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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-Q

(Mark one)

[x]       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly
            period ended June 30, 2001

or

[ ]       Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition           period to

COMMISSION FILE NUMBER 000-29809

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

|                                                               |  |                                                          |  |                                     
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 7372                                                     |  | 52-1769077                          
|(state or other jurisdiction of
incorporation or organization) |  | (Primary Standard Industrial
Classification Code Number) |  | (IRS Employer
Identification Number)

2600 TOWER OAKS BOULEVARD
ROCKVILLE, MARYLAND 20852
(240) 747-6400

(Address, including zip code, and telephone number, including area code, of
registrants principal executive offices)

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

YES [X] NO [ ]

As of July 31, 2001 there were outstanding 32,986,091 shares of OTG
Software, Inc. common stock, $0.01 par value per share.



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OTG SOFTWARE, INC.
Form 10-Q
Quarterly Period Ended June 30, 2001

Table of Contents

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|PART I FINANCIAL INFORMATION                                                                             
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|Item 1. Financial Statements                                                                              |                                                                                                                  |  | 1    |   
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|                                                                                                          | Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000                                  |  |      | 1  | 
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|                                                                                                          | Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2001 and 2000 |  |      | 2  | 
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|                                                                                                          | Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000                  |  |      | 3  | 
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|                                                                                                          | Notes to Condensed Consolidated Financial Statements                                                             |  |      | 4  | 
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|Item 2. Managements Discussion and Analysis of Financial Condition and
Results of       
     Operations |                                                                                                                  |  | 8    |   
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|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                        |                                                                                                                  |  | 22   |   
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|PART II OTHER INFORMATION                                                                                
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|Item 1. Legal Proceedings                                                                                 |                                                                                                                  |  | 22   |   
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|Item 2. Changes in Securities and Use of Proceeds                                                         |                                                                                                                  |  | 22   |   
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|Item 3. Defaults Upon Senior Securities                                                                   |                                                                                                                  |  | 22   |   
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|Item 4. Submission of Matters to a Vote of Security Holders                                               |                                                                                                                  |  | 22   |   
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|Item 5. Other Information                                                                                 |                                                                                                                  |  | 23   |   
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|Item 6. Exhibits and Reports on Form 8-K                                                                 
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|                                                                                                          | (a) Exhibits                                                                                                     |  |      | 23 | 
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|                                                                                                          | (b) Reports on Form 8-K                                                                                          |  |      | 23 | 
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|SIGNATURES                                                                                                |                                                                                                                  |  | 24   |   





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PART I FINANCIAL INFORMATION
      Item 1. Financial Statements

