customers about the Company's embedded database products
and the packaged client/server applications market generally. However, there
can be no assurance that such expenditures will enable the Company's products
to achieve any additional degree of market acceptance. The rate at which
organizations have adopted the Company's products has varied significantly by
market and by product within each market, and the Company expects to continue
to experience such variations with respect to its target markets and products
in the future. There can be no assurance that the market for the Company's
products will continue to develop or that the Company's products will be
widely accepted. Additionally, there can be no assurance that the market for
client/server and other applications in which the Company's products are
embedded will continue to grow. If the markets for the Company's products or
the applications in which they are embedded fail to develop, or develop more
slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially adversely
affected. See "Business--Industry Background," "--Products" and "--Sales and
Marketing."

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS

The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to continue to enhance its 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. As
a result of the complexities inherent in client/server computing environments
and the performance demanded by customers for embedded databases, 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 the Company's business,
operating results and financial condition. The Company has experienced delays
in the past in the release of new products and new product enhancements. There
can be no assurance that the Company will 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, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction or
marketing of these products or that the Company's new products and product
enhancements will achieve market acceptance. See "Business--Research and
Development."

RISK OF SOFTWARE DEFECTS

Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. The Company has in the past discovered software
errors in certain of its new products after their introduction. There can be
no assurance that, despite testing by the Company, defects and errors will not
be found in current versions, new versions or enhancements of its products
after commencement of commercial shipments, resulting in loss of revenues or
delay in market acceptance, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Research and Development."

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, in less than three years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance. Although the
latest versions of Btrieve and Scalable SQL are

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<PAGE>

designed to be Year 2000 compliant, an earlier release of Scalable SQL is not
Year 2000 compliant. There can be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary
date code changes.

The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues in a variety of ways. Many
companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. Potential customers may also choose to defer
purchasing Year 2000 compliant products until they believe it is absolutely
necessary, thus resulting in potentially stalled market sales within the
industry. Conversely, Year 2000 issues may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a consequent
decrease in long-term demand for software products. Additionally, Year 2000
issues could cause a significant number of companies, including current
Company customers, to reevaluate their current software needs, and as a result
switch to other systems or suppliers. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.

MANAGEMENT OF CHANGING BUSINESS

The Company has recently experienced a period of significant revenue growth
and an expansion in the number of its employees, the scope of its operating
and financial systems and geographic area of its operations. In particular,
the Company had a total of 168 employees at June 30, 1997, as compared to 104
at June 30, 1996. This growth has resulted in new and increased
responsibilities for management and has placed a strain upon the Company's
financial and other resources. The Company expects that planned expansion of
international operations will lead to increased financial and administrative
demands, such as 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. The Company's future operating results will
also depend on its ability to expand its sales and marketing organizations,
further develop its sales channels to penetrate different and broader markets
and expand its support organization to accommodate growth in the Company's
installed base. The failure of the Company to manage its expansion effectively
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Sales and
Marketing" and "Management."

RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS

During fiscal 1995, 1996 and 1997, the Company derived approximately 41%,
43% and 34% of its revenues, respectively, from sales outside North America
with revenues from Japan and Europe, respectively, accounting for 19% and 18%,
18% and 20%, and 12% and 19% of the Company's revenues for these periods. The
Company anticipates that for the foreseeable future a significant portion of
its revenues will be derived from sources outside North America and the
Company intends to continue to expand its sales and support operations
internationally. In order to successfully expand international sales, the
Company must establish additional foreign operations, expand its international
sales channel management and support organizations, hire additional personnel,
customize its products for local markets, recruit additional international
resellers and increase the productivity of existing international resellers.
To the extent that the Company is unable to do so in a timely and cost-
effective manner, the Company's sales growth internationally, if any, will be
limited, and the Company's business, operating results and financial condition
could be materially adversely affected. Even if the Company is able to
successfully expand its international operations there can be no assurance
that the Company will be able to maintain or increase international market
demand for its products. See "Business--Sales and Marketing."

The Company's international operations are generally subject to a number of
risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition,
dependence on local vendors, compliance with multiple, conflicting and
changing government laws and regulations, longer sales cycles, greater
difficulty or delay in accounts receivable collection, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, foreign currency

10
<PAGE>

exchange rate fluctuations, multiple and conflicting tax laws and regulations
and political and economic instability. To date, a majority of the Company's
revenues and costs have been denominated in U.S. dollars. However, the Company
believes that in the future, an increasing portion of the Company's revenues
and costs will be denominated in foreign currencies. Although the Company may
from time to time undertake foreign exchange hedging transactions to reduce
its foreign currency transaction exposure, the Company does not currently
attempt to eliminate all foreign currency transaction exposure. In the event
the Company is able to increase its international sales, its total revenues
may fluctuate to an even greater extent during the quarter ending September 30
due to weaker European and Japanese demand during the summer months. See "--
Operating Results Subject to Significant Fluctuations; Seasonality" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the efforts of
Ron R. Harris, the Company's President and Chief Executive Officer, and other
key management, sales and marketing, technical support and research and
development personnel, none of whom are bound by an employment contract. The
loss of key management or technical personnel could adversely affect the
Company. The Company believes that its future success will depend in large
part upon its continuing ability to attract and retain highly skilled
managerial, sales and marketing, technical support and research and
development personnel. Like other software companies, the Company faces
intense competition for such personnel, and the Company has at times
experienced and continues to experience difficulty in recruiting qualified
personnel. There can be no assurance that the Company will be successful in
attracting, assimilating and retaining additional qualified personnel in the
future. The loss of the services of one or more of the Company's key
individuals, or the failure to attract and retain additional qualified
personnel, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Employees" and
"Management."

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; USE OF
LICENSED TECHNOLOGY

The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company licenses its 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. However, the Company believes that such measures
afford only limited protection. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology
or design around the copyrights and trade secrets owned by the Company.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and although the Company is unable
to determine the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. Embedded software
products, like those offered by the Company, can be especially susceptible to
software piracy. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights as fully as do the laws of the U.S.

The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers increasingly will be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without

11
<PAGE>

merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
either license the infringed or similar technology or develop alternative
technology on a timely basis, the Company's business, operating results and
financial condition could be materially adversely affected.

The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. There
can be no assurance that these third-party software licenses will continue to
be available to the Company 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 the Company's
business, operating results and financial condition.

PRODUCT LIABILITY

Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims, it is possible that such limitation of liability
provisions may not be effective as a result of existing or future laws or
unfavorable judicial decisions. The Company has not experienced any material
product liability claims to date; however, the sale and support of the
Company's products may entail the risks of such claims, which may be
substantial in light of the use of the Company's products in business-critical
applications. A successful product liability claim brought against the Company
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Products."

NO PRIOR TRADING MARKET FOR THE COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
was determined by negotiation among the Company, the Selling Stockholders and
the representatives of the Underwriters, and may not be indicative of the
price that will prevail in the open market. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price.

The market price of the Common Stock is likely to be highly volatile and may
be significantly affected by factors such as actual or anticipated
fluctuations in the Company's revenues and operating results, announcements of
technological innovations, new or enhanced products by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
conditions and trends in the software and other technology industries,
adoption of new accounting standards affecting the software industry, changes
in financial estimates by securities analysts, general market conditions and
other factors. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the securities of technology companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
the company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Underwriting."

CONTROL OF COMPANY BY OFFICERS, DIRECTORS AND FIVE PERCENT STOCKHOLDERS

Upon the consummation of this offering, the executive officers, directors,
five percent or greater stockholders and their affiliates in the aggregate
will beneficially own approximately 64.5% of the outstanding

12
<PAGE>

Common Stock (63.8% if the Underwriters' over-allotment option is exercised in
full). As a result, acting together these stockholders will be able to
exercise effective control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying
or preventing a change in control of the Company. See "Principal and Selling
Stockholders."

ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW

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. See "Management--1997 Stock
Incentive Plan" and "Description of Capital Stock--Preferred Stock" and "--
Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock after the offering
could adversely affect the market price of the Common Stock and could impair
the Company's ability to raise capital through the sale of equity securities.
Upon completion of the offering, the Company will have outstanding 13,104,743
shares of Common Stock, assuming no exercise of options after June 30, 1997.
Of these shares, the 4,000,000 shares offered hereby (4,600,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act
("Rule 144") described below. The remaining 9,104,743 shares of Common Stock
outstanding upon completion of the offering will be "restricted securities" as
that term is defined in Rule 144.

Upon the expiration of lock-up agreements (the "Lock-Up Agreements") between
certain stockholders of the Company (including the Selling Stockholders) and
the representatives of the Underwriters, 180 days after the date of this
Prospectus, 7,715,132 shares will be eligible for sale subject to the timing,
volume and manner of sale restrictions of Rule 144. In addition, upon the
expiration of the lock-up provisions set forth in the stock purchase
agreements used under the 1997 Plan and its predecessor plan (the "Plan Stand-
Off Agreements"), an additional 1,389,611 shares will become eligible for sale
pursuant to Rule 701 under the Securities Act ("Rule 701") beginning 180 days
after the date of this Prospectus subject in certain cases to such shares
becoming eligible for sale from time to time more than 180 days after the date
of this Prospectus as the Company's rights to repurchase such shares expire.
In addition to the foregoing, as of June 30, 1997, there were outstanding
under the 1997 Plan and its predecessor plan options to purchase an aggregate
of 2,259,697 shares of Common Stock. The shares underlying such options will
be eligible for sale upon expiration of the lock-up provisions contained in
the Plan Stand-Off Agreements beginning 180 days after the date of this
Prospectus, subject in certain cases to such shares underlying outstanding
options becoming eligible for sale more than 180 days after the date of this
Prospectus as such options vest. The Company has agreed not to release shares
from the lock-up provisions of the Plan Stand-Off Agreements without the prior
written consent of Robertson, Stephens & Company LLC. The Company intends to
register, within 180 days following this offering, all shares of Common Stock
subject to outstanding options or reserved for issuance under the Company's
stock and option plans. Further, certain stockholders holding approximately
9,713,132 shares of Common Stock are entitled to demand registration of their
shares of Common Stock at the

13
<PAGE>

expiration of the 180-day lock-up period. By exercising their demand
registration rights, such stockholders could cause a large number of
securities to be registered and sold in the public market, which could have an
adverse effect on the market price of the Common Stock. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution. In addition, the Company has issued options to acquire Common Stock
at prices significantly below the initial public offering price. To the extent
such outstanding options are exercised, there will be further dilution. See
"Dilution" and "Shares Eligible for Future Sale."

14
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this offering are estimated to be $17.5 million,
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Stockholders.

The principal purposes of the offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to facilitate future
access by the Company to public equity markets, to provide liquidity for
certain of the Company's existing stockholders and to provide increased
visibility of the Company in a marketplace where many of its competitors are
publicly held companies.

The Company intends to use the proceeds of the offering for working capital
and general corporate purposes. The Company may also use a portion of the net
proceeds for possible acquisition of businesses, products and technologies
that are complementary to those of the Company. Although the Company has not
identified any specific businesses, products or technologies that it may
acquire, nor are there any current agreements or negotiations with respect to
any such transactions, the Company from time to time evaluates such
opportunities. Pending such uses, the Company plans to invest the net proceeds
in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will
be retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's operating results, financial condition and capital requirements,
the terms of then-existing indebtedness, general business conditions and such
other factors as the Board of Directors deems relevant. In addition, the terms
of the Company's current credit facility prohibits the payment of cash
dividends without the lender's consent.

15
<PAGE>

CAPITALIZATION

The following table sets forth the total capitalization of the Company as of
June 30, 1997, (i) on an actual basis, (ii) on a pro forma basis to reflect
the filing of a Restated Certificate of Incorporation and the conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock and
(iii) on such pro forma basis as adjusted to reflect the sale of the shares of
Common Stock offered hereby at the initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term liabilities, net of current portion... $ -- $ -- $ --
Redeemable Convertible Preferred Stock: $0.001
par value, 3,548,281 shares authorized,
3,548,281 shares issued and outstanding, actu-
al; no shares authorized, issued and outstand-
ing, pro forma and as adjusted................. 4,026 -- --
Stockholders' equity:
Convertible Preferred Stock: $0.001 par value,
6,164,851 shares authorized, 6,164,851 shares
issued and outstanding, actual; 5,000,000
shares authorized, no shares issued and
outstanding, pro forma and as adjusted........ 3,915 -- --
Common Stock: $0.001 par value, 15,000,000
shares authorized, 1,391,611 shares issued and
outstanding, actual; 75,000,000 shares
authorized, 11,104,743 shares issued and
outstanding, pro forma; 75,000,000 shares
authorized, 13,104,743 shares issued and
outstanding, as adjusted(1)................... 205 8,146 25,596
Retained deficit............................... (4,514) (4,514) (4,514)
------- ------- -------
Total stockholders' equity (deficit).......... (394) 3,632 21,082
------- ------- -------
Total capitalization........................ $ 3,632 $3,632 $21,082
======= ======= =======
</TABLE>
- --------
(1) Excludes 2,259,697 shares subject to options outstanding as of June 30,
1997 at a weighted exercise price of $0.59 per share; and 1,168,914 shares
reserved for issuance under the Company's stock plans. See "Management--
1997 Stock Incentive Plan," "--Employee Stock Purchase Plan" and Note 6 of
Notes to Consolidated Financial Statements.

16
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1997,
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of this offering, was $3.6 million, or
approximately $0.33 per share. "Pro forma net tangible book value" per share
represents the amount of total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock outstanding on an
as-converted basis. The pro forma net tangible book value of the Company as of
June 30, 1997 would have been $21.1 million, or $1.61 per share after giving
effect to the conversion of the Preferred Stock and the sale of 2,000,000
shares of Common Stock offered by the Company in this offering at the initial
public offering price of $10.00 per share and the application of the estimated
net proceeds therefrom. This represents an immediate increase in pro forma net
tangible book value of $1.28 per share to existing stockholders and an
immediate dilution of $8.39 per share to investors purchasing shares of Common
Stock in the offering. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price ................................ $10.00
Pro forma net tangible book value as of June 30, 1997....... $0.33
Increase attributable to new investors...................... 1.28
-----
Adjusted pro forma net tangible book value as of June 30,
1997......................................................... 1.61
------
Dilution to new investors..................................... $ 8.39
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors (before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company) at the initial public offering price of $10.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 11,104,743 84.7% $ 8,146,000(1) 28.9% $ 0.73
New investors(2)........ 2,000,000 15.3 20,000,000 71.1 10.00
---------- ----- ----------- -----
Totals................ 13,104,743 100.0% $28,146,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes $1.5 million of non-cash consideration attributable to certain
assets transferred by Novell to the Company.
(2) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 9,104,743, or 69.5% (8,504,743,
or 64.9%, if the Underwriters' over-allotment option is exercised in
full), and will increase the number of shares held by new investors to
4,000,000, or 30.5% (4,600,000, or 35.1%, if the Underwriters' over-
allotment option is exercised in full), of the total number of shares of
Common Stock outstanding after this offering. See "Principal and Selling
Stockholders."

As of June 30, 1997, there were 2,259,697 shares subject to options
outstanding at a weighted exercise price of $0.59 per share; and an additional
1,168,914 shares were reserved for issuance under the Company's stock plans.
To the extent outstanding options are exercised, there will be further
dilution to new investors. See "Management--1997 Stock Incentive Plan," "--
Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated Financial
Statements.

17
<PAGE>

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 Prospectus. The
consolidated statements of operations data for the fiscal years ended June 30,
1995, 1996 and 1997, and the consolidated balance sheet data at June 30, 1996
and 1997 are derived from audited consolidated financial statements included
elsewhere in this Prospectus. The consolidated statements of operations data
for the period from January 12, 1994 (inception) to June 30, 1994, and the
consolidated balance sheet data at June 30, 1994 and 1995 are derived from
audited consolidated financial statements not included herein.

