This paper reports the findings of a study designed to understand the process of technology development with special reference to the nature of interaction between software firms and the technology supporting institutions catering to the industry in the context of the external environmental trends. The software industry has experienced very rapid growth in recent times. During the second half of the decade of the eighties exports overtook the domestic turnover. The successes of the industry in the last few years must, however, be seen in the global context which would bring about a sobering effect. The Indian software industry accounts for only 2 per cent of the world's software output. This fact may be interpreted in two ways; (a) the Indian industry is far, far behind the world's leaders and (b) on the contrary the recent resurgence of the industry and the small global share indicates the presence of certain strengths that may be exploited to reach a significantly higher level. The paper describes the developments in the industry in an evolutionary perspective and presents the findings from (a) interview survey of 18 firms, (b) mail survey of 26 firms and (c) interview of relevant technology institutions. Finally implication for technology institutions, firms and the government are drawn.