OTG SOFTWARE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |             |               |         |  
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | -------- | ------- | ------------ | ----------- | ------------- | ------- | -
|                                                   |                                                                                                                                          |                           |                                            |         | June 30, |         | December 31,
|                                                   |                                                                                                                                          |                           |                                            |         | 2001     |         | 2000        
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |             | (As restated)
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              | (unaudited)
|                                                   | ASSETS                                                                                                                                  
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|Current assets                                     |                                                                                                                                          |                           |                                            |         |          |         |              |            
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|                                                   | Cash and cash equivalents                                                                                                                |                           | $                                          | 98,959  |          |         | $            | 102,197     |              
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|                                                   | Accounts receivable, net of allowance
   of $1,455 and $1,541, respectively                                                              |                           |                                            | 19,662  |          |         |              | 20,613      |              
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|                                                   | Deferred income taxes                                                                                                                    |                           |                                            | 3,474   |          |         |              | 2,066       |              
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|                                                   | Other current assets                                                                                                                     |                           |                                            | 4,021   |          |         |              | 2,919       |              
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          | Total current assets      |                                            |         | 126,116  |         |              |             | 127,795       |        
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|Other assets                                       |                                                                                                                                          |                           |                                            |         |          |         |              |            
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|                                                   | Property and equipment, net                                                                                                              |                           |                                            | 9,404   |          |         |              | 4,744       |              
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|                                                   | Goodwill, net                                                                                                                            |                           |                                            | 2,220   |          |         |              | 2,510       |              
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|                                                   | Other intangibles, net                                                                                                                   |                           |                                            | 948     |          |         |              | 1,212       |              
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|                                                   | Deferred income taxes                                                                                                                    |                           |                                            | 1,221   |          |         |              | 1,302       |              
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|                                                   | Other non-current assets, net                                                                                                            |                           |                                            | 539     |          |         |              | 759         |              
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          | Total other assets        |                                            |         | 14,332   |         |              |             | 10,527        |        
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          |                           | Total assets                               |         | $        | 140,448 |              |             | $             | 138,322 |  
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|                                                   | LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    
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|Current liabilities                                |                                                                                                                                          |                           |                                            |         |          |         |              |            
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|                                                   | Accounts payable                                                                                                                         |                           | $                                          | 3,145   |          |         | $            | 4,080       |              
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|                                                   | Income taxes payable                                                                                                                     |                           |                                            |        |          |         |              | 1,143       |              
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|                                                   | Accrued expenses                                                                                                                         |                           |                                            | 8,113   |          |         |              | 7,572       |              
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|                                                   | Current portion of long-term debt                                                                                                        |                           |                                            | 46      |          |         |              | 61          |              
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|                                                   | Current portion of notes payable                                                                                                         |                           |                                            | 225     |          |         |              | 225         |              
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|                                                   | Current portion of notes payable to shareholder                                                                                          |                           |                                            | 68      |          |         |              | 67          |              
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|                                                   | Current portion of deferred rent                                                                                                         |                           |                                            | 281     |          |         |              |            |              
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|                                                   | Current portion of deferred revenues                                                                                                     |                           |                                            | 8,112   |          |         |              | 7,586       |              
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          | Total current liabilities |                                            |         | 19,990   |         |              |             | 20,734        |        
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|Other liabilities                                  |                                                                                                                                          |                           |                                            |         |          |         |              |            
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|                                                   | Long-term debt, net of current portion                                                                                                   |                           |                                            | 9       |          |         |              | 23          |              
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|                                                   | Note payable, net of current portion                                                                                                     |                           |                                            |        |          |         |              | 225         |              
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|                                                   | Notes payable to shareholder, net of current portion                                                                                     |                           |                                            |        |          |         |              | 18          |              
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|                                                   | Deferred rent, net of current portion                                                                                                    |                           |                                            | 2,532   |          |         |              |            |              
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|                                                   | Deferred revenues, net of current portion                                                                                                |                           |                                            | 452     |          |         |              | 446         |              
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          | Total other liabilities   |                                            |         | 2,993    |         |              |             | 712           |        
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          |                           | Total liabilities                          |         |          | 22,983  |              |             |               | 21,446  |  
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|Commitments and contingencies
Shareholders equity |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                  
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|                                                   | Preferred stock, $0.01 par value; 5,000,000 shares
   authorized, none issued                                                            |                           |                                            |        |          |         |              |            |              
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|                                                   | Common stock, $0.01 par value; 65,000,000 shares authorized,
   31,507,836 and 30,883,477 shares issued and outstanding,
   respectively |                           |                                            | 315     |          |         |              | 309         |              
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|                                                   | Additional paid-in capital                                                                                                               |                           |                                            | 141,587 |          |         |              | 140,025     |              
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|                                                   | Deferred compensation, net                                                                                                               |                           |                                            | (1,193  | )        |         |              | (1,637      | )            
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|                                                   | Accumulated other comprehensive loss                                                                                                     |                           |                                            | (23     | )        |         |              | (28         | )            
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|                                                   | Accumulated deficit                                                                                                                      |                           |                                            | (22,129 | )        |         |              | (20,741     | )            
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   | Total shareholders equity before stock subscriptions
receivable                                                                         |                           |                                            | 118,557 |          |         |              | 117,928     |              
|                                                  
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|                                                   |                                                                                                                                          |                           | Less: stock subscriptions receivable       |         |          | (1,092  | )            |             |               | (1,052  | )
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          |                           | Total shareholders equity                 |         |          | 117,465 |              |             |               | 116,876 |  
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            
|                                                   |                                                                                                                                          |                           | Total liabilities and shareholders equity |         | $        | 140,448 |              |             | $             | 138,322 |  
|                                                   |                                                                                                                                          |                           |                                            |         |          |         |              |            

See accompanying Notes to Condensed Consolidated Financial Statements.

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OTG SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)