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 12, 1994 YEAR ENDED JUNE 30,
(INCEPTION) TO ------------------------
JUNE 30, 1994 1995 1996 1997
---------------- ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues........................... $ 933 $8,601 $13,476 $24,481
Costs and expenses:
Cost of revenues and technical
support......................... 424 1,997 2,605 3,310
Sales and marketing.............. 216 3,864 6,998 10,034
Research and development......... 2,303 2,399 4,477 5,996
General and administrative....... 198 996 2,505 2,886
------- ------ ------- -------
Total costs and expenses........... 3,141 9,256 16,585 22,226
------- ------ ------- -------
Operating income (loss)............ (2,208) (655) (3,109) 2,255
Interest and other income, net... 5 86 99 55
Provision for income taxes....... -- (129) (170) (593)
Minority interest in (earnings)
loss of subsidiary.............. -- 89 (25) (127)
------- ------ ------- -------
Net income (loss).................. $(2,203) $ (609) $(3,205) $ 1,590
======= ====== ======= =======
Pro forma net income per share(1).. $ 0.12
=======
Shares used in computing pro forma
net income per share(1)........... 13,368
=======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 1,281 $ 5,740 $ 1,768 $ 1,560
Total assets................................ 2,937 8,480 7,471 10,445
Long-term liabilities, net of current
portion.................................... 958 1,006 621 --
Redeemable convertible preferred stock...... -- 4,026 4,026 4,026
Total stockholders' equity (deficit)........ 1,562 1,061 (2,083) (394)
</TABLE>
- --------
(1) Pro forma net income per share reflects the conversion of all outstanding
shares of Preferred Stock into Common Stock. See Note 2 of Notes to
Consolidated Financial Statements for an explanation of the method used to
determine the number of shares used in computing pro forma net income per
share.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
factors, including, but not limited to, those discussed in "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

Pervasive is a leading provider of embedded database software designed to
enable the cost-effective development, deployment and support of low-
maintenance, packaged client/server applications. The Company has experienced
significant revenue growth over the last three years and has been profitable
for the five most recent fiscal quarters. The Company markets and sells its
products through indirect channels by targeting both ISVs that build packaged
client/server applications and VARs that recommend and sell applications to
end users. The Company markets, sells and supports its products worldwide
through its principal office in Austin, Texas and through offices in
Frankfurt, Paris, Brussels and Dublin. In May 1995, the Company acquired a
controlling interest in a newly formed entity located in Tokyo, Btrieve
Technologies Japan, Ltd., to further the localization and sale of the
Company's products in Japan.

The Company was founded in January 1994 and, in April 1994, entered into an
Asset Purchase Agreement with Novell (the "Novell Agreement") whereby the
Company acquired certain software and technology related to Btrieve and
Scalable SQL. Since April 1994, the Company has developed and released
multiple Btrieve and Scalable SQL products for multiple operating system
platforms, including Microsoft Windows NT. Significant releases of Btrieve and
Scalable SQL since inception include Btrieve 6.15 server engine for NetWare in
March 1995, Btrieve 6.15 server engine for Windows NT in May 1995, Btrieve
6.15 server engine for OS/2 Warp in December 1996, Scalable SQL 3.0 server
engine for Windows NT in May 1995 and Scalable SQL 4 server engines for
Windows NT and NetWare in February 1997.

The Company derives its revenues primarily from shrink wrap licenses through
ISVs, VARs and distributors and from OEM license agreements with ISVs.
Additionally, the Company generates revenues from user count upgrades as well
as from upgrades to client/server environments from single workstation or
peer-to-peer environments. Shrink wrap license fees depend on both the user
count of the license and whether the license is for the Company's client- or
server-based products. The Company's OEM licensing program offers ISVs volume
discounts and specialized technical support, training and consulting in
exchange for embedding the Company's products in packaged applications and
paying to the Company a royalty based on sales of the applications.

Revenues are generally recognized from the license of software upon the
later of shipment or when all significant vendor obligations have been
satisfied. Revenues related to agreements involving nonrefundable fixed
minimum license fees are generally recognized upon delivery of the product
master or first copy if no significant vendor obligations remain. Per copy
royalties in excess of a fixed minimum amount are recognized as revenues when
such amounts are reported to the Company. The Company operates with virtually
no order backlog because its software products are shipped shortly after
orders are received, which makes product revenues in any quarter substantially
dependent on orders booked and shipped throughout that quarter. The Company
enters into agreements with certain distributors that provide for certain
stock rotation and price protection rights. These rights allow the distributor
to return products in a non-cash exchange for other products or for credits
against future purchases. The Company reserves for the cost of estimated sales
returns, stock rotation and price protection rights, as well as for
uncollectable accounts based on experience. See "Risk Factors--Operating
Results Subject to Significant Fluctuations; Seasonality," "--Dependence on
Indirect Sales Channel; Distributor Concentration" and Note 2 of Notes to
Consolidated Financial Statements.

19
<PAGE>

Although the Company's revenues have increased in recent periods,
profitability has been marginal and, except for the quarters ended September
30, 1994 and December 31, 1994, the Company incurred net losses in each
quarter from inception through the quarter ended March 31, 1996 and as of June
30, 1997, the Company had an accumulated deficit of approximately $4.5
million. There can be no assurance that the Company's revenues will grow in
future periods, that they will grow at past rates, or that the Company will
remain profitable on a quarterly or annual basis in the future. Substantially
all of the Company's revenues to date have been attributable to the sale and
license of its Btrieve and Scalable SQL products, and these products are
currently expected to account for substantially all of the Company's revenues
for the foreseeable future. The Company's future operating results are
dependent upon continued market acceptance of its Btrieve and Scalable SQL
products and enhancements to these products. Consequently, a decline in the
demand for, or market acceptance of, the Company's Btrieve and Scalable SQL
products as a result of competition, technological change or other factors,
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Limited Operating History;
Marginal Profitability; Future Operating Results Uncertain," "--Operating
Results Subject to Significant Fluctuations; Seasonality" and "--Product
Concentration."

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
revenues represented by certain lines in the Company's consolidated statements
of operations:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues....................................... 100% 100% 100%
Costs and expenses:
Cost of revenues and technical support....... 23 19 14
Sales and marketing.......................... 45 52 41
Research and development..................... 28 33 24
General and administrative................... 12 19 12
------ ------ ------
Total costs and expenses....................... 108 123 91
------ ------ ------
Operating income (loss)........................ (8) (23) 9
Interest and other income, net............... 1 1 --
Provision for income taxes................... (1) (2) (2)
Minority interest in (earnings) loss of sub-
sidiary..................................... 1 -- (1)
------ ------ ------
Net income (loss).............................. (7)% (24)% 6%
====== ====== ======
</TABLE>

Revenues

The Company's revenues increased from $8.6 million in fiscal 1995 to $13.5
million in fiscal 1996 and to $24.5 million in fiscal 1997, representing
growth of 57% in fiscal 1996 and 81% growth in fiscal 1997. The increase in
the Company's revenues from fiscal 1995 to fiscal 1996 was attributable
primarily to the increased revenues from the Company's OEM licensing programs.
The increase in the Company's revenues from fiscal 1996 to fiscal 1997 was
attributable primarily to increased market acceptance of the Company's recent
product releases, principally product releases for Windows NT. The Company
believes the increase in revenues from fiscal 1996 to 1997 was also
attributable to market acceptance of price increases for most products
instituted in June 1996. Although the Company's revenues have increased in
recent periods, there can be no assurance that the Company's revenues will
grow in future periods, that they will grow at past rates or that the Company
will remain profitable on a quarterly or annual basis in the future. See "Risk
Factors--Limited Operating History; Marginal Profitability; Future Operating
Results Uncertain" and "--Operating Results Subject to Significant
Fluctuations; Seasonality."

20
<PAGE>

Prior to April 1994, Novell bundled then-current versions of Btrieve
database technology with its NetWare product. As part of the Novell Agreement,
the Company granted to Novell a worldwide, non-exclusive, perpetual, royalty-
free license to continue to bundle these versions of Btrieve with Novell
operating systems, including NetWare. Shortly thereafter, the Company
developed and released upgraded versions of Btrieve and began charging a
promotional license fee to customers. Effective June 1, 1996, the Company
discontinued its promotional pricing and significantly increased the list
prices of most of its Btrieve products in North America and Europe. The effect
of the list price increase, combined with the effect of changes in product and
channel mix, has been an increase of approximately 97% in average sales price
per shrink wrap unit in fiscal 1997 relative to fiscal 1996. The number of
units sold increased in anticipation of the pricing increase, and decreased in
the quarter immediately subsequent to the price increase. However, the average
sales price per shrink wrap unit has remained relatively constant since the
price increase and the number of units sold in each of the last two fiscal
quarters exceeded the number of units sold in the quarter ended March 31,
1996, the quarter prior to the price increase.

Revenues attributable to licenses of the Company's software operating on
NetWare represented approximately 60% of the Company's revenues in fiscal
1997. Revenues attributable to licenses of the Company's software operating on
Windows NT increased in dollar amount and as a percentage of total revenues in
each quarter of fiscal 1997 and represented approximately 25% of the Company's
revenues in fiscal 1997, up from approximately 10% in fiscal year 1996. The
Company believes this increase in percentage of revenues related to Windows NT
is primarily due to increased market acceptance of the Company's software
operating on the Windows NT platform. The percentages of the Company's
revenues attributable to licenses of its software operating on particular
platforms are subject to change from time to time due to a number of factors
outside the Company's control, such as changing market acceptance and
penetration of the various operating system platforms supported by the Company
and the relative mix of development and installation by ISVs and VARs of
application software operating on such platforms. As a result, the Company has
limited ability to predict the percentage of revenues attributable to
particular operating system platforms and there can be no assurance that the
Company's revenues attributable to licenses of its software operating on
Windows NT, or any other operating system platform, will grow in the future,
or at all.

International Revenues. International revenues, consisting of all revenues
from customers located outside of North America, were $3.6 million, $5.7
million and $8.3 million in fiscal 1995, 1996 and 1997, representing 41%, 43%
and 34% of revenues, respectively. The increase in dollar amount in each
period was primarily attributable to increased market acceptance of the
Company's new product releases, principally new product releases for Windows
NT. The decrease in international revenues as a percentage of revenues from
fiscal 1996 to 1997 was primarily due to the increasing contribution to
revenues from the Company's domestic OEM licensing program and, to a lesser
extent, from the June 1996 price increase. The Company believes that revenues
from international markets represent a significant opportunity and expects
that international revenues will account for an increasing portion of its
revenues in the future as the Company expands internationally, primarily in
Europe and Japan but also in other areas of the world. For a discussion of the
risks associated with international sales, see "Risk Factors--Risks Associated
with International Sales and Operations" and Notes 8 and 12 of Notes to
Consolidated Financial Statements.

Costs and Expenses

Cost of Revenues and Technical Support. Cost of revenues and technical
support consists primarily of the cost to manufacture and fulfill orders for
the Company's shrink wrap software products and the cost to provide technical
support, primarily telephone support, which is typically provided within 30
days of purchase. Cost of revenues and technical support was $2.0 million,
$2.6 million and $3.3 million in fiscal 1995, 1996 and 1997, representing 23%,
19% and 14% of revenues, respectively. The dollar increase in cost of revenues
and technical support from fiscal 1995 to fiscal 1996 was primarily
attributable to increased cost of sales related to increased sales volume. The
dollar increase in cost of revenues and technical support from fiscal 1996 to
fiscal 1997 was primarily due to additional investment in technical support
personnel and related technical support resources. The Company anticipates
that cost of revenues and technical support will continue to increase in
dollar amount as the Company incurs higher support costs anticipated with the
expansion of international operations and that such costs could vary as a
percentage of revenues relative to fiscal 1997.

21
<PAGE>

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
foreign sales office expenses, travel and entertainment and promotional
expenses. Sales and marketing expenses were $3.9 million, $7.0 million and
$10.0 million in fiscal 1995, 1996 and 1997, representing 45%, 52% and 41% of
revenues, respectively. The increases, both in dollar amount and as a
percentage of revenues, from fiscal 1995 to 1996, were primarily due to a
deliberate program of increased investment in most aspects of the Company's
infrastructure, including sales and marketing, following the closing of the
sale of $2.7 million of preferred stock in April 1995. The increase in sales
and marketing expenses during that period was primarily attributable to
increased costs associated with expanded marketing programs and lead
generation activities and, to a lesser extent, increased costs associated with
the hiring of additional sales and marketing personnel. The increase in dollar
amounts from fiscal 1996 to 1997 was primarily attributable to increased costs
associated with hiring additional sales and marketing personnel and, to a
lesser extent, increased infrastructure costs associated with foreign sales
office expansion, partially offset by a reduction of approximately $1.2
million in marketing costs associated with the Company's shift away from
advertising toward more direct mail oriented lead generation activities. Sales
and marketing expenses decreased as a percentage of revenues in fiscal 1997
primarily because of significant revenue growth that outpaced sales and
marketing expenditures. The Company expects that sales and marketing expenses
will continue to increase in dollar amount as the Company continues to hire
additional sales and marketing personnel, increase lead generation activities
and expand the international reach of its activities. Sales and marketing
expenses are likely to continue to fluctuate as a percentage of revenues due
to the timing of costs associated with new product releases and international
expansion activities.

Research and Development. Research and development expenses primarily
consist of personnel and related costs. Research and development expenses were
$2.4 million, $4.5 million and $6.0 million in fiscal 1995, 1996 and 1997,
representing 28%, 33% and 24% of revenues, respectively. The increases, both
in dollar amount and as a percentage of revenues, from fiscal 1995 to 1996,
are primarily due to the increased investments in the Company's infrastructure
following the April 1995 private financing, in particular the hiring of, and
contracting with, additional research and development personnel. The increases
in dollar amounts from fiscal 1996 to 1997 reflect a continuation of these
trends. Research and development expenses decreased as a percentage of
revenues in fiscal 1997 primarily because of significant revenue growth that
outpaced research and development expenditures. The Company anticipates that
it will continue to devote substantial resources to research and development
and that such expenses will continue to increase in dollar amount.

Research and development expenses are generally charged to operations as
incurred. Costs that were eligible for capitalization in accordance with
Statement of Financial Accounting Standards No. 86 were insignificant during
these periods, and accordingly the Company charged all software development
costs to research and development expenses. The Company capitalized certain
costs related to the technology acquired from Novell in 1994, which were fully
amortized as of the end of fiscal 1996. See Note 2 of Notes to Consolidated
Financial Statements.

General and Administrative. General and administrative expenses primarily
consist of the personnel and other costs of the Company's finance, human
resources, information systems and administrative departments. General and
administrative expenses were $1.0 million, $2.5 million and $2.9 million in
fiscal 1995, 1996 and 1997, representing 12%, 19% and 12% of revenues,
respectively. The increases, both in dollar amount and as a percentage of
revenues, from fiscal 1995 to 1996, were primarily due to the increased
investments in the Company's infrastructure following the April 1995 private
financing, in particular the increased staffing and associated expenses
necessary to manage and support the Company's increased scale of operations,
both domestically and internationally. The increases in dollar amounts from
fiscal 1996 to 1997 reflect a continuation of these trends. General and
administrative expenses decreased as a percentage of revenues in fiscal 1997
primarily because of significant revenue growth that outpaced general and
administrative expenditures. The Company believes that its general and
administrative expenses will continue to increase in dollar amount in fiscal
1998 as a result of the expansion of the Company's administrative staff to
support its growing international operations and as a result of an increase in
expense associated with being a public company.

22
<PAGE>

Provision for Income Taxes. Provision for income taxes was approximately
$129,000, $170,000, and $593,000 in fiscal 1995, 1996 and 1997, respectively.
Tax expense in fiscal 1995 and 1996, and an insignificant portion of the tax
expense in fiscal 1997, represents withholding taxes paid or accrued to be
paid to foreign countries on royalties earned by the Company. The Company had
domestic and foreign net operating loss carryforwards of approximately
$422,000 at June 30, 1996, which were fully utilized in fiscal 1997. The
Company believes that, based on a number of factors, it is more likely than
not that a substantial amount of the Company's deferred tax assets may not be
realized. These factors include a limited history of profitability, recent
increases in expense levels to support the Company's growth, the lack of
carryback capacity to realize the deferred tax assets and the fact that the
Company operates in an intensely competitive market subject to rapid change.
Accordingly, the Company has recorded a valuation allowance to the extent
deferred tax assets exceed the potential benefit from carryback of deferred
items to offset current or prior year taxable income. The Company had an
effective tax rate of 26% in fiscal 1997 and expects its effective tax rate to
increase in the future as the Company fully utilized its net operating loss
carryforwards in fiscal 1997. See Note 4 of Notes to Consolidated Financial
Statements.

RECENTLY ISSUED ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS No. 128"), Earnings per Share, which the Company is required to
adopt by June 30, 1998. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. The impact of SFAS No. 128 on the calculation of pro forma
fully diluted earnings per share for fiscal 1997 is not expected to be
material. Under the new requirements for calculating primary earnings per
share, the dilutive effect of common stock equivalents will be excluded. The
impact is expected to result in an increase in pro forma earnings per share
for fiscal 1997 of $0.77 per share, resulting in a basic pro forma earnings
per share of $0.89.