|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |        |        |        | 
|---------------------------------- | ------------------------------------------------------------ | ---------------------------- | ------------ | ------ | -------------- | ------ | -------------- | ------ | ------------- | ------ | ------ | ------ | ------ | ------ | ------------- | ------ | ------ | ------ | 
|                                   |                                                              |                              |              |        | Three Months   |        | Six Months    
|                                   |                                                              |                              |              |        | Ended June 30, |        | Ended June 30,
|                                   |                                                              |                              |              |        | 2001           |        | 2000           |        | 2001          |        | 2000  
|                                   |                                                              |                              |              |        |                |        |                |        | (As restated) |        |        |        |        |        | (As restated)
|                                   |                                                              |                              |              |        | (unaudited)    |        | (unaudited)   
|Revenues                           |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
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|                                   | Software licenses                                            |                              | $            | 11,096 |                |        | $              | 9,063  |               |        | $      | 21,382 |        |        | $             | 17,551 |       
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|                                   | Services                                                     |                              |              | 4,830  |                |        |                | 3,007  |               |        |        | 8,467  |        |        |               | 5,202  |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                   |                                                              | Total revenues               |              |        | 15,926         |        |                |        | 12,070        |        |        |        | 29,849 |        |               |        | 22,753 |       
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|Cost of revenues                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
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|                                   | Software licenses                                            |                              |              | 1,155  |                |        |                | 727    |               |        |        | 2,064  |        |        |               | 1,200  |       
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|                                   | Services                                                     |                              |              | 1,731  |                |        |                | 1,207  |               |        |        | 3,305  |        |        |               | 2,285  |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                   |                                                              | Total cost of revenues       |              |        | 2,886          |        |                |        | 1,934         |        |        |        | 5,369  |        |               |        | 3,485  |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                   |                                                              |                              | Gross profit |        |                | 13,040 |                |        |               | 10,136 |        |        |        | 24,480 |               |        |        | 19,268 | 
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|Operating expenses                 |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
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|                                  
|                                  
|                                   | Sales and marketing                                          |                              |              | 7,700  |                |        |                | 5,425  |               |        |        | 14,382 |        |        |               | 10,168 |       
|                                  
|                                  
|                                  
|                                  
|                                   | Research and development                                     |                              |              | 4,464  |                |        |                | 2,724  |               |        |        | 8,517  |        |        |               | 5,247  |       
|                                  
|                                  
|                                  
|                                  
|                                   | General and administrative                                   |                              |              | 2,421  |                |        |                | 1,829  |               |        |        | 4,543  |        |        |               | 3,471  |       
|                                  
|                                  
|                                  
|                                  
|                                   | Merger-related costs                                         |                              |              |       |                |        |                |       |               |        |        | 1,585  |        |        |               |       |       
|                                  
|                                  
|                                  
|                                  
|                                   | Amortization of acquired intangible assets                   |                              |              | 208    |                |        |                | 139    |               |        |        | 416    |        |        |               | 139    |       
|                                  
|                                  
|                                  
|                                  
|                                   | Write-off of acquired in-process research
   and development |                              |              |       |                |        |                | 620    |               |        |        |       |        |        |               | 620    |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                   |                                                              | Total operating expenses     |              |        | 14,793         |        |                |        | 10,737        |        |        |        | 29,443 |        |               |        | 19,645 |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|Loss from operations               |                                                              |                              | (1,753       | )      |                |        | (601           | )      |               |        | (4,963 | )      |        |        | (377          | )     
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|Other income (expense)             |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                  
|                                  
|                                  
|                                  
|                                   | Interest income                                              |                              |              | 1,085  |                |        |                | 1,062  |               |        |        | 2,491  |        |        |               | 1,273  |       
|                                  
|                                  
|                                  
|                                  
|                                   | Interest expense                                             |                              |              | (12    | )              |        |                | (16    | )             |        |        | (31    | )      |        |               | (640   | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign exchange loss                                        |                              |              | (64    | )              |        |                | (59    | )             |        |        | (102   | )      |        |               | (4     | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Other expense                                                |                              |              | (152   | )              |        |                |       |               |        |        | (152   | )      |        |               |       |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                   |                                                              | Total other income (expense) |              |        | 857            |        |                |        | 987           |        |        |        | 2,206  |        |               |        | 629    |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|Income (loss) before income taxes  |                                                              |                              | (896         | )      |                |        | 386            |        |               |        | (2,757 | )      |        |        | 252           |       
|                                  
|                                  
|                                  
|                                  
|Income tax expense (benefit)       |                                                              |                              | (825         | )      |                |        | 21             |        |               |        | (1,327 | )      |        |        | 21            |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                  
|                                  
|                                  
|                                  
|Net income (loss)                  |                                                              | $                            | (71          | )      |                | $      | 365            |        |               | $      | (1,430 | )      |        | $      | 231           |       
|                                   |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|Net income (loss) per common share |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                  
|                                  
|                                  
|                                  
|                                   | Basic                                                        |                              | $            | (0.00  | )              |        | $              | 0.01   |               |        | $      | (0.05  | )      |        | $             | 0.01   |       
|                                  
|                                  
|                                  
|                                  
|                                   | Diluted                                                      |                              | $            | (0.00  | )              |        | $              | 0.01   |               |        | $      | (0.05  | )      |        | $             | 0.01   |       
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|Shares used for computation        |                                                              |                              |              |        |                |        |                |        |               |        |        |        |        |        |               |       
|                                  
|                                  
|                                  
|                                  
|                                   | Basic                                                        |                              |              | 31,449 |                |        |                | 28,555 |               |        |        | 31,238 |        |        |               | 24,999 |       
|                                  
|                                  
|                                  
|                                  
|                                   | Diluted                                                      |                              |              | 31,449 |                |        |                | 31,792 |               |        |        | 31,238 |        |        |               | 28,222 |       

See accompanying Notes to Condensed Consolidated Financial Statements.

2



---



OTG SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)

|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | ------ | -------------- | ------ | ------ | ------ | ------------- | ------ | -
|                                                     |                                                                                                   |                                                              |                                           |        | Six Months    
|                                                     |                                                                                                   |                                                              |                                           |        | Ended June 30,
|                                                     |                                                                                                   |                                                              |                                           |        | 2001           |        | 2000  
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |       
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        | (As restated)
|                                                     |                                                                                                   |                                                              |                                           |        | (unaudited)   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                   | $                                                            | 102,197                                   |        |                | $      | 4,296  |       
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|Net income (loss)                                    |                                                                                                   |                                                              | (1,430                                    | )      |                |        | 231    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income (loss) to cash
   provided by (used for) operating activities |                                                              |                                           |        |                |        |        |        |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Write-off of acquired in-process research
   and development |                                           |        |               |        |        |        | 620           |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Amortization of acquired intangible assets                   |                                           |        | 554            |        |        |        | 139           |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Depreciation and amortization                                |                                           |        | 1,070          |        |        |        | 633           |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Gain or loss on disposal of assets                           |                                           |        | 152            |        |        |        |              |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Stock compensation expense                                   |                                           |        | 321            |        |        |        | 370           |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Tax benefit from exercise of stock options                   |                                           |        | 450            |        |        |        |              |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Provision for bad debts and returns                          |                                           |        | 627            |        |        |        | 694           |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Deferred income taxes                                        |                                           |        | (1,327         | )      |        |        | (465          | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   | Changes in certain assets and liabilities                    |                                           |        |                |        |        |        |               |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   |                                                              | Accounts receivables, net                 |        |                | 324    |        |        |               | (3,386 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   |                                                              | Other current and noncurrent assets       |        |                | (882   | )      |        |               | (1,078 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   |                                                              | Accounts payable and accrued expenses     |        |                | (248   | )      |        |               | 518    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   |                                                              | Income taxes payable                      |        |                | (1,143 | )      |        |               |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                   |                                                              | Deferred revenues                         |        |                | 532    |        |        |               | 1,119  |  
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|                                                     |                                                                                                   |                                                              | Net cash used for operating
activities    |        |                | (1,000 | )      |        |               | (605   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from investing activities                 |                                                                                                   |                                                              |                                           |        |                |        |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                               |                                                              |                                           | (3,069 | )              |        |        | (1,531 | )            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of xVault, net of cash acquired                                                       |                                                              |                                           |       |                |        |        | (1,731 | )            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of intangible assets                                                                  |                                                              |                                           |       |                |        |        | (830   | )            
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|                                                     |                                                                                                   |                                                              | Net cash used for investing activities    |        |                | (3,069 | )      |        |               | (4,092 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from financing activities                 |                                                                                                   |                                                              |                                           |        |                |        |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from initial public offering                                                         |                                                              |                                           |       |                |        |        | 87,373 |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Direct costs of secondary public offering                                                         |                                                              |                                           | (146   | )              |        |        |       |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from other issuances of common stock                                                     |                                                              |                                           | 1,243  |                |        |        | 245    |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under note payable to bank                                                             |                                                              |                                           | 397    |                |        |        |       |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments on note payable to bank                                                                |                                                              |                                           | (622   | )              |        |        | (5,009 | )            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under long-term debt                                                                   |                                                              |                                           |       |                |        |        | 481    |              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments on long-term debt                                                                      |                                                              |                                           | (29    | )              |        |        | (1,790 | )            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments on stockholders notes                                                                 |                                                              |                                           | (17    | )              |        |        | (9,819 | )            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Distributions to stockholders                                                                     |                                                              |                                           |       |                |        |        | (1,160 | )            
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|                                                     |                                                                                                   |                                                              | Net cash provided by financing activities |        |                | 826    |        |        |               | 70,321 |  
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Effect of changes in foreign exchange rates          |                                                                                                   |                                                              | 5                                         |        |                |        | (27    | )     
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|Net increase (decrease) in cash and cash equivalents |                                                                                                   |                                                              | (3,238                                    | )      |                |        | 65,597 |       
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |        |               |        |  
|Cash and cash equivalents at end of period           |                                                                                                   | $                                                            | 98,959                                    |        |                | $      | 69,893 |       
|                                                     |                                                                                                   |                                                              |                                           |        |                |        |        |       

See accompanying Notes to Condensed Consolidated Financial Statements.

3



---



OTG SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.  Basis of Presentation and Nature of Operations

The accompanying condensed consolidated financial statements include the
accounts of OTG Software, Inc. (OTG Software), Smart Storage, Inc. (Smart
Storage), OTG Sales, Inc. (OTG Sales) and OTG E-Mail Corp. (OTG E-Mail). OTG
Software, Smart Storage, OTG Sales and OTG E-Mail are collectively referred to
as the Company. References such as we, our, and us also refer to OTG
Software and its wholly-owned subsidiaries. The statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America (GAAP) and the applicable rules and regulations of the United
States Securities and Exchange Commission (SEC). These interim financial
statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes thereto contained in our Annual
Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on
March 7, 2001. The interim financial statements contained in this report are
unaudited and, as permitted by GAAP as well as SEC rules and regulations, do
not include certain information and disclosures normally included in audited
financial statements filed annually with the SEC.

In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the Companys
financial position, results of operations and cash flows for the periods
presented. All significant intercompany balances and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with GAAP requires management to make certain assumptions and
estimates that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In addition, our operating results for interim periods may not be
indicative of the results of operations for a full fiscal year.

Headquartered in Rockville, Maryland, we are a provider of on-line data
storage, data access and e-mail management software. Our products enable
enterprises to store, track and retrieve data over a variety of network
architectures, including the Web and storage area networks. Through our
application-centric product suite, we offer business, Web and e-commerce
solutions that provide robust functionality across industries. Our products
empower storage by combining storage with access and e-mail management. Our
products are available through a worldwide network of value-added resellers
(VARs), distributors and original equipment manufacturers (OEMs) as well as
directly from us. Our primary product line is sold under the registered
trademark XtenderSolutions.

We acquired Smart Storage on March 29, 2001. The acquisition of Smart
Storage was accounted for using the pooling of interests method of
accounting. Accordingly, our statements of operations and cash flows and
related information for the three and six month periods ended June 30, 2000 and
the balance sheet as of December 31, 2000 presented in this report have been
restated to include the results of Smart Storage as if Smart Storage had always
been a part of the Company. See Note 2 for additional information.