23
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited consolidated statements of
operations data for the eight quarters ended June 30, 1997, as well as the
percentage of the Company's revenues represented by each item. This data has
been derived from unaudited interim consolidated financial statements prepared
on the same basis as the audited Consolidated Financial Statements contained
herein and include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
such information when read in conjunction with the Consolidated Financial
Statements and Notes thereto.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1995 1995 1996 1996 1996 1996 1997 1997
-------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 2,483 $ 3,171 $ 3,097 $4,725 $5,090 $5,676 $6,418 $7,297
Costs and expenses:
Cost of revenues and
technical support..... 506 651 665 783 734 744 861 971
Sales and marketing.... 1,675 1,873 1,883 1,567 1,905 2,481 2,651 2,997
Research and develop-
ment.................. 894 1,063 1,304 1,216 1,120 1,204 1,691 1,981
General and administra-
tive.................. 475 733 673 624 709 715 672 790
------- ------- ------- ------ ------ ------ ------ ------
Total costs and ex-
penses................. 3,550 4,320 4,525 4,190 4,468 5,144 5,875 6,739
------- ------- ------- ------ ------ ------ ------ ------
Operating income
(loss)................. (1,067) (1,149) (1,428) 535 622 532 543 558
Interest and other in-
come (expense), net... 39 34 18 8 17 25 16 (3)
Provision for income
taxes................. (29) (51) (45) (45) (164) (144) (143) (142)
Minority interest in
(earnings) loss of
subsidiary............ (12) -- (13) -- (17) (23) (44) (43)
------- ------- ------- ------ ------ ------ ------ ------
Net income (loss)....... $(1,069) $(1,166) $(1,468) $ 498 $ 458 $ 390 $ 372 $ 370
======= ======= ======= ====== ====== ====== ====== ======
AS A PERCENTAGE OF
REVENUES:
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenues and
technical support..... 20 21 21 17 14 13 13 13
Sales and marketing.... 68 59 61 33 38 44 42 41
Research and develop-
ment.................. 36 33 42 26 22 21 26 27
General and administra-
tive.................. 19 23 22 13 14 13 11 11
------- ------- ------- ------ ------ ------ ------ ------
Total costs and ex-
penses................. 143 136 146 89 88 91 92 92
------- ------- ------- ------ ------ ------ ------ ------
Operating income
(loss)................. (43) (36) (46) 11 12 9 8 8
Interest and other in-
come (expense), net... 1 1 -- -- -- -- -- --
Provision for income
taxes................. (1) (2) (1) (1) (3) (2) (2) (2)
Minority interest in
(earnings) loss of
subsidiary............ -- -- -- -- -- -- -- (1)
------- ------- ------- ------ ------ ------ ------ ------
Net income (loss)....... (43)% (37)% (47)% 10% 9% 7% 6% 5%
======= ======= ======= ====== ====== ====== ====== ======
</TABLE>

Revenues increased 53% in the quarter ended June 30, 1996 compared to the
quarter ended March 31, 1996. This increase was primarily the result of
increased unit sales of the Company's products prior to the June 1996 price
increase. The significantly increased sales volume during that period led to a
corresponding decrease in sales volume in the following period. Revenues
increased in each quarter since the June 1996 price increase, however, due to
other factors such as increased market acceptance of new product releases,
particularly for the Windows NT platform, and increased market acceptance of
the Company's pricing strategy. Quarterly costs and expenses have generally
increased primarily due to increased staffing levels in the Company's
technical support, sales and marketing, research and development and
administrative organizations, and related increases in costs such as
facilities, equipment and travel.

24
<PAGE>

expansion, foreign currency exchange rate fluctuations, performance of
indirect channel partners, changes in the mix of indirect channels through
which the Company's products are offered, the impact of acquisitions of
competitors and indirect channel partners, the Company's ability to control
costs and general domestic and international economic and political
conditions. The Company operates with virtually no order backlog because its
software products are shipped shortly after orders are received, which 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 unlikely that the Company
will be able to meet its revenue targets for that quarter. In addition, the
Company is substantially reliant upon indirect sales channels over which the
Company has little or no control. Moreover, the Company's expense levels are
based to a significant extent on the Company's expectations of future revenues
and therefore are relatively fixed in the short term. If revenue levels are
below expectations, operating results are likely to be adversely and
disproportionately affected because only a small portion of the Company's
expenses vary with its revenues. In addition, the Company's quarterly revenues
and income may also vary significantly due to seasonal factors. Although the
Company's revenues have increased in recent periods and the Company was
profitable in fiscal 1997, there can be no assurance that the Company's
revenues will grow in future periods, that they will grow at past rates, or
that the Company will remain profitable on a quarterly basis, if at all. Based
upon all of the foregoing, the Company believes that the Company's quarterly
revenues, expenses and operating results are likely to vary significantly in
the future, that period-to-period comparisons of its results of operations are
not necessarily meaningful and that, in any event, such comparisons should not
be relied upon as indications of future performance. See "Risk Factors--
Limited Operating History; Marginal Profitability; Future Operating Results
Uncertain" and "--Operating Results Subject to Significant Fluctuations;
Seasonality."

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has funded its operations and met its
capital expenditure requirements through the private sale of $6.4 million of
Preferred Stock and cash generated from operating activities. Cash generated
from operating activities was insignificant in fiscal 1995 and cash used in
operating activities was $1.5 million in fiscal 1996. Cash generated from
operating activities was $3.7 million in fiscal 1997. For such periods cash
generated by, or used in, operating activities resulted primarily from net
income or net losses, net of changes in working capital.

To date, the Company's investing activities have consisted primarily of
capital expenditures totaling approximately $598,000, $843,000 and $2.2
million in fiscal 1995, 1996 and 1997, respectively, to acquire equipment,
mainly computer hardware and software, for the Company's growing employee
base. The Company expects that its capital expenditures will increase as the
Company's employee base grows. At June 30, 1997, the Company did not have any
material commitments for capital expenditures.

At June 30, 1997, the Company had $4.1 million in cash and cash equivalents
and $1.6 million in working capital. The Company has a $2.0 million revolving
line of credit and a $2.0 million equipment line with Texas Commerce Bank, but
has at no time borrowed under such lines. Total borrowings under the revolving
line are limited generally to 80% of eligible receivables with interest at the
bank's prime lending rate. On June 30, 1997, the Company had approximately
$2.1 million of borrowing capacity under the two lines. The Company's lines of
credit contain certain financial covenants and restrictions as to various
matters including the Company's ability to pay cash dividends and effect
mergers or acquisitions without the bank's prior approval. The Company is
currently in compliance with such financial covenants and restrictions. The
Company has granted a first priority security interest in substantially all of
its tangible assets as security for its obligations under its credit lines.
See Note 9 of Notes to Consolidated Financial Statements.

The Company believes that the net proceeds from the offering, existing cash
and cash equivalents and cash generated from operating activities will be
adequate to meet its cash needs for at least the next 12 months. Thereafter,
the Company may require additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity financing or from other sources. There can be
no assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to the Company
or that any additional financing would not be dilutive.

25
<PAGE>

BUSINESS

The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
of the risk factors set forth below and elsewhere in this Prospectus.

OVERVIEW

Pervasive is a leading provider of embedded database software designed to
enable the cost-effective development, deployment and support of low-
maintenance, packaged client/server applications. The Company's database
engines, Btrieve and Scalable SQL, are well suited for integration by software
developers into business-critical applications that are reliable and scalable
and can be rapidly deployed. These products enable independent software
vendors ("ISVs") and value added resellers ("VARs") to develop, deploy and
support packaged client/server applications that provide robust functionality
and low overall cost of ownership to end users. In addition, the Company's
comprehensive approach to selling, marketing and supporting its products is
designed to address the specific needs of ISVs, VARs, in-house development
organizations and their end users. The Company markets, sells and supports its
products worldwide through its principal office in Austin, Texas and through
offices in Frankfurt, Paris, Brussels, Dublin and Tokyo.

INDUSTRY BACKGROUND

Organizations are increasingly recognizing the importance of collecting,
analyzing and disseminating information to obtain competitive advantage. This
information is increasingly generated by sophisticated client/server
applications and managed by underlying database software that allow for
decentralized decision making and broader access to critical business
information. The benefits of client/server systems and computing trends such
as improved hardware price performance and the proliferation of application
development tools, have resulted in significant growth in the market for
packaged client/server applications and underlying database software.
According to Business Research Group, the domestic market for client/server
software was approximately $25 billion in 1996, and is projected to grow to
over $60 billion in 2000. In addition, according to Dataquest, the worldwide
database software market was approximately $5.7 billion in 1996, and is
projected to grow to approximately $9.4 billion in 2000.

Client/server computing environments are inherently complex, typically
involving a variety of hardware, operating systems, networking protocols,
applications and database software. It is likely that this complexity will
increase over time as organizations seek to exploit new technologies, such as
the Internet, intranets and mobile computing. As a result of this complexity,
large and costly information technology departments, typically found in large
organizations, are required to develop, deploy and support applications built
on enterprise-scale database software.

Many small and mid-sized organizations, including departments of large
organizations, also face competitive pressures to achieve the benefits
associated with client/server computing. These organizations typically do not
have the information technology budgets, infrastructure, personnel or
computing expertise required to deploy and support client/server applications
built on enterprise-scale database software. Consequently, these organizations
have been slow to adopt client/server computing environments. Business
Research Group estimates that, in 1997 approximately 22% of domestic
organizations with less than 1,000 employees have deployed client/server
applications while more than 90% of larger organizations have deployed such
applications. According to 1990 U.S. Census data, in the U.S. alone there were
over 6 million organizations with less than 1,000 employees, not including
departments of larger organizations whose needs often mirror those of smaller
organizations.

This relatively low penetration of client/server applications in small and
mid-sized organizations has created a market opportunity for ISVs and VARs. To
effectively capitalize on this market opportunity, ISVs

26
<PAGE>

and VARs must develop, deploy and support packaged client/server applications
that meet their customers' robust functionality needs and run in environments
that often lack a well developed information technology infrastucture. Only
then can ISVs and VARs provide the benefits of client/server computing, ease
of implementation and low overall cost of ownership that small and mid-sized
organizations require. ISVs and VARs must also be able to develop, deploy and
support their applications without having to become an expert in the
complexities of client/server computing.

To provide these benefits, ISVs and VARs require embeddable database
software that facilitates the development, deployment and support of packaged
client/server applications. ISVs require database software that enables them
to develop these applications with minimal investments in networking,
communications or client/server database expertise. VARs require reliable,
high-performance, low-maintenance database software that they can cost-
effectively deploy and support. Low-end desktop database products do not meet
the needs of this market because they typically lack the scalability and
functionality required for developing full featured client/server applications
and are often sold through retail channels that provide minimal deployment or
support to their customers. Likewise, enterprise-scale database software fails
to meet the needs of this market because it typically either requires a large
and costly information technology department or results in prohibitively high
implementation and support costs. Accordingly, there is a need for reliable,
high-performance, low-maintenance database software that enables ISVs and VARs
to cost-effectively develop, deploy and support robust client/server
applications targeted at small and mid-sized organizations and departments of
larger organizations.

THE PERVASIVE SOLUTION

Pervasive is a leading provider of embedded database software designed to
enable the cost-effective development, deployment and support of low-
maintenance, packaged client/server applications. The Company's database
engines, Btrieve and Scalable SQL, are well suited for integration by software
developers into business-critical applications that are reliable and scalable
and can be rapidly deployed. These products enable the Company's ISV and VAR
customers to develop, deploy and support packaged client/server applications
that, in turn, provide robust functionality and low overall cost of ownership
to their small and mid-sized customers. In addition, the Company's
comprehensive approach to selling, marketing and supporting its products is
designed to address the specific needs of ISVs, VARs, in-house development
organizations and their end users.

The Company's database software simplifies application development by
enabling developers to write applications that are capable of running on
multiple platforms and that can scale with little or no modification from
single workstation to peer-to-peer and client/server environments. The
Company's products currently operate on the Windows NT, NetWare, Windows 95,
Windows 3.1, OS/2 Warp and DOS operating platforms. In addition, the software
is designed to allow developers to exercise a high degree of control over the
database engine, enabling the tight integration, or embedding, of the database
into their applications. As a result, packaged applications built on the
Company's embedded databases enable organizations to implement client/server
systems and automate critical business functions without the costs and
complexities typically associated with enterprise-class client/server
applications. In addition, the architecture of the Company's products
incorporates network and communications protocols which monitor and manage the
client/server connection. Further, the small memory footprint of the Company's
software requires significantly smaller investments in memory and computing
power than enterprise-class database software and permits portability to a
wide range of PC desktop and server systems as well as personal digital
assistant and hand-held devices.

27
<PAGE>

STRATEGY

Pervasive's objective is to be the leading provider of embedded database
products for packaged client/server applications. The Company has tailored its
database software products to meet the specific needs of ISVs and VARs that
are developing solutions for small and mid-sized organizations and departments
of larger organizations. Key elements of the Company's strategy include:

Extend Technology Leadership into New Markets. The Company intends to extend
its leadership position in embedded databases for packaged client/server
applications. The Company continually upgrades its technology to ensure
increased database functionality and reliable, low-maintenance connections
between clients and servers to meet the needs of changing technological
environments. As the Company's customers extend the use of client/server
applications to Internet and intranet applications, the Company intends to
further enhance the functionality of its products to exploit these
opportunities. In addition, the Company is evaluating opportunities to utilize
the technological advantages of its small memory footprint, highly reliable,
low-maintenance databases for use in new and emerging markets, such as
applications designed for hand-held devices, network computers, mobile
computing and electronic commerce.

Continue to Leverage Indirect Channel Model. The Company intends to continue
to sell its embeddable database products exclusively through ISVs and VARs.
The Company believes that its past investments in training and educating its
channel partners, its long-term relationships with the diverse ISV and VAR
communities and its success in encouraging them to embed the Company's
products into their applications has created competitive advantage in the
marketplace. The Company's channel approach is designed to further the
integration of its products into client/server applications and to stimulate
sales of the applications themselves. The Company intends to continue to
leverage its large investment in U.S. channel programs by expanding its U.S.
channels and replicating this success internationally.

Focus on Microsoft Platforms. The Company has adopted the Windows NT
platform as its development reference platform, and intends to expand its
support for Microsoft technologies, including further integration with
Microsoft Back Office products, and to provide products complementary to
Windows NT. The Company believes that Microsoft's operating system platforms,
which include Windows NT, Windows 95 and Windows CE, have emerged as the
dominant platforms for client/server computing, and the adoption of Windows NT
as its reference platform makes its products applicable to the broadest range
of customers.

Leverage Installed Base. A significant element of the Company's strategy is
to leverage its large installed base. The Company has a large installed base
in accounting and financial applications, which are often the first
client/server applications purchased by small and mid-sized organizations.
Once an end user standardizes on a functional application and embedded
database, additional applications can be more easily integrated. Accordingly,
the Company intends to leverage this strong position to penetrate additional
application markets, such as sales force automation and others.

In addition, since April 1994, Novell has bundled an older version of the
Company's Btrieve product on a royalty-free basis with every copy of NetWare.
The Company derives revenues from upgrade sales of its subsequent versions of
Btrieve. The Company intends to leverage this large, worldwide installed base
of NetWare users by providing incentives to upgrade to the most recent
versions of Btrieve.

Continue Client-Based "Seeding" Strategy. The Company's seeding strategy
stimulates high-volume deployment of its client-based shrink wrap products.
This strategy enables ISVs to develop client-based applications and to deploy
them broadly with minimal incremental cost. The Company then works with its
ISVs and VARs through a combination of promotional and lead referral programs
to upgrade these applications to client/server environments. The Company
intends to continue its seeding strategy in order to generate upgrade revenues
while enabling ISVs and VARs to sell higher margin server products as end
users upgrade from single workstation or peer-to-peer to client/server
environments.

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<PAGE>

Expand Global Distribution Capabilities. The Company intends to expand its
global sales capabilities by increasing the size of its channel and strategic
sales organizations and continuing to leverage distribution partners in
selected markets. In fiscal 1997, the Company derived 34% of its revenues from
sales of its products in more than 30 countries outside North America, and the
Company believes that significant opportunities exist for its products in
international markets. The Company has established offices in Tokyo,
Frankfurt, Paris, Brussels and Dublin and intends to continue to increase its
international indirect sales and marketing activities.