OTG E-Mail reflects the activity of the former xVault, Inc. (xVault), a
company that we acquired on April 25, 2000. The acquisition of xVault was
accounted for using the purchase method of accounting; therefore, the assets
acquired and liabilities assumed from xVault were adjusted to fair value as of
April 25, 2000 and consolidated with our balance sheet as of that date.
Activity of the former xVault entity is recognized in our financial results
beginning April 26, 2000.

2.  Acquisition of Smart Storage

On March 29, 2001, we acquired Smart Storage in a transaction accounted
for using the pooling of interests method of accounting. Pursuant to the
merger agreement with Smart Storage, we issued 3,081,108 shares of our Common
Stock to the former Smart Storage shareholders in exchange for all the
outstanding shares of Smart Storages capital stock (of the shares issued,
308,087 are being held in escrow for a period of twelve months to secure
certain indemnification obligations of certain former Smart Storage
shareholders). In addition, we reserved 468,219 shares of Common Stock for
issuance upon the exercise of the outstanding options to purchase Smart Storage
common stock, which we assumed as part of the merger agreement. In connection
with our acquisition of Smart Storage we incurred merger and acquisition
related expenses of approximately $1.6 million in the first quarter of 2001.
Included in the merger and acquisition related expenses was $240,000 related to
employee termination benefits. At June 30, 2001, the
remaining amount accrued for such benefits was approximately $100,000.

4



---



Products acquired from Smart Storage include standards-based DVD and CD
storage management software. These product offerings enable companies to
increase the availability of information for their employees and customers by
utilizing diverse networking architectures; networked servers such as Windows
NT, UNIX and NetWare; and storage devices including CD-ROM, CD-R, DVD-ROM,
DVD-R and DVD-RAM media.

For the period January 1, 2001 through the day immediately preceding the
consummation of the acquisition, Smart Storages revenues and net loss were
$1.8 million and $1.9 million, respectively. These amounts are based upon
certain assumptions and estimates that the Company believes are reasonable.
Smart Storages stand-alone results for this period include merger-related
costs (e.g., attorneys and accountants fees) of approximately $0.9 million.
As mentioned above, the Companys results and related information for all
periods presented in this report reflect the activity of Smart Storage as if
Smart Storage had always been a part of the Company. The Smart Storage results
provided above do not necessarily represent the results that would have
occurred if the merger had taken place at a date earlier than the actual
consummation date of the merger.

For the three month period ended June 30, 2000, Smart Storages revenues
and net loss were $2.5 million and $0.1 million, respectively. For the six
month period ended June 30, 2000, Smart Storages revenues and net income were
$4.9 million and $0.1 million, respectively.

3.  Shareholders Equity

(a) Common Stock

As discussed in Note 2, on March 29, 2001, we issued 3,081,108 shares of
Common Stock, $0.01 par value (Common Stock), to acquire Smart Storage,
including 308,087 shares that are being held in escrow for twelve months to
secure certain indemnification obligations of certain former Smart Storage
shareholders. In addition, we have reserved 468,219 shares of Common Stock for
issuance upon the exercise of the outstanding options to purchase Smart Storage
common stock, which we assumed as part of the merger agreement.

During the three months ended June 30, 2001, employee exercises of stock
options resulted in proceeds of approximately $90,000 and the issuance of
13,430 shares of Common Stock. During the six months ended June 30, 2001,
employee exercises of stock options resulted in proceeds of $1.1 million and
the issuance of 562,170 shares of Common Stock. The third offering period
(January 1, 2001 to June 30, 2001) under the Companys 2000 Employee Stock
Purchase Plan (2000 ESPP) ended in June 2001, resulting in proceeds to the
Company of approximately $195,000 and the issuance of 32,790 shares of Common
Stock.

(b) Stock-based compensation

In February 2001, the number of awards available under our stock-based
compensation program was increased by 834,071 shares to 1,094,123 under the
evergreen provisions of our 2000 Stock Incentive Plan. At our annual
shareholders meeting on May 31, 2001, the shareholders approved an additional
increase of 1,500,000 shares in the number of awards available under the 2000
Stock Incentive Plan.

4.  Lease Commitment

In April 2001, we entered into an amendment to our lease agreement, dated
June 20, 2000, relating to our new headquarters facility. The primary purpose
of the amendment was to change the occupancy date to June 1, 2001 from April
15, 2001. In June 2001, we relocated to our new facilities. In connection
with our relocation from our prior facilities, we paid our prior landlord
approximately $100,000 in additional rent and termination fees and eliminated
approximately $1.4 million in future lease obligations.

5.  Software Revenue Recognition

Revenues are generated from licensing software and providing services,
including maintenance and technical support, training and consulting.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A
and SAB 101B, which expresses the SECs views in applying generally accepted
accounting
principles to revenue recognition in financial statements. We adopted the
accounting and disclosure requirements of this SAB in the fourth quarter of
2000. The application of this SAB did not have a material impact on our
financial statements and related disclosures.

5



---



In October 1997, the American Institute of Certified Public Accountants
(the AICPA) issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. SOP 97-2 requires that revenue recognized from sales arrangements
that include software licenses be allocated to the various elements of the
arrangement based on the relative fair values of the constituent elements, such
as maintenance and technical support, training and consulting services. The
relative fair value of each element of a multi-element sales arrangement is
based on vendor specific objective evidence (VSOE). Subsequently, in March
1998 and December 1998, the AICPA issued SOP 98-4 and SOP 98-9, respectively,
which deferred until the Companys fiscal year beginning January 1, 2000, the
application of several paragraphs and examples in SOP 97-2 that limit the
definition of VSOE for determining fair value of various elements in a multiple
element arrangement. The provisions of SOP 97-2 have been applied to
transactions entered into beginning January 1, 1998. Prior to 1998, our
revenue recognition policy was in accordance with the preceding authoritative
guidance provided by SOP No. 91-1, Software Revenue Recognition. The adoption
of the provisions of SOP 97-2 did not have a material impact on our financial
statements. As of January 1, 2000, we adopted the portions of SOP 97-2 which
were deferred by SOP 98-4 and SOP 98-9. The adoption of these portions of SOP
97-2 did not have a material impact on our financial statements.

Software license revenues consist of fees for licenses of our software
products. We sell software products primarily through value-added resellers,
distributors and original equipment manufacturers. We offer extended payment
terms to certain customers. For such arrangements in which payment terms are
within six months, we recognize the revenue when the agreement is signed, the
arrangement fee is fixed and determinable, delivery of the software has
occurred and collectibility of the fee is considered probable. For arrangements
in which payment terms extend beyond six months, we recognize revenue when
payment by the customer is made or becomes due, if all other revenue
recognition criteria have been met.

Services revenues consist of maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service period.
Other services revenues are recognized ratably as the related services are
provided or, in certain cases where customer acceptance occurs at defined
project milestones or at completion of the project, when those milestones
have been reached and satisfied or when the customer has accepted the work.

6.  Net Income (Loss) Per Common Share

Net income (loss) per common share is presented on both a basic and
diluted basis in accordance with SFAS No. 128, Earnings per Share. Basic net
income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of shares of Common Stock outstanding during the
period. Diluted net income (loss) per common share reflects the maximum
dilution that would result after giving effect to dilutive securities.

The table below presents the computation of basic and diluted net income
(loss) per common share. Because we recognized net losses in the three months
and six months ended June 30, 2001, the inclusion of incremental shares from
the assumed conversion of stock options and warrants into common stock is
anti-dilutive. Therefore, such amounts have been excluded from the
calculations.

|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        |  | 
|------------------------------------------ | --------------------------------------------------------------------------- | - | ----- | ------------------------- | - | ------------------------- | ---- | ------ |  | ---- | ----- | ------ | - | - | ---- | ------ |  | 
|                                           |                                                                             |   |       | Three Months              |   | Six Months               
|                                           |                                                                             |   |       | Ended June 30,            |   | Ended June 30,           
|                                           |                                                                             |   |       | 2001                      |   | 2000                      |      | 2001   |  | 2000
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |     
|                                           |                                                                             |   |       | (in thousands,            |   | (in thousands,           
|                                           |                                                                             |   |       | except per share amounts) |   | except per share amounts)
|                                           |                                                                             |   |       | (unaudited)               |   | (unaudited)              
|Net income (loss):                        
|                                          
|                                          
|                                          
|                                          
|                                           | Net income (loss)  basic and diluted                                       |   | $     | (71                       | ) |                           | $    | 365    |  |      | $     | (1,430 | ) |   | $    | 231    | 
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        |  | 
|                                          
|                                          
|                                          
|                                          
|Shares used for computation:              
|                                          
|                                          
|                                          
|                                          
|                                           | Weighted average shares of Common    Stock outstanding (basic)              |   |       | 31,449                    |   |                           |      | 28,555 |  |      |       | 31,238 |   |   |      | 24,999 | 
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        |  | 
|                                           | Incremental shares related to outstanding stock    options                  |   |       |                          |   |                           |      | 3,237  |  |      |       |       |   |   |      | 3,223  | 
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        |  | 
|                                           | Weighted average equivalent shares of Common    Stock
outstanding (diluted) |   |       | 31,449                    |   |                           |      | 31,792 |  |      |       | 31,238 |   |   |      | 28,222 | 
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        |  | 
|Net income (loss) per common share-basic   |                                                                             | $ | (0.00 | )                         |   | $                         | 0.01 |        |  | $    | (0.05 | )      |   | $ | 0.01 |       
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        | 
|Net income (loss) per common share-diluted |                                                                             | $ | (0.00 | )                         |   | $                         | 0.01 |        |  | $    | (0.05 | )      |   | $ | 0.01 |       
|                                           |                                                                             |   |       |                           |   |                           |      |        |  |      |       |        |   |   |      |        | 

6



---



7.  Comprehensive Income (Loss)

We recognized a comprehensive income (loss) of ($32,000) and $0.3 million
for the three months ended June 30, 2001 and 2000, respectively, and recognized a comprehensive income (loss) of ($1.4) million
and $0.2 million for the six months ended June 30, 2001 and 2000, respectively.
Comprehensive income or loss encompasses net income or loss and other
comprehensive income or loss, which includes all other non-owner transactions
and events that change shareholders equity. Our other comprehensive income
(loss) reflects the effect of foreign currency translation adjustments on the
accounts of our foreign operations.