PRODUCTS

The Company offers a range of embedded database products that enable
commercial developers to combine the sophistication of client/server computing
with the low cost of ownership and convenience of packaged software. The
resulting applications enable small and mid-sized organizations and the
departments of large organizations to automate business-critical functions in
client/server environments. The following table provides an overview of these
products and the platforms on which they operate:

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PLATFORMS
- ------------------------------------------------------------------------------
<C> <S> <C>
BTRIEVE Navigational, record-oriented database software Windows NT
targeted at high volume transaction applications NetWare
Windows 95
Windows 3.1
OS/2 Warp
DOS
- ------------------------------------------------------------------------------
SCALABLE SQL Relational database software optimized for Windows NT
reporting, ad hoc query and decision support NetWare
systems Windows 95
Windows 3.1
DOS
- ------------------------------------------------------------------------------
</TABLE>

The Company's primary products are the Btrieve navigational database and the
Scalable SQL relational database. Btrieve allows users to navigate quickly
through data at the individual record level, while Scalable SQL leverages the
relational data model and industry standard Structured Query Language (SQL),
which is better suited for reporting, query and decision support applications.
Because the Company's products are all built on its MicroKernel Database
Engine ("MKDE"), developers and end users can simultaneously access common
data sets through either Btrieve or Scalable SQL.

Btrieve is a leading navigational client/server database offering high
performance in high volume transaction processing environments such as
accounting, banking and insurance. Btrieve offers a high degree of programming
control through its record-oriented, navigational interface and delivers low-
maintenance operation through self-tuning algorithms for index balancing, disk
space allocation and cache management. Btrieve-based applications can scale
from single workstation to peer-to-peer and client/server configurations
without the need to modify the application or database.

Scalable SQL is a leading relational client/server database built for high
volume client/server applications with flexible reporting, ad hoc query and
decision support requirements. Scalable SQL delivers SQL capabilities in an
engine that shares many Btrieve characteristics, including high performance,
multi-platform support, low maintenance operation, and application scalability
from single workstations to peer-to-peer and client/server configurations. The
Company also offers Inscribe, a Visual Basic compatible scripting tool that is
currently supported by Scalable SQL.

In addition, the Company offers Btrieve and Scalable SQL software developer
kits, which include tools, documentation and licenses to enable programmers to
develop, test and deploy applications that embed the Company's databases.

29
<PAGE>

The Company has designed its Btrieve and Scalable SQL products with a number
of common characteristics as set forth in the table below:

<TABLE>
<CAPTION>
PRODUCT CHARACTERISTICS DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
Embeddable Designed to be "hidden" inside Allows broad deployment of
an application, permitting complex distributed
development of a tightly applications into environments
integrated application. with minimal or no information
technology infrastructure.
- ----------------------------------------------------------------------------------------------
Small Memory Footprint Btrieve requires less than 350 Maximizes resources available
KB of internal memory and to the application and enables
Scalable SQL requires less than operation on a wide range of
4 MB. hardware.
- ----------------------------------------------------------------------------------------------
Low Maintenance Administrative functions, such Requires low level of
as disk space allocation, information technology support
memory and index management are making complex applications
automated, which eliminates the available to small and mid-
need for regular maintenance. sized organizations and the
departments of large
organizations.
- ----------------------------------------------------------------------------------------------
Reliability Btrieve and Scalable SQL are Provides high degree of data
based on industry-proven integrity and stability to
technology. business applications.
- ----------------------------------------------------------------------------------------------
Configurability Btrieve and Scalable SQL can Enables the storage and
access local and distributed processing of databases to be
data simultaneously. distributed throughout the
network.
- ----------------------------------------------------------------------------------------------
Application Scalability Applications can run in any Offers cost savings for
configuration from single developers and end users
workstation to peer-to-peer to because a single application
supporting hundreds of can be deployed in multiple
concurrent users in configurations without
client/server environments. modification.
- ----------------------------------------------------------------------------------------------
Open Database Connectivity Industry standard interface Allows ODBC-compliant
("ODBC") enabling any application to applications to access data
communicate with any database. stored in any Btrieve or
Scalable SQL database.
- ----------------------------------------------------------------------------------------------
Common MicroKernel Navigational Btrieve and Allows developers to choose the
Database Engine relational Scalable SQL-based appropriate data access method:
applications can simultaneously navigational access for high
share common databases. volume transactions and
relational access for
reporting, queries and decision
support.
- ----------------------------------------------------------------------------------------------
</TABLE>

30
<PAGE>

CUSTOMERS

The Company has over 1,000 ISV and VAR customers worldwide. The Company
believes that the following list is representative of the Company's larger ISV
customers and the markets into which the Company's products are deployed:

ACCOUNTING HEALTHCARE ADMINISTRATION
Abacus Research AG AtWork Corporation
ACCPAC International ComCotec Inc.
AGRIS Corporation Enterprise Systems
Dexter & Cheney Inc. IMPAC Medical Systems, Inc.
DITEC Informationstechnologie
GmbH & Co. KG MANUFACTURING
Exact International Development B.V. Bergen Computer
Great Plains Software, Inc. Expandable Software, Inc.
KHK Software GmbH & Co. KG Micro MRP
Macola Software, Incorporated
Matrix International B.V. NETWORK ADMINISTRATION
Platinum Software Corporation Cheyenne Software
Scala ECE Overseas Ltd. Intel Corporation
Solomon Software Sterling Software, Inc.
SU-A/S Systemutvikling
Systems Union Group, Ltd. SALES FORCE AUTOMATION
Maximizer Technologies Inc.
DOCUMENT IMAGING Software of the Future, Inc.
Cardiff Software, Inc.
Document Solutions OTHER
Ingenieurgesellschaft Pliete- ADC Labs, Inc.
Gukelberger GmbH American Computer Software, LLC
MACESS Corporation Apollo Travel Services
CAM Data Systems, Inc.
FINANCE Josten's Learning Corporation
Associated Software Consultants, Inc. La Societe de Programmation COBA
basoft Neue Bankensoftware AG inc.
Estweeka B.V. Magic Software Enterprises, Ltd.
Fair Isaac and Company Rapattoni Corporation
Kindle Banking Systems Ltd. royalblue technologies plc
Smith, Abbott & Company, Inc.
Software 4 Retail Solutions

The following illustrates the selection, implementation and use of Btrieve
and Scalable SQL by certain of the Company's customers.

Accounting ISV

A leading provider of Windows, Windows NT and NetWare-based SQL accounting
systems for small and mid-size organizations serves over 45,000 customers in
100 countries worldwide. Prior to adopting Scalable SQL, the vendor marketed a
character-based product built on the DOS version of Btrieve. While moving to
the graphical environment, the vendor pursued an opportunity to build the new
system around industry-standard SQL database technology. The vendor required a
SQL database that would be affordable to its small and mid-sized customers,
that would be scalable to support a broad mix of customer configurations from
single-user implementations to full client/server systems and that would
provide a high level of data security and performance across LANs and WANs.

The vendor's familiarity with the Company's Btrieve product assisted in the
transition to Scalable SQL. The vendor was able to release a Windows-based
client/server application only a few months following commencement of
development. To date the vendor has installed over 7,000 client/server
applications using Scalable SQL.

31
<PAGE>

Retailing Software ISV

A retailing software vendor develops comprehensive supermarket systems that
manage checkout operations, receiving, inventory labeling, vendor management,
accounts receivable, and price modeling. This vendor sells its products
through a network of over 100 resellers, as well as through a direct sales
team, to customers including over 5,000 independently owned supermarkets and
regional grocery chains.

This vendor desired to migrate from proprietary systems into an open
environment that would enable it to integrate all the information access needs
of its customers' operations. Previously, the proprietary system required it
to constantly synchronize two separate files of inventory items, one at the
point-of-sale and the second on the back office PC.

This vendor now offers systems built on Btrieve running on Microsoft Windows
NT. The new system simplifies and streamlines supermarket operations by
allowing every employee access to a single unified dataset with the assurance
that the information is reliable, complete and up to date. In addition, this
vendor has implemented dual server "hot file mirroring," which enables
continuous operation in the event of the failure of one server. Btrieve also
provides the ability to process in excess of 100 scans per minute, which this
vendor believes provides it with a competitive advantage.

Property Management VAR

A VAR specializing in property management and real estate applications has
utilized Scalable SQL in the design and implementation of a database-driven
sales guide providing Internet access to hundreds of properties listed in the
Manhattan area.

The site features extensive property search capabilities including price
range, number of rooms, amenities, location and school district. The user
specifies the property search criteria and the application formulates a
Scalable SQL database query that returns a list of suitable properties. The
system has enabled customers to quickly search through thousands of listings
and focus their search on the relevant properties.

Division Within a Large Organization

A division of a large national moving company specializes in transporting
valuable commodities such as mainframe computers, electronics, and medical
equipment. Prior to implementing its client/server mobile tracking system,
this division used a mainframe system with a terminal in each distribution
center. Clerks manually entered tracking information each time a shipment
reached a check-in point. As the business expanded, the margin for manual
tracking errors increased. In addition, real-time updates of the status and
location of shipments was not feasible.

The division selected Btrieve as the foundation for its new mobile wireless
tracking system because Btrieve offers the performance required to process up
to 25 million data transactions per year and the stand-alone reliability to
operate 24 hours a day, 7 days a week. The distribution centers can now handle
more shipments in less time with greater accuracy. In addition, customers
receive real-time, highly accurate information about the location of shipments
via telephone or dial-in connection.

SALES AND MARKETING

Pervasive's sales and marketing organization focuses exclusively on indirect
channels by targeting the ISVs that build packaged client/server applications
and the VARs that sell and implement the applications to the end user. The
Company's marketing group has primary responsibility for product direction and
has developed a number of programs utilized by the sales organization to
support the ISV and VAR channels, such as the manufacturing partner program
and VAR partner programs. 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. The
Company's sales organization consists of a strategic sales

32
<PAGE>

group focusing on larger ISVs and VARs, an inside sales group targeting small
and mid-sized ISVs and VARs, and an international sales group, all of which
are supported by the Company's marketing organization.

The strategic sales group focuses on recruiting large ISVs to embed the
Company's database products on an OEM basis through the Company's
manufacturing partner program. This program is designed to generate mutually
beneficial strategic relationships between the Company and its ISVs and
ongoing royalties for the Company through licensing contracts, which are
typically for three-year terms. Through this program, the Company offers its
manufacturing partners specialized technical support, training and consulting,
enabling delivery of tightly integrated solutions to end users. The strategic
sales group administers education and training programs for the VARs that work
directly with large ISVs. These programs reduce the burden on the ISVs and
allow the Company to access and influence the ISVs' reseller channel.

The inside sales group recruits small and mid-sized ISVs to develop
applications that are designed to be deployed with shrink wrap versions of the
Company's database products. In addition, the inside sales group develops,
supports and trains VARs to facilitate the deployment of packaged
applications. As ISVs grow, the inside sales group also manages the transition
of smaller ISVs to its manufacturing partner program.

The international sales group utilizes distribution partners in 30 countries
worldwide to implement its sales and marketing programs for a particular
region, typically using the Company's business alliance, distributor or master
distributor programs. In addition to managing these distributor relationships,
the international sales group recruits and supports ISVs with the same
programs as the domestic strategic and inside sales groups. The Company
currently has sales offices in Frankfurt, Paris, Brussels and Tokyo.

The Company's sales and marketing organization utilizes a seeding strategy
for sales of its client-based shrink wrap products to stimulate high-volume
deployment of these products. This strategy enables ISVs to develop client-
based applications and to deploy them broadly with minimal incremental cost.
The Company then works with its ISVs and VARs through a combination of
promotional and lead referral programs to upgrade these applications to
client/server environments. As a result, the Company generates upgrade
revenues while enabling ISVs and VARs to sell higher margin server products as
end users upgrade from single workstation or peer-to-peer networks to
client/server environments.

Although the Company focuses its sales and marketing efforts on ISVs and
VARs, it often sells its products through distributors. Aggregate purchases by
two distributors totaled $2.3 million in 1995, and purchases by two different
distributors totaled $3.6 million and $7.1 million in fiscal 1996 and 1997,
representing 27%, 27% and 29% of revenues, respectively. No other customers
accounted for more than 10% of the Company's revenues in fiscal 1995, 1996 or
1997.

CUSTOMER SERVICE AND SUPPORT

The Company offers two levels of customer service. First level support
responds to customer inquiries via telephone, electronic mail and fax. Second
level support responds to higher level technical needs and supports the
manufacturing partner accounts. To provide high quality customer support, the
Company has established a specialized customer engineering group, consisting
of both support and engineering personnel. The Company believes that combining
support and engineering expertise in one group provides customers with more
rapid resolution of software support issues. The Company's customer service
and support organization also provides training and consulting services to its
channel partners.

Customer service is provided at no charge for the first 30 days after
initial purchase and at any time via electronic mail or the Company's World
Wide Web site. After the 30 days, the Company offers contract and fee-based
premium support programs. Worldwide customer support is provided through the
corporate offices in Austin, Texas, through a support and development center
in Dublin, Ireland and through AG Tech, a company based in Nagoya, Japan. From
the Company's inception in January 1994 through June 30, 1997, revenues from
customer service and support were not significant.

33
<PAGE>

RESEARCH AND DEVELOPMENT

The Company has made substantial investments in research and development
through both internal development and technology acquisition. Although the
Company will evaluate on an ongoing basis externally developed technologies
for integration into its product lines, the Company expects that most
enhancements to existing and new products will be developed internally.

The Company has invested the majority of its research and development
activity on developing feature extensions to its Btrieve, Scalable SQL and
ODBC Interface products. This development consists primarily of adding new
competitive product features, expanding the number of computer and network
operating systems on which the products can be installed and maintaining the
ability to run in mixed operating system environments. Development activities
continue to focus on developing database software characterized by a small
memory footprint, high-performance and low-maintenance requirements, to better
serve the ISVs, VARs and their end users. Recent developments are focused on
further simplifying the installation and maintenance of the Company's database
software while maintaining an emphasis on performance.

The Company's research and development expenditures for fiscal 1995, 1996
and 1997 were $2.4 million, $4.5 million and $6.0 million, respectively. The
Company expects that it will continue to commit significant resources to
research and development in the future. To date, all research and development
expenses have been expensed as incurred.

The market for the Company's products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing customer requirements. The
introduction of products incorporating new technologies and the emergence of
new industry standards could render existing products obsolete and
unmarketable. The Company's future success will depend in part upon its
ability to anticipate changes, enhance its current products, develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers. See "Risk
Factors--Rapid Technological Change and New Products."

34
<PAGE>

TECHNOLOGY

Both Btrieve and Scalable SQL are based on Pervasive's MicroKernel Database
Architecture. Within this architecture, the MKDE provides a modular foundation
that enables Btrieve applications and Scalable SQL applications to share
common data sets. A primary advantage of this architecture is that
applications using new data access methods can work in conjunction with
existing applications. For example, Btrieve customers that wish to add
Scalable SQL for reporting, ad hoc queries and decision support can do so with
minimal modification to the Btrieve applications.

The following diagram depicts the modular nature of the MicroKernel Database
Architecture:

[CHART]

Key functions of the Company's modular components include:

MicroKernel Database Engine. The MKDE is a full 32-bit, multi-threaded
implementation that is readily portable to new operating environments and
that provides low level data management services for the access modules
including: transaction processing, logging and roll forward, data
integrity enforcement, referential integrity enforcement, data caching
and physical data access.

Data Access Modules: Btrieve, Scalable SQL and ODBC. Implements specific
data models and appropriate data structures and access techniques
including: data definition functions, schema (rows, columns, tables,
etc.) and data operations (select, join, etc.).

MicroKernel Extensions. The MKDE itself is extensible through direct
interfaces to modular components such as Inscribe, a Visual Basic
compatible scripting engine that is currently supported by Scalable SQL.
Inscribe and future scripting engines enable the developer to write
business rules and implement them through stored procedures and triggers.
The business rules are enforced through the Inscribe engine and security
mechanisms at the database level to prevent violation from any
application.

The modular architecture also enables Pervasive's database products to be
highly configurable and allows configuration changes without affecting the
applications. Applications can scale from single workstation to peer-to-peer
and client/server environments with minimal code changes or relinking. 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 the Company's products include the following:

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

Peer-to-Peer. Peer-to-peer networks, such as Windows 95, Windows for
Workgroups and LANtastic, enable database files stored on one workstation
to be accessed by multiple users running applications on other
workstations.

35
<PAGE>

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.

COMPETITION

The market for the Company's products is intensely competitive and subject
to rapid change. The Company primarily encounters competition from large,
public companies, including Microsoft, Oracle, Informix, Sybase and IBM. Each
of these companies offers database software products competitive with the
Company's products. In particular, Sybase offers a small memory footprint
database software product, SQL Anywhere, which directly competes with the
Company's Scalable SQL product. In addition, because there are relatively low
barriers to entry in the software market, the Company may encounter additional
competition from other established and emerging companies. Most of the
Company's competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources than the Company,
significantly greater name recognition and a larger installed base of
customers. As a result, the Company's 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 can the Company. There is also a substantial risk
that announcements of competing products by large competitors such as
Microsoft or Oracle 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 the Company's
ability to sell its products through particular distribution partners.
Accordingly, new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. The Company also expects
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 the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that the competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.