8.  Segment Information and Related Disclosures

Our operations consist of one business segment providing on-line data
storage, data access and e-mail management software and related services. For
the three months ended June 30, 2001 and 2000, our revenues from foreign
countries represented 6% and 18%, respectively, of our total revenues, and for
the six months ended June 30, 2001 and 2000, our revenues from foreign
countries represented 12% and 18%, respectively, of our total revenues.

9.  Related Party Transactions

In the three months and six months ended June 30, 2001, we made payments
totaling $16,000 and $64,000, respectively, to the estate of a former employee
pursuant to an agreement entered into on behalf of that employee in 1998. Also,
in the three months and six months ended June 30, 2001, the Company recorded
interest expense on notes payable to a shareholder totaling $2,000 and $13,000,
respectively.

10.  Supplemental Information - Condensed Consolidated Statements of Cash Flows

|                                 |                                                                                                                                                                        |  |                |       |                |  |      |       |      |  |   |       |  |  |   |       | 
|-------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | -------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                 |                                                                                                                                                                        |  | Three months   |       | Six months    
|                                 |                                                                                                                                                                        |  | ended June 30, |       | ended June 30,
|                                 |                                                                                                                                                                        |  | 2001           |       | 2000           |  | 2001 |       | 2000
|                                 |                                                                                                                                                                        |  |                |       |                |  |      |       |     
|                                 |                                                                                                                                                                        |  | (in thousands) |       | (in thousands)
|                                 |                                                                                                                                                                        |  | (unaudited)    |       | (unaudited)   
|Cash paid during the period for:
|                                
|                                
|                                
|                                
|                                 | Income taxes                                                                                                                                                           |  | $              | 4     |                |  | $    |      |      |  | $ | 966   |  |  | $ | 16    | 
|                                
|                                
|                                
|                                
|                                 | Interest                                                                                                                                                               |  | $              | 8     |                |  | $    | 5     |      |  | $ | 17    |  |  | $ | 684   | 
|                                
|                                
|                                
|                                
|Material non-cash transactions: 
|                                
|                                
|                                
|                                
|                                 | Issuance of Common Stock related to the March 2001
   acquisition of Smart Storage (reflected at par value)                                                            |  | $              |      |                |  | $    |      |      |  | $ | 31    |  |  | $ |      | 
|                                
|                                
|                                
|                                
|                                 | Issuance of Common Stock related to the April 2000
   acquisition of xVault                                                                                            |  | $              |      |                |  | $    | 2,173 |      |  | $ |      |  |  | $ | 2,173 | 
|                                
|                                
|                                
|                                
|                                 | Conversion of all outstanding convertible
   subordinated notes payable (including
   related accrued interest) into 4,161,506
   shares of Common Stock in March 2000 |  | $              |      |                |  | $    |      |      |  | $ |      |  |  | $ | 8,833 | 
|                                
|                                
|                                
|                                
|                                 | Issuance of note payable related to acquisition of
   intangible assets                                                                                                |  | $              |      |                |  | $    |      |      |  | $ |      |  |  | $ | 450   | 
|                                
|                                
|                                
|                                
|                                 | Acquisition of property and equipment resulting
   from lease incentives                                                                                               |  | $              | 2,813 |                |  | $    |      |      |  | $ | 2,813 |  |  | $ |      | 

11.  Subsequent Event

On July 25, 2001, we acquired Unitree Software, Inc. (Unitree Software) in
a transaction accounted for using the purchase method of accounting. Under
the terms of this acquisition, OTG has issued 1,466,667 shares of stock, $6.0
million in cash and $4.8 million in promissory notes bearing interest at 7% per
annum and payable over eighteen months, subject to certain conditions to be met
by Unitree Software or some of its stockholders and certain other rights of
offset in favor of OTG. Additional payments of up to 222,222 shares of stock
and $2.0 million in cash may be made upon the achievement of certain financial
results.

On July 26, 2001, a class action lawsuit was filed in the Southern
District of New York naming OTG Software, our officers who
signed the registration statement in connection with our initial public
offering and the managing underwriters of our initial public offering as
defendants. The complaint alleges that our initial public offering
registration statement and final prospectus contained material
misrepresentations and/or omissions, related, in part, to additional, excessive
and undisclosed commissions received by our underwriters. We are still in the
process of reviewing the allegations. We intend to vigorously defend ourselves
and our officers. Therefore it is the position of our management that, at this
time, it is not possible to estimate the amount of a probable loss, if any,
that might result from this matter. Accordingly, no provision for this matter
has been made in our condensed consolidated financial statements.

7



---



Item 2.  Managements Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion of OTG Softwares financial condition and results
of operations should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K filed with the SEC on March 7, 2001 (Form 10-K). The
information contained herein is not a comprehensive discussion and analysis of
the financial condition and results of operations, but rather updates
disclosures made in our Form 10-K filing.