PROPRIETARY RIGHTS

36
<PAGE>

property rights. The Company expects that software product developers
increasingly will be subject to infringement claims as the number of products
and competitors in the Company's 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 the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, if at all. In the event of a successful claim of
product infringement against the Company and failure or inability of the
Company to either license the infringed or similar technology or develop
alternative technology on a timely basis, the Company's business, operating
results and financial condition could be materially adversely affected.

EMPLOYEES

As of June 30, 1997, the Company employed 168 full-time employees, including
68 in sales and marketing, 49 in research and development, 25 in technical
support and 26 in general and administrative. The Company believes that its
future success will depend in large part upon its continuing ability to
attract and retain highly skilled managerial, sales, marketing, customer
support and research and development personnel. Like other software companies,
the Company faces intense competition for such personnel, and the Company has
at times experienced and continues to experience difficulty in recruiting
qualified personnel. There can be no assurance that the Company will be
successful in attracting, assimilating and retaining other qualified personnel
in the future. The Company is not subject to any collective bargaining
agreement and it believes that its relationships with its employees are good.

FACILITIES

The Company's principal offices are located in approximately 33,700 square
feet of office space in Austin, Texas. Approximately 30,000 square feet of
this office space is leased pursuant to a lease and amendment that expire on
November 30, 1999, at which time the Company has the option to extend the
lease for an additional five-year term. The remaining 3,700 square feet of
office space is subleased pursuant to an agreement that expires on December
31, 1997, at which time the Company has the option to enter into a primary
lease for the space for two consecutive three-year periods beginning on
January 1, 1998. The Company will assume the remaining term of a lease
beginning on August 1, 1997 and ending on March 31, 1998 for approximately
3,000 square feet of office space in the same complex as its principal offices
in Austin, Texas. The Company believes that its existing facilities are
adequate to meet its current needs; however, the Company believes that it will
need additional office space at its principal offices in Austin, Texas in the
near future. The Company believes that adequate facilities will be available
on commercially reasonable terms, as needed.

LEGAL PROCEEDINGS

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

37
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
August 31, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ --- -------------------------------------
<C> <C> <S>
Ron R. Harris....................... 44 President, Chief Executive Officer
and Director
James R. Offerdahl.................. 41 Chief Financial Officer, Vice
President, Finance and Administration
and Secretary
Timothy Abels....................... 38 Chief Technical Officer
Robert J. Adams, Jr. ............... 38 Vice President, Marketing and Inside
Sales
Theodule J. (Ted) Doucet, Jr. ...... 40 Vice President, Strategic Sales
Gordon A. (Casey) Leaman............ 50 Vice President, International Sales
Marcus D. Marshall.................. 45 Vice President, Customer Engineering
Nancy R. Woodward(1)................ 41 Director and Chairman of the Board
Joseph C. Aragona(1)................ 40 Director
David A. Boucher(2)................. 46 Director
David R. Bradford................... 46 Director
Shelby H. Carter, Jr.(1)(2)......... 66 Director
</TABLE>
- --------
(1)Member of Compensation Committee
(2) Member of Audit Committee

Ron R. Harris has served as President and Chief Executive Officer since its
inception and as a director since June 1995. He has also served as the
Company's acting Vice President of Research and Development since May 1997.
Prior to joining the Company, Mr. Harris served as a Vice President of Citrix
Systems, Inc., a developer of thin-client/server software, from October 1990
to May 1993. 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 the Company's Chief Financial Officer, Vice
President, Finance and Administration and Secretary since October 1996. From
May 1993 to September 1996, Mr. Offerdahl served as Chief Financial Officer
and Vice President, Administration of Tivoli Systems Inc., a provider of
enterprise systems management solutions, acquired by IBM in March 1996. From
April 1991 to May 1993, Mr. Offerdahl served as Vice President, Finance and
Administration of InterFlo Medical, a medical device company that was acquired
by Baxter Healthcare Corporation in April 1992. Mr. Offerdahl received a B.S.
in Accounting from Illinois State University and an M.B.A. from the University
of Texas at Austin.

Timothy Abels has served as the Company's Chief Technical Officer since
March 1997. Prior to joining the Company, Mr. Abels served as Director of
Development Tools for Microsoft Corporation from July 1996 to February 1997.
From June 1989 to July 1997, Mr. Abels held several positions at CompuServe,
Inc., a network services company, including Senior Manager of Internet
Products and Senior Manager of Research & Development. Mr. Abels received a
B.S. in Computer Science from Bowling Green State University and an M.S. in
Computer Science from Purdue University.

Robert J. Adams, Jr. has served as the Company's Vice President, Marketing
since April 1996 and Vice President, Marketing and Inside Sales since August
1996. Prior to joining the Company, Mr. Adams served as

38
<PAGE>

President and Chief Executive Officer of Adams & Co., Inc., a consulting
company, from October 1995 to April 1996. From January 1993 to October 1995,
Mr. Adams served as President and Chief Executive Officer of Business Matters,
Inc., a software development company. From March 1984 to January 1993, Mr.
Adams served in various capacities at Lotus Development Corporation, a
software development company, most recently as Director of the Database
Products Group. Mr. Adams currently serves as a director of PC Build, Inc., a
privately held hardware manufacturing company. Mr. Adams received a B.S. in
Industrial Engineering from Purdue University and an M.B.A. from Babson
College.

Theodule J. (Ted) Doucet, Jr. has served as the Company's Vice President,
Strategic Sales since September 1995. From September 1995 to August 1996, Mr.
Doucet also served as Vice President of Inside Sales. Prior to joining the
Company, Mr. Doucet was a consultant from March 1995 to August 1995 for
SunRiver Data Systems, Inc., an Internet software company, and Human Code,
Inc., an interactive multimedia software company. From May 1993 to February
1995, Mr. Doucet served as Director of Business Development for
Microelectronics and Computer Technology Corporation ("MCC"), an industrial
research and development consortium. Prior to joining MCC, Mr. Doucet served
as District Sales Manager of Edify Corporation, a supplier of self-service
software products, from April 1992 to May 1993. From December 1989 to March
1992, Mr. Doucet was a sales representative for Sybase, Inc., a database
software company. Mr. Doucet received a B.B.A. in General Business from
Stephen F. Austin State University.

Gordon A. (Casey) Leaman has served as the Company's Vice President,
International Sales since February 1997. Prior to joining the Company, Mr.
Leaman served as Vice President, 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. From March 1989 through June
1992, Mr. Leaman served in various roles at Lotus Development Corporation,
including Regional General Manager-Asia & Australia. 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 the Company's Vice President, Customer
Engineering since May 1997. He served as the Company's Vice President,
Research and Development from November 1995 to May 1997 and as Vice President,
Engineering and Technical Support from June 1995 to November 1995. Prior to
joining the Company, 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, Development of International
Software Systems, Inc., a developer of software engineering and simulation
software. Mr. Marshall received a B.S. and an M.S. in Electrical Engineering
from Rice University.

Nancy R. Woodward is a founder of the Company and has served as a director
and Chairman of the Board since its inception. Ms. Woodward also serves as a
director of Scientific Measurement Systems, Inc., a technology-based,
industrial measurement tool company. Ms. Woodward received a B.S. in Computer
Science from the University of Michigan.

Joseph C. Aragona has served as a director of the Company since June 1995.
Since June 1982, Mr. Aragona has served as a General Partner of Austin
Ventures, a venture capital firm. He also serves as a director for various
private companies. Mr. Aragona received a B.A. from Harvard College and an
M.B.A. from the Harvard University Graduate School of Business.

David A. Boucher has served as a director of the Company since October 1995.
Mr. Boucher has served as a General Partner of Applied Technology, a venture
capital firm, since January 1993. From January 1981 to August 1992, Mr.
Boucher served as President and Chief Executive Officer of Interleaf, Inc., an
electronic

39
<PAGE>

publishing software developer. Mr. Boucher also serves as director of Wang
Laboratories, Inc., a network integration services company, Interleaf, Inc.
and various private companies.

David R. Bradford has served as a director of the Company since October
1995. Mr. Bradford has served as Senior Vice President, General Counsel of
Novell, a networking software company, since 1985. Mr. Bradford also serves as
a director of a private company. Mr. Bradford received a B.A. in Political
Science and a J.D. from Brigham Young University and an M.B.A. from Pepperdine
University.

Shelby H. Carter, Jr. has served as a director of the Company since August
1996. Since January 1986, Mr. Carter has served as an adjunct professor at the
University of Texas Graduate School of Business and College of Business
Administration. Mr. Carter also serves as a director of Bay Networks, Inc., a
computer network equipment and management system company, InPut/OutPut, Inc.,
a manufacturer of seismic data acquisition systems, and several private
companies. Mr. Carter received a B.B.A. from the University of Texas at
Austin.

BOARD COMPOSITION

The Company currently has authorized seven directors. Upon the completion of
the offering, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 1998; Class II, whose term will expire at the
annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The
Class I directors are Joseph C. Aragona and David R. Bradford, the Class II
directors are Shelby H. Carter, Jr. and Nancy R. Woodward, and the Class III
directors are Ron R. Harris and David A. Boucher. At each annual meeting of
stockholders after the initial classification, the successors to directors
whose term will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company.

Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than
nonemployee directors, devotes substantially full time to the affairs of the
Company. The Company's nonemployee directors devote such time to the affairs
of the Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers or key employees of the
Company.

COMMITTEES OF THE BOARD

The Audit Committee reviews, acts on and reports to the Board of Directors
with respect to various auditing and accounting matters, including the
selection of the Company's independent accountants, the scope of the annual
audits, fees to be paid to the independent accountants, the performance of the
Company's independent accountants and the accounting practices of the Company.

The Compensation Committee establishes salaries, incentives and other forms
of compensation for officers and other employees of the Company and
administers the incentive compensation and benefit plans of the Company.

DIRECTOR COMPENSATION

Directors receive no cash remuneration for serving on the Board of Directors
but are reimbursed for reasonable expenses incurred by them in attending Board
and Committee meetings. The Company's 1997 Stock Incentive Plan provides for
automatic grants of non-qualified stock options to certain non-employee
directors of the Company. See "Management--1997 Stock Incentive Plan."

40
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table. The following Summary Compensation Table sets
forth the compensation earned by the Company's Chief Executive Officer and the
four other most highly compensated officers whose salary and bonus for fiscal
1997 were in excess of $100,000 (collectively, the "Named Officers"), for
services rendered in all capacities to the Company and its subsidiaries for
that fiscal year.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL AWARDS
COMPENSATION SECURITIES ---------------
----------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS OPTIONS(#) COMPENSATION(2)
- --------------------------- --------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
Ron R. Harris.................. $150,587 $50,000 0 $510
President, Chief Executive Of-
ficer and Director
James R. Offerdahl(3).......... 105,000 15,000 200,000 352
Chief Financial Officer, Vice
President,
Finance and Administration and
Secretary
Robert J. Adams, Jr. .......... 142,654 24,200 50,000 308
Vice President, Marketing and
Inside Sales
Theodule J. Doucet, Jr. ....... 104,112 56,281(4) 40,000 314
Vice President, Strategic
Sales
Marcus D. Marshall............. 115,390 10,000 20,000 603
Vice President, Customer Engi-
neering
</TABLE>
- --------
(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) All Other Compensation consists of life insurance premiums.
(3) Mr. Offerdahl commenced employment with the Company on October 1, 1996;
Mr. Offerdahl's annual salary is currently $140,000.
(4) Represents sales commissions.

41
<PAGE>

Option Grants in Last Fiscal Year. The following table contains information
concerning the stock option grants made to each of the Named Officers in the
fiscal year ended June 30, 1997. No stock appreciation rights were granted to
these individuals during such year.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED(1) 1997(2) SHARE(3) DATE 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ron R. Harris........... 0 -- -- -- -- --
James R. Offerdahl...... 200,000 18.3% $0.13 8/21/06 $ 16,351 $ 41,437
Robert J. Adams, Jr. ... 50,000 4.6 3.60 5/22/07 113,201 286,873
Theodule J. Doucet,
Jr. ................... 30,000 2.7 3.60 5/22/07 67,920 172,122
10,000 0.9 0.30 10/25/06 1,886 4,781
Marcus D. Marshall...... 10,000 0.9 3.60 5/22/07 22,640 57,374
10,000 0.9 0.20 9/25/06 1,257 3,187
</TABLE>
- --------
(1) Each of the options listed in the table is immediately exercisable, but
any shares purchased under the options are subject to vesting requirements
and may be repurchased by the Company at the original exercise price paid
per share upon the optionee's cessation of service prior to vesting in
such shares. The repurchase right lapses and the optionee vests in the
option shares in a series of four equal annual installments. Upon a merger
or other change in control, the option shares shall become vested as if
the optionee had been employed for an additional 12 months. In addition,
the option shares shall vest in full if outstanding options are not
assumed by the acquiring entity. Should options be assumed but the
optionee's employment be involuntarily terminated within 12 months of such
a change in control, then the option shares shall vest in full. Each
option has a maximum term of ten years, subject to earlier termination in
the event of the optionee's cessation of employment with the Company.
(2) Based on an aggregate of 1,094,018 options granted in fiscal 1997.
(3) The exercise price may be paid in cash or through a cashless exercise
procedure.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.

42
<PAGE>

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth information concerning the shares
acquired and the value realized upon the exercise of stock options during
fiscal 1997 and the year-end number and value of unexercised options with
respect to each of the Named Officers. No stock appreciation rights were
exercised by the Named Officers in fiscal 1997 or were outstanding at the end
of that year.

<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT JUNE 30, 1997(#)(2) AT JUNE 30, 1997(3)
ACQUIRED ON VALUE ------------------------ ---------------------
NAME EXERCISE(#) REALIZED(1) VESTED(3) UNVESTED VESTED UNVESTED
---- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ron R. Harris........... 250,000 $ 7,500 642,021 693,795 $2,889,095 $3,122,078
James R. Offerdahl...... 200,000(4) 14,000 0 0 -- --
Robert J. Adams, Jr. ... 100,000(4) 17,000 0 50,000 -- 50,000
Theodule J. Doucet,
Jr. ................... 32,500(4) 60,350 0 67,500 -- 196,350
Marcus D. Marshall...... 60,000(4) 42,500 0 10,000 -- 10,000
</TABLE>
- --------
(1) Market price at exercise less exercise price.
(2) Each of the options listed in the table is immediately exercisable, but
any shares purchased under the options will be subject to vesting
requirements and may be repurchased by the Company at the original
exercise price per share upon the optionee's cessation of service prior to
vesting in such shares.
(3) Based on the fair market value of the Company's Common Stock at fiscal
year end (June 30, 1997) ($4.60 per share), as determined by the Company's
Board of Directors less the exercise price payable for such shares.
(4) The acquired shares include options exercised for vested and unvested
shares. As of June 30, 1997, the repurchase right had lapsed with respect
to shares acquired during the fiscal year as follows: Mr. Harris
(250,000); Mr. Offerdahl (no shares); Mr. Adams (25,000); Mr. Doucet
(15,000) and Mr. Marshall (12,500).

BONUS PLAN

The Company has adopted a bonus program pursuant to which all full-time,
non-commissioned employees are eligible for annual cash bonuses based upon a
combination of the Company achieving specified objectives and the employee
meeting specified individual performance objectives.

1997 STOCK INCENTIVE PLAN

The Company's 1997 Stock Incentive Plan (the "1997 Plan") was adopted by the
Board of Directors on May 22, 1997, subject to approval by the stockholders,
as the successor to the First Amended and Restated 1994 Incentive Plan
("1994 Plan"). The Company has reserved 3,428,611 shares of Common Stock for
issuance under the 1997 Plan, plus an additional number of shares equal to 5%
of the number of shares of Common Stock and Common Stock equivalents
outstanding on July 1 of each year beginning July 1, 1998 and ending July 1,
2000. As of July 1, 1997, no shares had been issued under the 1997 Plan,
options for 2,259,697 shares were outstanding (including options incorporated
from the 1994 Plan) and 1,168,914 shares remained available for future grant.
Shares of Common Stock subject to outstanding options, including options
granted under the 1994 Plan, which expire or terminate prior to exercise will
be available for future issuance under the 1997 Plan. Outstanding options
under the 1994 Plan will be incorporated into the 1997 Plan effective July 1,
1997 and no further option grants will be made under the 1994 Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the
1997 Plan to those options. Except as otherwise noted below, the outstanding
options under the 1994 Plan contain substantially the same terms and
conditions specified below for the Discretionary Option Grant Program in
effect under the 1997 Plan.

43
<PAGE>

Under the 1997 Plan, employees, officers, directors and independent
consultants may, at the discretion of the plan administrator, be granted
options or awarded shares of Common Stock. Non-employee members of the Board
of Directors, other than individuals who are preferred stockholders or who own
5% or more of the voting power of the Company or individuals who represent
entities that own preferred stock or 5% or more of the voting power of the
Company, will also be eligible for automatic option grants under the 1997
Plan.

The 1997 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at
the discretion of the plan administrator, be granted options to purchase
shares of Common Stock at an exercise price per share not less than 85% of
fair market value on the grant date; (ii) the Stock Issuance Program under
which eligible individuals may, at the discretion of the plan administrator,
be issued shares of Common Stock directly, through the purchase of such shares
at a price per share not less than 85% of fair market value at the time of
issuance or as a fully-paid bonus for services rendered the Company; and (iii)
the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to the
fair market value of the option shares on the grant date.

The 1997 Plan will be administered by the Board or the Compensation
Committee of the Board after this Offering. The plan administrator has
complete discretion to determine which eligible individuals are to receive
option grants or stock awards, the number of shares subject to each such
grant, the status of any granted option as either an incentive option or a
non-statutory option under the Federal tax laws, the vesting schedule to be in
effect for each option grant or stock award and the maximum term for which
each granted option is to remain outstanding. In no event, however, may any
one participant in the 1997 Plan acquire shares of Common Stock under the 1997
Plan in excess of 500,000 shares each calendar year over the term of the Plan.

The exercise price for options or purchase price for shares granted under
the 1997 Plan may be paid in cash or in outstanding shares of Common Stock.
Options may also be exercised on a cashless basis through the same-day sale of
the purchased shares. The plan administrator may also permit the participant
to pay the exercise price or purchase price through a promissory note payable
in installments over a period of years. The amount financed may include any
Federal or state income and employment taxes incurred by reason of the option
exercise or share purchase.

The plan administrator has the authority to effect, from time to time, the
cancellation of outstanding options under the 1997 Plan in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock
on the new grant date.

In the event the Company is acquired by merger or consolidation, or the sale
of all or substantially all of the Company's assets or by a tender offer for
50% or more of the outstanding voting stock, the vesting of each option then
outstanding under the 1994 Plan and 1997 Plan will accelerate as if the
optionee remained in service an additional 12 months and will accelerate in
full to the extent the options are not assumed or replaced with a cash
incentive program by the successor or acquiring entity. Should the successor
or acquiring entity assume an outstanding option and the optionee be
involuntarily terminated within 12 months following the date of the
transaction, the assumed options will become fully vested upon termination.
The foregoing acceleration provisions apply both to options outstanding and
shares issued under the 1994 Plan and the 1997 Plan. In addition, the plan
administrator has the discretion to accelerate the vesting of outstanding
options.

Under the Automatic Option Grant Program, each individual who first joins
the Board as an eligible non-employee director on or after the effective date
of the 1997 Plan will receive at that time, an automatic option grant for
20,000 shares of Common Stock. In addition, at each annual stockholders
meeting, beginning with the first annual meeting after June 30, 1998, each
eligible non-employee director, whether or not he or she is standing for re-
election at that particular meeting, will be granted a stock option to
purchase 5,000 shares of

44
<PAGE>

Common Stock. The optionee will vest in each automatic option grant in a
series of four annual installments over the optionee's period of Board
service, beginning one year from the grant date. Each option will have an
exercise price equal to the fair market value of the Common Stock on the
automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. Vesting of
the automatic option shares will automatically accelerate and the options
become fully exercisable upon (i) a change in control of the Company by merger
or consolidation, sale of all or substantially all of its assets or tender
offer for 50% or more of the Company's outstanding voting stock or (ii) the
death or disability of the optionee while serving as a Board member.

The Board may amend or modify the 1997 Plan at any time within limits
prescribed by law. The 1997 Plan will terminate on June 30, 2007, unless
sooner terminated by the Board.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan (the "Purchase Plan"), was
adopted by the Board on July 18, 1997, subject to approval by the
stockholders. A total of 500,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, will be implemented by
overlapping offering periods, each with a maximum duration of 24-months, with
purchases occurring at six-month intervals. The initial offering period will
commence on the closing of this offering and will end on October 29, 1999,
with the first purchase date to be April 30, 1998. The Purchase Plan will be
administered by the Board or the Compensation Committee of the Board.
Employees will be eligible to participate if they are employed by the Company
for more than 20 hours per week. The Purchase Plan permits eligible employees
to purchase Common Stock through payroll deductions, which may not exceed 10%
of an employee's cash compensation. No more than 500 shares may be purchased
by each participant on the initial purchase date and 250 shares per
participant on each subsequent purchase date. The price of stock purchased
under the Purchase Plan will be 85% of the lower of the fair market value of
the Common Stock at the beginning of the 24-month offering period or on the
applicable semi-annual purchase date. Employees may end their participation in
the offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. Each outstanding
purchase right will be exercised immediately prior to a merger or
consolidation. The Board may amend or terminate the Purchase Plan immediately
after the close of any purchase date. However, under current tax law the Board
may not, without stockholder approval, materially increase the number of
shares of Common Stock available for issuance or materially modify the
eligibility requirements for participation. The Purchase Plan will in all
events terminate in April 2007.

CHANGE OF CONTROL ARRANGEMENTS

The Compensation Committee of the Board of Directors, as plan administrator
of the 1997 Plan, has the authority to provide for accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Named
Officers and any other executive officer, employee or director in connection
with certain changes in control of the Company or the subsequent termination
of the officer's employment following the change in control event. None of the
Named Officers have employment agreements with the Company, and their
employment may be terminated at any time.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board was formed in March 1997,
and the members of the Compensation Committee are Joseph C. Aragona, Shelby H.
Carter, Jr. and Nancy R. Woodward. Other than Nancy R. Woodward, who has
served as Secretary of the Company and is currently Chairman of the Board,
none of these individuals was at any time during fiscal 1997, or at any other
time, an officer or employee of the Company. No member of the Compensation
Committee of the Company serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board or Compensation Committee.

45
<PAGE>

CERTAIN TRANSACTIONS

TRANSACTIONS WITH DIRECTORS AND OFFICERS

The Company loaned Nancy R. Woodward, a director of the Company, and Douglas
W. Woodward $1,485,000 pursuant to a promissory note dated April 25, 1994. The
proceeds of the loan were used to purchase Preferred Stock of the Company. The
loan was repaid by the Woodwards, and the promissory note canceled by the
Company, on April 26, 1995.

In October 1995, the Company granted David R. Bradford, a director of the
Company and General Counsel of Novell, a greater than 5% stockholder of the
Company, options to purchase 10,000 shares of its Common Stock at an exercise
price of $0.13 per share. In August 1996, the Company granted options to
purchase 10,000 shares of its Common Stock at an exercise price of $0.13 per
share to Shelby H. Carter, Jr., a director of the Company. In March 1997, the
Company granted Mr. Carter options to purchase 10,000 shares of its Common
Stock at an exercise price of $2.00 per share.

The Company has granted Novell a non-exclusive, perpetual, royalty-free,
irrevocable license to reproduce and distribute an earlier version of Btrieve
and to reproduce and use internally Btrieve-licensed products and source code.
The Company has also entered into a Joint Venture Agreement with Novell Japan,
Ltd. to form Btrieve Technologies Japan, Ltd.

In April 1995, the Company sold 2,213,132 shares of Series C Preferred Stock
to the following stockholders for $1.23 per share:

<TABLE>
<S> <C>
Austin Ventures IV-A, L.P. ...................................... 469,110
Austin Ventures IV-B, L.P. ...................................... 984,192
Technologies for Information and Entertainment, L.P. ............ 189,957
Technologies for Information and Publishing, L.P. ............... 189,958
Triad Ventures Limited, II....................................... 379,915
---------
2,213,132
</TABLE>

Pursuant to the Series C Stock Purchase Agreement, Joseph C. Aragona and
David A. Boucher became directors of the Company. Mr. Aragona is a General
Partner of AV Partners IV, L.P., which is the General Partner of Austin
Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. Mr. Boucher is a General
Partner of the entities that are the general partners of Technologies for
Information and Entertainment, L.P. and Technologies for Information and
Publishing, L.P. See "Principal and Selling Stockholders" for more information
regarding securities held by these purchasers.

INDEMNIFICATION

The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary
duty as directors, except to the extent otherwise required by the Delaware
General Corporation Law. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions that may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.

46
<PAGE>

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors on the Board
of Directors, and will continue to be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.

47
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of its Common Stock as of June 30, 1997, and as
adjusted to reflect the sale of shares offered hereby, by (i) each person who
is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Officers and (iv) all current executive officers and directors as a
group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING NUMBER OF AFTER OFFERING(2)
NAME AND ADDRESS OF ------------------------------ SHARES BEING ------------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED(2) NUMBER PERCENT(3)
- ------------------- --------------- -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Funds affiliated with Austin Ventures (4)..... 2,330,057 21.0% -- 2,330,057 17.8%
114 West Seventh Street
1300 Norwood Tower
Austin, TX 78701
Novell, Inc (5)............................... 1,500,000 13.5 1,153,846 346,154 2.6
122 East 1100 South
Provo, UT 84606
Triad Ventures Limited, II (6)................ 609,112 5.5 468,548 140,564 1.1
4600 Post Oak Place, Suite 100
Houston, TX 77027
Funds affiliated with Applied Technology (7).. 609,112 5.5 234,274 374,838 2.9
1001 West Avenue
Austin, TX 78701
Ron R. Harris (8)............................. 1,585,816 12.8 -- 1,585,816 11.0
Robert J. Adams, Jr. (9)...................... 150,000 1.3 -- 150,000 1.1
Theodule J. Doucet, Jr. (10).................. 100,000 * -- 100,000 *
Marcus D. Marshall (11)....................... 70,000 * -- 70,000 *
James R. Offerdahl............................ 200,000 1.8 -- 200,000 1.5
Nancy R. and Douglas W. Woodward (12)......... 4,666,851 42.0 143,332 4,523,519 34.5
Joseph C. Aragona (4)......................... 2,330,057 21.0 -- 2,330,057 17.8
David A. Boucher (7).......................... 609,112 5.5 234,274 374,838 2.9
David R. Bradford (13)........................ 10,000 * -- 10,000 *
Shelby H. Carter, Jr. (14).................... 20,000 * -- 20,000 *
All directors and executive officers as a
group (12 persons) (15)...................... 9,881,836 77.6% 377,606 9,504,230 64.5%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment
power with respect to securities. Unless otherwise indicated, the address
for each listed stockholder is c/o Pervasive Software Inc., 8834 Capital
of Texas Highway, Austin, Texas 78759. To the Company's knowledge, except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to the shares of Common Stock
indicated.
(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(3) Percentage of beneficial ownership is based on 11,104,743 shares of
Common Stock outstanding as of June 30, 1997, and 13,104,743 shares of
Common Stock outstanding after the completion of this offering. The
number of shares of Common Stock beneficially owned includes the shares
issuable pursuant to stock options that are exercisable within 60 days of
June 30, 1997. Shares issuable pursuant to stock options are deemed
outstanding for computing the percentage of the person holding such
options but are not outstanding for computing the percentage of any other
person. The number of shares of Common Stock outstanding after this
offering includes 2,000,000 shares of Common Stock being offered for sale
by the Company in this offering.

48
<PAGE>

(4) Includes 752,117 shares held by Austin Ventures IV-A, L.P. and 1,577,940
shares held by Austin Ventures IV-B, L.P. Mr. Aragona, a director of the
Company, is a General Partner of AV Partners IV, L.P., which is the
general partner of Austin Ventures IV-A, L.P. and Austin Ventures IV-B,
L.P. Mr. Aragona disclaims beneficial ownership of the shares held by
Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. except to the
extent of his pecuniary interest therein arising from his general
partnership interest in AV Partners IV, L.P.
(5) If the over-allotment option is exercised in full, Novell, Inc. will sell
an additional 346,154 shares.
(6) If the over-allotment option is exercised in full, Triad Ventures
Limited, II will sell an additional 140,564 shares.
(7) Includes 304,556 shares held by Technologies for Information and
Publishing, L.P. and 304,556 shares held by Technologies for Information
and Entertainment, L.P. Mr. Boucher, a director of the Company, is a
General Partner of the entities that are the general partners of
Technologies for Information and Publishing, L.P. and Technologies for
Information and Entertainment, L.P. Mr. Boucher disclaims beneficial
ownership of the shares held by Technologies for Information and
Publishing, L.P. and Technologies for Information and Entertainment, L.P.
except to the extent of his pecuniary interest therein arising from his
general partnership interest in Technologies for Information and
Publishing, L.P. and Technologies for Information and Entertainment, L.P.
All of the shares being sold in the offering are being sold by
Technologies for Information and Publishing, L.P. If the over-allotment
option is exercised in full, Technologies for Information and Publishing,
L.P. will sell an additional 70,282 shares.
(8) Includes options immediately exercisable for 1,335,816 shares of Common
Stock.
(9) Includes options immediately exercisable for 50,000 shares of Common
Stock.
(10) Includes options immediately exercisable for 67,500 shares of Common
Stock.
(11) Includes options immediately exercisable for 10,000 shares of Common
Stock.
(12) Includes 300,000 shares held by Northern Trust Bank of Texas N.A. as
trustee of Nancy R. Woodward Grantor Retained Annuity Trust and 300,000
shares held by Northern Trust Bank of Texas N.A. as trustee of Douglas W.
Woodward Grantor Retained Annuity Trust. If the over-allotment option is
exercised in full, Mr. and Mrs. Woodward will sell an additional 43,000
shares.
(13) Includes options immediately exercisable for 10,000 shares of Common
Stock.
(14) Includes options immediately exercisable for 10,000 shares of Common
Stock.
(15) Includes options immediately exercisable for 1,623,316 shares of Common
Stock. If the over-allotment option is exercised in full, the number and
percentage of shares beneficially owned will be 9,390,948 and 63.8%,
respectively.

49
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 75,000,000 shares of Common Stock, $0.001 par value,
and 5,000,000 shares of Preferred Stock, $0.001 par value.

COMMON STOCK

As of June 30, 1997, there were 1,391,611 shares of Common Stock outstanding
that were held of record by approximately 95 stockholders. There will be
13,104,743 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and assuming no exercise after June 30,
1997, of outstanding options) after giving effect to the sale of the shares of
Common Stock to the public offered hereby and the conversion of the Company's
Preferred Stock into Common Stock at a one-to-one ratio.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of the liquidation, dissolution,
or winding up of the Company, the holders of Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of Preferred Stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. At present, the Company has no plans to
issue any of the Preferred Stock.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW

Certificate of Incorporation and Bylaws

The Company's Restated Certificate of Incorporation provides that, upon the
closing of this offering, the Board of Directors will be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification of the Board of Directors has the effect of generally requiring
at least two annual stockholder meetings, instead of one, to replace a
majority of the Board members. The Restated Certificate of Incorporation also
provides that, effective upon the closing of this offering, all stockholder
actions must be effected at a duly called meeting and not by a consent in
writing. Provisions of the Bylaws and the Restated Certificate of
Incorporation provide that the stockholders may amend the Bylaws or certain
provisions of the Restated Certificate of Incorporation only with the
affirmative vote of 75% of the Company's capital stock. Further, the Bylaws
(i) provide that only the Board of Directors may call special meetings of the
stockholders and (ii) establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the
Company, including proposed nominations of persons for election to the Board
of Directors. These provisions of the Restated Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors
and to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are

50
<PAGE>

designed to reduce the vulnerability of the Company to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for the Company's
shares and, as a consequence, they also may inhibit fluctuations in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in the management of the Company. See "Risk Factors--Anti-takeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."

Delaware Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

REGISTRATION RIGHTS

After this offering, the holders of approximately 9,713,132 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the agreement between
the Company and the holders of such registrable securities, if the company
proposes to register any of its securities under the Securities Act, either
for its own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such registration
and are entitled to include share of such Common Stock therein. Additionally,
such holders are also entitled to certain demand registration rights pursuant
to which they may require the Company to file a registration statement under
the Securities Act at its expense with respect to their shares of Common
Stock, and the Company is required to use its best efforts to effect such
registration. Further, holders may require the Company to file additional
registration statements on Form S-3 at the Company's expense. All of these
registration rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of
shares included in such registration and the right of the Company not to
effect a requested registration within six months following an offering of the
Company's securities, including the offering made hereby.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer and Trust, Inc., and its telephone number is (303) 234-5300.

51
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 13,104,743 shares of
Common Stock outstanding (assuming no exercise of the Underwriter's over-
allotment option or of outstanding options after June 30, 1997). Of this
amount, the 4,000,000 shares offered hereby (4,600,000 if the Underwriter's
over-allotment option is exercised in full) will be available for immediate
sale in the public market as of the date of this Prospectus. Approximately
9,104,743 additional shares will be available for sale in the public market
following the expiration of 180-day lock-up agreements with the
Representatives of the Underwriters or the Company, subject in some cases to
compliance with the volume and other limitations of Rule 144.

<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ------------------------ -------
<S> <C> <C>
Upon Effectiveness...... 4,000,000 Freely tradeable shares sold in offering
and shares salable under Rule 144(k) that
are not subject to 180-day lock-up
180 days................ 9,104,743 Lock-up released; shares salable under Rule
144, 144(k) or 701
Thereafter.............. 0 Restricted securities held for one year or
less
</TABLE>

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year is entitled to sell within any three-month period commencing 90 days
after the date of this Prospectus a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 131,000 shares immediately after the offering) or (ii) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to the filing of a Form 144 with respect to such sale. A person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after the applicable holding periods have been
satisfied.

The Company is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common
Stock of the Company, the personal circumstances of the sellers and other
factors. Prior to this offering, there has been no public market for the
Common Stock, and there can be no assurance that a significant public market
for the Common Stock will develop or be sustained after the offering. Any
future sale of substantial amounts of the Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.

The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Robertson, Stephens & Company LLC for a
period of 180 days from the date of this Prospectus (the "180-day Lock-up
Period"), except that the Company may, without such consent, grant options and
sell shares pursuant to the Company's stock plans.

Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. As of the date of this Prospectus, the holders of
options exercisable into approximately 2,259,697 shares of Common Stock will
be eligible to sell their shares upon the expiration of the 180-day Lockup
Period, or subject in certain cases to vesting of such options.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock issued or reserved for
issuance under the Company's stock plans within 180 days after the date of
this Prospectus, thus permitting the resale of such shares by nonaffiliates in
the public market

52
<PAGE>

without restriction under the Securities Act. The Company intends to register
these shares on Form S-8, along with options that have not been issued under
the Company's stock plans as of the date of this Prospectus.

In addition, after this offering, the holders of approximately 9,713,132
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock--Registration Rights."

53
<PAGE>

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, UBS Securities LLC and First Albany
Corporation (the "Representatives"), have severally agreed with the Company
and the Selling Stockholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC.................................. 1,642,500
UBS Securities LLC................................................. 1,314,000
First Albany Corporation........................................... 328,500
BT Alex. Brown Incorporated........................................ 125,000
Hambrecht & Quist LLC.............................................. 125,000
Montgomery Securities.............................................. 125,000
Needham & Company, Inc............................................. 100,000
Hoak Breedlove Wesneski & Co....................................... 80,000
Southcoast Capital Corp............................................ 80,000
Southwest Securities, Inc.......................................... 80,000
---------
Total............................................................ 4,000,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not in excess of $0.40 per share,
of which $0.10 may be reallowed to other dealers. After the initial public
offering, the public offering price, concession, and reallowance to dealers
may be reduced by the Representatives. No such reduction shall change the
amount of proceeds to be received by the Company as set forth on the cover
page of this Prospectus.

The Selling Stockholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 600,000 additional shares of Common Stock at the same price per
share as the Company and Selling Stockholders will receive for the 4,000,000
shares that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown
in the above table represents as a percentage of the 4,000,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 4,000,000 shares are being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.

Each officer and director who holds shares of the Company and holders
(including such officers and directors) of 9,104,743 shares of Common Stock
have agreed, for the 180-day Lock-up Period, subject to certain exceptions,
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge, or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock owned as of the
date of this Prospectus directly by such holders or with respect to which they
have the power of disposition, without the prior written consent of Robertson,
Stephens & Company LLC. However, Robertson, Stephens & Company LLC may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. There are no agreements between
the Representatives and any of the Company's stockholders providing consent by
the Representatives to the sale of shares prior to the expiration of the 180-
day Lock-up Period. In addition, the Company has agreed that during the 180-
day Lock-up Period, the Company will not, without the prior written consent of
Robertson, Stephens & Company

54
<PAGE>

LLC, subject to certain exceptions, issue, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon
the exercise of outstanding options, and the Company's issuance of options and
shares under existing employee stock option and stock purchase plans. See
"Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined through negotiations among the
Company, the Selling Stockholders and the Representatives. Among the factors
considered in such negotiations were prevailing market conditions, certain
financial information of the Company, market valuations of other companies
that the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

55
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company and certain of the Selling Stockholders by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Austin, Texas. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, Austin, Texas.

EXPERTS

The consolidated financial statements and the related financial schedule of
Pervasive Software Inc. at June 30, 1996 and 1997 and for each of the three
years ended June 30, 1995, 1996 and 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and such Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov.

56
<PAGE>

PERVASIVE SOFTWARE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)................................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and StockholdersPervasive Software Inc.

We have audited the accompanying consolidated balance sheets of Pervasive
Software Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in redeemable convertible preferred stock
and stockholders' equity (deficit) and cash flows for each of the three years
in the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pervasive
Software Inc. at June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Austin, Texas
July 24, 1997

F-2
<PAGE>

PERVASIVE SOFTWARE INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY
---------------- AT JUNE 30, 1997
1996 1997 (NOTE 14)
------- ------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 2,739 $ 4,058
Trade accounts receivable, net of
allowance for doubtful accounts of $100
in 1997.................................. 2,568 2,803
Inventory................................. 89 105
Deferred income taxes..................... -- 157
Prepaid expenses and other current
assets................................... 695 555
------- -------
Total current assets........................ 6,091 7,678
Property and equipment, net................. 1,232 2,664
Other assets................................ 148 103
------- -------
Total assets................................ $ 7,471 $10,445
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Trade accounts payable.................... $ 735 $ 1,052
Accrued payroll and payroll related
costs.................................... 459 517
Other accrued expenses.................... 916 2,273
Deferred revenue.......................... 1,792 1,267
Income taxes payable...................... -- 301
Deferred royalty payable--Novell, current
portion.................................. 421 708
------- -------
Total current liabilities.................. 4,323 6,118
Deferred royalty payable--Novell, net of
current portion........................... 621 --
Minority interest in subsidiary............ 584 695
COMMITMENTS AND CONTINGENCIES
Redeemable convertible preferred stock..... 4,026 4,026 $ --
Stockholders' equity (deficit):
Convertible preferred stock............... 3,915 3,915 --
Common stock, $0.001 par value;
authorized--15,000,000 shares; issued and
outstanding--2,000 shares in 1996,
1,391,611 shares in 1997, and 11,104,743
shares on a pro forma basis............. -- 205 8,146
Retained deficit.......................... (5,998) (4,514) (4,514)
------- ------- -------
Total stockholders' equity (deficit)........ (2,083) (394) $ 3,632
------- ------- =======
Total liabilities and stockholders' equity
(deficit).................................. $ 7,471 $10,445
======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE>

PERVASIVE SOFTWARE INC.

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------ -------- -------
<S> <C> <C> <C>
Revenues............................................ $8,601 $ 13,476 $24,481
Costs and expenses:
Cost of revenues and technical support............ 1,997 2,605 3,310
Sales and marketing............................... 3,864 6,998 10,034
Research and development.......................... 2,399 4,477 5,996
General and administrative........................ 996 2,505 2,886
------ -------- -------
Total costs and expenses............................ 9,256 16,585 22,226
------ -------- -------
Operating income (loss)............................. (655) (3,109) 2,255
Interest and other income, net.................... 86 99 55
------ -------- -------
Income (loss) before income taxes and minority
interest........................................... (569) (3,010) 2,310
Provision for income taxes........................ (129) (170) (593)
Minority interest in (earnings) loss of
subsidiary, net of tax........................... 89 (25) (127)
------ -------- -------
Net income (loss)................................... $ (609) $ (3,205) $ 1,590
====== ======== =======
Pro forma net income per share...................... $ 0.12
=======
Shares used in computing pro forma net income per
share.............................................. 13,368
=======
</TABLE>

See accompanying notes.

F-4
<PAGE>

PERVASIVE SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------
REDEEMABLE TOTAL
CONVERTIBLE CONVERTIBLE STOCKHOLDERS'
PREFERRED PREFERRED NOTE COMMON RETAINED EQUITY
STOCK STOCK RECEIVABLE STOCK DEFICIT (DEFICIT)
----------- ----------- ---------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1,
1994................... $ -- $ 5,250 $(1,485) $ -- $(2,203) $ 1,562
Issuance of Series C
Preferred Stock
(Note 7).............. 2,691 -- -- -- -- --
Conversion of Series B
Preferred Stock
(Note 7).............. 1,335 (1,335) -- -- -- (1,335)
Payment received on
note receivable....... -- -- 1,485 -- -- 1,485
Foreign currency
translation
adjustment............ -- -- -- -- (42) (42)
Net loss............... -- -- -- -- (609) (609)
------ ------- ------- ------ ------- -------
Balances at June 30,
1995................... 4,026 3,915 -- -- (2,854) 1,061
Foreign currency
translation
adjustment............ -- -- -- -- 61 61
Net loss............... -- -- -- -- (3,205) (3,205)
------ ------- ------- ------ ------- -------
Balances at June 30,
1996................... 4,026 3,915 -- -- (5,998) (2,083)
Issuance of 1,389,611
shares of common stock
pursuant to the
exercise of stock
options............... -- -- -- 205 -- 205
Foreign currency
translation
adjustment, cumulative
amount of $(87) at
June 30, 1997 ........ -- -- -- -- (106) (106)
Net income............. -- -- -- -- 1,590 1,590
------ ------- ------- ------ ------- -------
Balances at June 30,
1997................... $4,026 $ 3,915 $ -- $ 205 $(4,514) $ (394)
====== ======= ======= ====== ======= =======
Unaudited Pro Forma
Stockholders' Equity at
June 30, 1997 (Note
14).................... $ -- $ -- $ -- $8,146 $(4,514) $ 3,632
====== ======= ======= ====== ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE>

PERVASIVE SOFTWARE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss).................................. $ (609) $(3,205) $ 1,590
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 884 575 749
Other non cash items.............................. (112) 132 6
Change in current assets and liabilities:
Increase in current assets....................... (1,171) (1,663) (173)
Increase in accounts payable and accrued liabili-
ties............................................ 986 878 2,085
Increase (decrease) in deferred revenue.......... (62) 1,738 (525)
------- ------- -------
Net cash provided by (used in) operating
activities......................................... (84) (1,545) 3,732
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment................. (598) (843) (2,161)
Purchase of investment securities.................. (500) -- --
Proceeds from maturity of investment securities.... 500 -- --
------- ------- -------
Net cash used in investing activities............... (598) (843) (2,161)
CASH FROM FINANCING ACTIVITIES
Proceeds from issuance of redeemable convertible
preferred stock .................................. 2,691 -- --
Proceeds from payment on note receivable........... 1,485 -- --
Proceeds from minority interest investment in sub-
sidiary........................................... 813 -- --
Payment of royalty to Novell....................... -- -- (370)
Proceeds from exercise of stock options............ -- -- 205
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 4,989 -- (165)
Effect of exchange rate on cash and cash
equivalents........................................ (42) 31 (87)
------- ------- -------
Increase (decrease) in cash and cash equivalents.... 4,265 (2,357) 1,319
Cash and cash equivalents at beginning of year...... 831 5,096 2,739
------- ------- -------
Cash and cash equivalents at end of year............ $ 5,096 $ 2,739 $ 4,058
======= ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

1. THE COMPANY

Pervasive Software Inc. (the Company), formerly Btrieve Technologies, Inc.,
was incorporated in Delaware on January 12, 1994. The Company is a leading
provider of embedded database software designed to enable the cost-effective
development, deployment and support of low-maintenance packaged client/server
applications. The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

Software Development Costs and Purchased Technology

Software development costs incurred by the Company in connection with its
long-term development projects are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed (Statement 86). The Company
has not capitalized any internal costs through June 30, 1997 related to its
software development activities.

The Company recorded purchased technology resulting from the acquisition of
certain software and related technology from Novell, Inc. (Novell) in April
1994. These costs have been allocated among the Company's various product
lines and amortized over the estimated life of each product line, (six months
to thirty-three months). Amortization expense related to purchased technology
was approximately $639,000 and $83,000 for the years ended June 30, 1995 and
1996, respectively, and is reflected in the costs of revenues and technical
support. Purchased technology was fully amortized as of June 30, 1996.

Advertising Costs

The Company expenses costs of producing advertising and sales related
collateral materials as incurred. Other production costs associated with
direct mail programs, placement costs associated with magazine or

F-7
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

other printed media and all direct costs associated with trade shows and other
sales related events are expensed when the related direct mail is sent,
advertising space is used or the event is held. These expenses in 1995, 1996
and 1997 were approximately $1,300,000, $1,900,000 and $700,000, respectively.

Income Taxes

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

Cash and Cash Equivalents

Cash and cash equivalents in the statement of cash flows includes cash,
certificates of deposit, and securities with original maturities less than
thirty days.

Inventory

Inventories, consisting primarily of finished goods, are stated at the lower
of cost (first in, first out) or market. The Company utilizes the services of
a fulfillment house to manufacture, store, and ship inventory and process
returned product. The Company does not take title to product in inventory
until the point at which the product is packaged by the fulfillment house and
is available for shipping.

Property and Equipment

Property and equipment are stated at cost and are being depreciated over
their estimated useful lives (2 to 5 years) using the straight-line method.
Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter.

In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets. As of June 30, 1997 there were no
events or circumstances which indicated that long-lived assets of the Company
might be impaired.

Foreign Currency Transactions

For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end exchange rates, and income statement items are
translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and were not material in
1995, 1996 or 1997.

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

F-8
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Fair Value of Financial Instruments

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

Concentration of Credit Risk

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

For the year ended June 30, 1995, Customers A and B accounted for $973,000
and $1,335,000, respectively, of the Company's total revenues. For the year
ended June 30, 1996, Customer C accounted for $2,390,000 of the Company's
total revenues. For the year ended June 30, 1997, Customers C and D accounted
for $2,530,000 and $4,530,000, respectively, of the Company's total revenues.
No other customers accounted for more than 10% of the Company's revenues
during the years ended June 30, 1995, 1996 or 1997.

Use of Estimates

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

Net Income (Loss) Per Share

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of
the Company's anticipated initial public offering. Accordingly, historical net
income (loss) per share is not considered meaningful and has not been
presented herein. Instead, a pro forma calculation assuming the conversion of
all outstanding shares of convertible preferred stock into common stock upon
the Company's initial public offering using the if-converted method is
presented.

Pro forma net income (loss) per share is computed using the weighted average
number of shares of common stock and dilutive common equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletins, common stock and common equivalent
shares issued by the Company during the 12-month period prior to the proposed
offering (See Note 14) have been included in the calculation (using the
treasury stock method at an assumed public offering price) as if they were
outstanding for all periods presented regardless of whether they are dilutive.

Recently Issued Accounting Standard

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (Statement 128), which is required to be adopted
for financial statements issued for periods ending after December 15, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements, the presentation of primary earnings per share is replaced with
a presentation of basic earnings per share, the calculation of which excludes
the dilutive effect of common stock equivalents. The adoption of Statement 128
is expected to result in a basic earnings (loss) per share of $0.89 for the
year ended June 30, 1997. Compared to pro forma earnings per share as
currently presented, the adoption of Statement 128 results in an increase of
$0.77 per share for 1997. There is no impact on the fully diluted earnings per
share calculation for the year presented.

F-9
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Reclassifications

Certain reclassifications have been made to prior period's financial
statements to conform to the 1997 presentation.

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------ -------
<S> <C> <C>
Computer equipment and purchased software................... $1,238 $ 2,881
Office equipment, furniture and fixtures.................... 538 932
Leasehold improvements...................................... 135 213
------ -------
1,911 4,026
Less accumulated depreciation and amortization.............. (679) (1,362)
------ -------
$1,232 $ 2,664
====== =======
</TABLE>

4. INCOME TAXES

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Domestic income (loss).............................. $(311) $(3,083) $1,384
Foreign income (loss)............................... (258) 73 926
----- ------- ------
Income (loss) before taxes and minority interest.... $(569) $(3,010) $2,310
===== ======= ======

Details of the income tax provision consist of the following (in thousands):

<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Income tax provision:
Current:
Federal......................................... $ 71 $ (61) $ 185
Foreign......................................... 129 160 551
State........................................... -- -- 14
----- ------- ------
Total current................................. 200 99 750
Deferred:
Federal......................................... (71) 71 (157)
----- ------- ------
Total deferred................................ (71) 71 (157)
----- ------- ------
$ 129 $ 170 $ 593
===== ======= ======
</TABLE>

The foreign taxes incurred in the years ended June 30, 1995 and 1996 are
predominantly withholdings on royalties from foreign countries.

F-10
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. INCOME TAXES--(CONTINUED)

The Company's provision for income taxes differs from the expected provision
(benefit) amount computed by applying the statutory federal income tax rate of
34% to income before income taxes and minority interest for 1995, 1996 and
1997 as a result of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1995 1996 1997
----- ------- -----
<S> <C> <C> <C>
Computed at statutory rate of 34%..................... $(193) $(1,023) $ 785
Foreign income taxed at different rates............... 129 159 236
Future benefits not currently recognized.............. 189 1,023 (285)
Utilization of tax loss and credit carryforward....... -- -- (170)
Other................................................. 4 11 27
----- ------- -----
$ 129 $ 170 $ 593
===== ======= =====
</TABLE>

The components of deferred income taxes at June 30, 1996 and 1997 are as
follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Purchased technology, net................................ $ 868 $ 799
Net operating loss carryforwards......................... 168 --
Tax credit carryforwards................................. 288 308
Accrued expenses not deductible for tax purposes......... 114 352
Revenue deferred for financial purposes.................. 671 296
Other.................................................... 17 100
------- -------
Total deferred tax assets.............................. 2,126 1,855
Valuation allowance for deferred tax assets................ (2,126) (1,698)
------- -------
Net deferred tax assets................................ $ -- $ 157
======= =======
</TABLE>

Management believes that, based on a number of factors, it is more likely
than not that a substantial amount of the Company's deferred tax assets may
not be realized. These factors include the lack of a significant history of
profits, recent increases in expense levels to support the Company's growth,
the lack of carryback capacity to realize the deferred tax asset and the fact
that the Company operates in an intensely competitive market subject to rapid
change. Accordingly, the Company has recorded a valuation allowance to the
extent deferred tax assets exceed the potential benefit from carryback of
deferred items to offset current or prior year taxable income.

As of June 30, 1997, the Company has a foreign tax credit carryforward of
approximately $308,000, which will begin to expire in the year ending June 30,
1999.

5. EMPLOYEE BENEFITS

Effective January 1, 1995, the Company's employees were offered health and
dental coverage under a partially self-funded plan in which the Company
purchases specific stop-loss insurance coverage at $30,000 per year, per
employee. The Company has also purchased an aggregate stop-loss insurance
coverage to limit its maximum annual exposure to claims funded. Based on the
policy census at June 30, 1997, such maximum annual exposure for the policy
year ending December 31, 1997 is approximately $380,000. The Company pays a
fixed fee per individual covered for administrative costs of the administrator
and the cost of the stop-loss

F-11
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. EMPLOYEE BENEFITS--(CONTINUED)

insurance purchased on the Company's behalf. The Company contributes 100%
toward the cost to insure each employee and 75% toward the cost to insure
dependents for which coverage is requested by the employee. Expenses for the
partially self-funded plan including premiums and claims funded for the years
ended June 30, 1995, 1996 and 1997 were approximately $87,000, $255,000 and
$311,000, respectively.

The Company adopted a 401(k) retirement plan which is available to all
domestic, full-time employees beginning in April, 1995. The Company's expenses
related to the plan were not significant in the years ended June 30, 1995,
1996 or 1997.

6. COMMON STOCK AND STOCK OPTIONS

The Company has adopted the Pervasive Software Inc., First Amended and
Restated 1994 Incentive Plan (the 1994 Plan), under which incentive stock
options may be granted to employees of the Company entitling them to purchase
shares of common stock for a maximum of ten years (five years in the case of
options granted to a person possessing more than 10% of the combined voting
power of the Company as of the date of grant). The exercise price for
incentive stock options may not be less than fair market value of the common
stock on the date of the grant (110% of fair market value in the case of
options granted to a person possessing more than 10% of the combined voting
power of the Company). Nonqualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company
under the 1994 Plan. The exercise price for nonqualified stock options may not
be less than 85% of the fair market value of the common stock on the date of
the grant (110% of fair market value in the case of options granted to a
person possessing more than 10% of the combined voting power of the Company).
The Company may also award Restricted Stock and Stock Appreciation Rights
subject to provisions in the Plan.

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

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

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals market price of the underlying
stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method prescribed by
Statement 123. The Company has evaluated the effects of Statement 123 and
determined that it does not have a material effect on the Company's statement
of operations or earnings per share.

F-12
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. COMMON STOCK AND STOCK OPTIONS--(CONTINUED)

A summary of changes in common stock options during the year ended June 30,
1995, 1996 and 1997 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICE
---------- ----------- --------
<S> <C> <C> <C>
Options outstanding, July 1, 1994........... -- $ -- $ --
Granted................................... 2,297,316 0.10- 0.13 0.10
Exercised................................. -- -- --
Surrendered............................... (42,250) 0.10 0.10
---------- ----------- -----
Options outstanding, June 30, 1995.......... 2,255,066 0.10- 0.13 0.10
Granted................................... 644,510 0.13 0.13
Exercised................................. -- -- --
Surrendered............................... (108,600) 0.10- 0.13 0.11
---------- ----------- -----
Options outstanding, June 30, 1996.......... 2,790,976 0.10- 0.13 0.11
Granted................................... 1,094,018 0.13- 4.60 1.17
Exercised................................. (1,389,611) 0.10- 2.00 0.15
Surrendered............................... (235,686) 0.10- 2.00 0.15
---------- ----------- -----
Options outstanding, June 30, 1997.......... 2,259,697 $0.10-$4.60 $0.59
========== =========== =====
</TABLE>

The following is additional information relating to options outstanding at
June 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------------------
WEIGHTED-
WEIGHTED- AVERAGE
NUMBER AVERAGE REMAINING
RANGE OF OF EXERCISE CONTRACTUAL
EXERCISE PRICE OPTIONS PRICE LIFE OF OPTIONS
-------------- --------- -------------- ---------------
<S> <C> <C> <C>
$0.10 to $0.30 1,676,172 $0.11 7.96
0.60 to 0.90 294,200 0.52 9.53
2.00 to 4.60 289,325 3.21 9.85
-------------- --------- -------------- ----
$0.10 to $4.60 2,259,697 $0.11 to $3.21 8.39
============== ========= ============== ====
</TABLE>

Of the options exercised, 670,699 shares remain unvested at June 30, 1997
and may be repurchased by the Company should vesting requirements not be
fulfilled.

Common stock reserved at June 30, 1997 consists of the following:

<TABLE>
<S> <C>
For conversion of Preferred Stock................................. 9,713,132
For exercise of stock options..................................... 3,428,611
----------
13,141,743
==========
</TABLE>

F-13
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. PREFERRED STOCK

At June 30, 1996 and 1997 preferred stock outstanding is as follows (in
thousands, except share data):

<TABLE>
<CAPTION>
JUNE 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Redeemable convertible preferred stock:
Series B; $0.001 par value; 1,335,149 shares authorized,
issued and outstanding in 1996 and 1997................... $1,335 $1,335
Series C; $0.001 par value; 2,213,132 shares authorized,
issued and outstanding in 1996 and 1997................... 2,691 2,691
------ ------
$4,026 $4,026
====== ======
Convertible preferred stock:
Series A; $0.001 par value; 1,500,000 shares authorized,
issued and outstanding in 1996 and 1997................... $1,500 $1,500
Series B; $0.001 par value; 4,664,851 shares authorized,
issued and outstanding in 1996 and 1997................... 2,415 2,415
------ ------
$3,915 $3,915
====== ======
</TABLE>

During the year ended June 30, 1995, the Company issued 2,213,132 shares of
Series C Preferred Stock at $1.23 per share resulting in net proceeds of
$2,691,000 including $34,000 of expenses. Concurrent with the issuance of
Series C Preferred Stock, the Series C Preferred shareholders also purchased
1,335,149 shares of Series B Preferred Stock from existing Series B Preferred
shareholders. There was no preferred stock activity during the years ended
June 30, 1996 and 1997.

Series A, B and C Preferred shares are subject to the rights, preferences,
restrictions and other matters set forth in the Company's Second Amended and
Restated Certificate of Incorporation (Articles), effective April 1995, and
the Series B and C Preferred Stock Purchase Agreements, Investors' Rights
Agreement, Voting Agreement, Amendment to Co-Sale Agreement and Management
Rights Agreement, all effective April 1995. The holders of preferred shares
are entitled to, among other things, voting rights, non-cumulative dividend
rights, liquidation rights and conversion rights. The Series C Preferred
shares and the 1,335,149 shares of Series B Preferred shares held by Series C
Preferred shareholders are redeemable at the Series C Preferred and Series B
Preferred Preference Amount, respectively, as defined in the following
paragraph, on or after April 19, 2001 by written notice given to the Company
executed by a majority of the holders of Series C Preferred shares. Series A
Preferred shares and Series B Preferred shares not held by holders of Series C
Preferred shares are not redeemable.

The holders of each share of Series A, B and C Preferred have the right to
one vote for each share of voting common stock into which such Preferred Stock
could then be converted, subject to the provisions in the Articles. Holders of
Series A, B and C Preferred shares may receive dividends as may be declared by
the Board of Directors. In the event of a voluntary or involuntary
liquidation, dissolution, or winding up the affairs of the Company, the
holders of shares of Series A, B or C Preferred shall be entitled to receive,
out of available assets, an amount equal to $1.00 per share for each share of
Series A Preferred held (the Series A Preferred Preference Amount), an amount
equal to $0.4855 per share for each share of Series B Preferred held (the
Series B Preferred Preference Amount) and an amount equal to $1.6812 per share
for each share of Series C Preferred held (the Series C Preferred Preference
Amount). In each case, the Preferred Preference

F-14
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. PREFERRED STOCK--(CONTINUED)

Amount is subject to adjustments in the future related to certain events
defined in Articles. Further, Series A, B and C Preferred shares may be
converted, at the option of the holder, at any time into shares of voting
common stock at a rate, presently on a one-to-one basis, subject to formula
antidilution adjustments as defined in the Articles. Conversion is automatic
upon the closing of a public offering that results in aggregate cash proceeds
to the Company of at least $15,000,000 (prior to underwriters commissions and
expenses) and that has a public offering price of not less than $3.75 per
share.

8. INVESTMENT IN BTRIEVE TECHNOLOGIES JAPAN, LTD.

In May 1995, the Company acquired a 65.5% controlling interest in a newly
formed entity, Btrieve Technologies Japan, Ltd. (Btrieve Japan). Btrieve Japan
was formed for the purpose of localization, support and marketing in Japan of
the Company's embedded database products for packaged client/server
applications. Btrieve Japan's net assets before elimination of intercompany
balances at June 30, 1996 and 1997 were approximately $1,700,000 and
$2,000,000, respectively.

Btrieve Japan has entered into various operating agreements with certain of
its minority shareholders in which these certain shareholders provide
localization, pre- and post-sales support, management and marketing services.
Expenses related to these agreements were $100,000, $590,000 and $616,000 in
1995, 1996 and 1997, respectively. One of the minority shareholders is also a
distributor for Btrieve Japan. Sales to this distributor were approximately
$320,000, $2,390,000 and $2,530,000 in 1995, 1996 and 1997, respectively.
Receivables from this shareholder were $390,000 and $530,000 as of June 30,
1996 and 1997, respectively.

9. LINES OF CREDIT

At June 30, 1997, the Company has a $2,000,000 revolving line of credit and
a $2,000,000 equipment line of credit with a bank, but at no time has borrowed
under such lines. Total borrowings under the revolving line of credit are
generally limited to 80% of eligible accounts receivable. The revolving line
of credit will expire on March 31, 1998. Borrowings under the equipment line
of credit are limited to 80% of eligible equipment purchases during the 1997
calendar year and must be borrowed prior to December 31, 1997. The equipment
line of credit must be repaid in 24 equal installments beginning January 31,
1998. Both lines of credit are collateralized by substantially all accounts
receivable, inventory and equipment and bear interest at the bank's prime
lending rate. On June 30, 1997, the Company had approximately $2,100,000 of
borrowing capacity under the two lines.

10. COMMITMENTS AND CONTINGENCIES

The Company leases office space under a lease with an unrelated party. The
Company is obligated for its proportionate share of utilities and other
defined operating expenses of the building. Office rent expense for the year
ended June 30, 1995, 1996 and 1997, was approximately $318,000, $451,000 and
$573,000, respectively.

Future minimum lease payments at June 30, 1997 under the operating lease for
office space are as follows (in thousands):

The lease for office space includes one option to renew the lease for an
additional five year period and is partially collateralized by a letter of
credit in the amount of $126,000 to and in favor of the landlord.

F-15
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

In connection with the acquisition of technology rights and other intangible
assets from Novell, the Company agreed to pay a deferred royalty equal to 5%
of the Company's net revenues, up to a maximum royalty of $1,100,000. Payments
for royalties earned in each calendar quarter are due two years after the end
of each calendar quarter. The total estimated royalty of $950,000, net of an
imputed interest discount of $150,000, was recorded at the acquisition date.
Royalty payments to be paid to Novell will be approximately $708,000 in 1998
at which time the Company will have paid the maximum amount and will have no
further obligations.

11. FOREIGN CURRENCY SWAP AGREEMENT

The Company has entered into foreign currency swap contracts to minimize
foreign exchange exposure related to yen-denominated intercompany
transactions.

At June 30, 1995, the notional amount of the foreign currency contract
outstanding was approximately $1.4 million and matured in 1996. At June 30,
1996, there were no foreign currency contracts outstanding. At June 30, 1997,
the notional amount of the foreign currency contract outstanding was
approximately $224,000 and matures in 1999. Gains and losses on currency swaps
were not material to the consolidated financial statements as of June 30,
1995, 1996 and 1997.

12. SEGMENTS OF BUSINESS AND GEOGRAPHIC AREA INFORMATION

The Company is engaged in the design, development and marketing of embedded
database products for packaged client/server applications. The Company
considers its business activities to constitute a single segment of business.

A summary of the Company's operations by geographic area follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------ -------- -------
<S> <C> <C> <C>
Revenue:
United States
Domestic...................................... $5,050 $ 7,747 $16,135
Export
Europe....................................... 1,591 2,716 4,693
Japan........................................ 1,335 -- --
Rest of World................................ 304 588 790
------ -------- -------
Total United States......................... 8,280 11,051 21,618
Europe......................................... -- -- --
Japan.......................................... 321 2,425 2,863
------ -------- -------
Total....................................... $8,601 $13,476 $24,481
====== ======== =======
Operating income (loss):
United States.................................. $ (397) $ (267) $ 5,054
Europe......................................... -- (2,918) (3,562)
Japan.......................................... (258) 76 763
------ -------- -------
Total....................................... $ (655) $ (3,109) $ 2,255
====== ======== =======
Identifiable assets:
United States.................................. $5,814 $ 5,646 $ 6,644
Europe......................................... -- 392 810
Japan.......................................... 2,666 1,433 2,991
------ -------- -------
Total....................................... $8,480 $ 7,471 $10,445
====== ======== =======
</TABLE>

F-16
<PAGE>

PERVASIVE SOFTWARE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1995 1996 1997
------- ------- -----
<S> <C> <C> <C>
Increase in trade accounts receivable............. $(1,036) $(1,485) $(259)
Decrease in Novell receivable..................... 593 -- --
Decrease (increase) in inventory.................. (126) 123 (19)
Decrease (increase) in prepaid expenses and
other............................................ (602) (301) 105
------- ------- -----
$(1,171) $(1,663) $(173)
======= ======= =====
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
--------------------
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Increase (decrease) in trade accounts payable......... $ 721 $(126) $ 342
Increase in accrued payroll and payroll related
costs................................................ 181 213 57
Increase in income taxes refundable/payable........... (321) 311 301
Increase in accrued expenses.......................... 405 480 1,385
----- ----- ------
$ 986 $ 878 $2,085
===== ===== ======
Supplemental disclosures:
Interest paid during the year....................... $ -- $ -- $ --
===== ===== ======
Income taxes paid (refunded) during the year:
Domestic.......................................... $ 392 $(316) $ 376
===== ===== ======
Foreign........................................... $ 129 $ 159 $ --
===== ===== ======
</TABLE>

14. SUBSEQUENT EVENT

On July 18, 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
offering is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will convert to 9,713,132 shares of
common stock. Unaudited pro forma stockholders' equity as adjusted for the
conversion of the preferred stock is set forth in the accompanying consolidated
balance sheet and Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit). The shareholders of the
Company will consider an amendment to the Articles to change the number of
authorized shares of common stock to 75,000,000 shares of common stock and
5,000,000 shares of preferred stock upon closing of the offering.

F-17
<PAGE>

PERVASIVE SOFTWARE