Certain information contained herein should be considered forward-looking
information within the meaning of the Federal Private Securities Litigation
Reform Act of 1995. Forward-looking information is subject to a number of
substantial risks and uncertainties that can cause actual results to differ
materially. These risks and uncertainties include, but are not limited to, the
timely development and market acceptance of our products and the risk that such
domestic and/or international market acceptance might not happen, the risk that
we may not be able to maintain the quality of our relationships with our end
users or customers, that there may occur adverse changes in the general
economic conditions of our markets or in the specific economic conditions of
the information technology spending market, or that we may not be able to
manage our growth or integrate our acquisitions as planned. Statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking information. Without limiting the foregoing, words such as
anticipates, believes, could, estimate, expect, intend, may,
might, should, will, and would and other forms of these words or
similar words are intended to identify forward-looking information. For
example, and not by way of limitation, our forward-looking statements may
include statements regarding:



| |  |  | revenue growth or variations in gross margin                                       
| | - |  | -----------------------------------------------------------------------------------
| |  |  | development, deployment and acceptance of new products;                            
| |  |  | technological changes;                                                             
| |  |  | use of the proceeds from our initial public offering and follow-on public offering;
| |  |  | expansion plans, both international and domestic;                                  
| |  |  | spending on research and development;                                              
| |  |  | levels of expenditures generally, including investments in property and equipment; 
| |  |  | changes in accounts receivable, including collections activities, and;             
| |  |  | sufficiency of our liquidity and capital resources.                                

Such forward-looking statements including, but not limited to, information
about expected trends and related information, are made only as of the date of
this report. Important factors known to us that could cause such material
differences are discussed under the caption Risk Factors below. In light of
these risks, uncertainties and assumptions, the future events, developments, or
results described by the forward-looking statements in this report could turn
out to be materially different from those discussed or implied. We undertake no
obligation to update or revise any forward-looking information, whether as a
result of new information, future events or otherwise.

Overview

We are a provider of online data storage, data access and e-mail
management software. Our software enables enterprises to move, store, manage
and access data and e-mail quickly and efficiently over a variety of network
architectures, including the Web and storage area networks. Our software
supports many different types of storage devices, is easy to install and use,
and can manage storage systems ranging in size from a single storage device to
an enterprise-wide data storage network.

We were founded in March 1992. In April 2000, we acquired xVault, and in
March 2001 we acquired Smart Storage, as discussed below. We acquired xVault
for consideration of 159,996 shares of our Common Stock and $1.75 million in
cash. xVault was a provider of e-mail management and archiving solutions. We
renamed xVault as OTG E-Mail Corp. We have recorded net losses in certain
prior periods, including a net loss for 1999 and for 1998, but we were
profitable for the year ended December 31, 2000. For the six months ended June
30, 2001, we recognized a net loss of approximately $0.4 million before giving
effect to approximately $2.1 million in pre-tax expenses associated with
one-time merger and acquisition costs of Smart Storage and with the
amortization of acquisition costs associated with our acquisition of xVault.
As of June 30, 2001, we had an accumulated deficit of $22.1 million.

We generate revenues principally from licensing our software products and
providing related professional services including maintenance and technical
support, consulting and training.

We derive software license revenues from licenses of our software programs
to customers primarily through indirect sales channels, including original
equipment manufacturers, value-added resellers and distributors. We also sell
through our direct sales
force. Original equipment manufacturers (OEMs) either bundle our products with
the products they offer or resell our products under their own label. We
receive software license revenues each time an original equipment manufacturer
licenses a copy of its products that incorporates one or more of our products.
Our license agreements with original equipment manufacturers generally contain
no minimum sales requirements, and we cannot assure you that any original
equipment manufacturer will either commence or continue shipping our products
in the future. Moreover, following the execution of new OEM license agreements,
a significant period of time may elapse before any revenues are generated due
to the development work which we often undertake under these OEM agreements and
the time needed for the sales and marketing groups within these original
equipment manufacturers or other customers and resellers to become familiar
with our products.

8



---



We offer extended payment terms to certain customers, primarily select
OEMs and resellers. Extended payment terms are offered to these customers as
part of market penetration programs that are designed to increase the presence
of our products in the marketplace and attract targeted customers and
industries, gain forecast visibility or solidify long-term relationships with
these selected OEMs and resellers. For arrangements with payment terms within
six months, we recognize the revenue when the agreement is signed, the
arrangement fee is fixed and determinable, delivery of the software has
occurred and collection of the fee is considered probable. As of June 30, 2001,
net amounts due from such arrangements totaled $7.8 million, a decrease of
approximately 14.3% from $9.1 million due from such arrangements as of December
31, 2000. For arrangements in which payment terms extend beyond six months, we
recognize revenue when payment by the customer is made or becomes due, if all
other revenue recognition criteria listed above have been met.

Our services revenues consist of fees derived from annual maintenance
agreements, consulting and training and other professional services. The
maintenance agreements covering our products provide for technical support and
minor unspecified product upgrades for fees based on the number of software
licenses purchased and the level of service chosen by the customer. In 2000,
we began to require that at least one year of customer maintenance support be
purchased with new license purchases. Customers have the option of renewing
maintenance agreements annually. Maintenance fees are recognized ratably over
the term of the maintenance contract. We provide consulting and other
professional services, for which we charge a fee based upon the amount of time
worked and the cost of the materials used in providing the services. We provide
classroom and on-site training to our customers on a daily fee basis.
Professional services and training services typically have lower gross margins
than sales of software licenses and customer support.

We currently have sales and services offices in the United States and
provide sales and services support in Europe and Asia through employees located
in England, Germany, the Netherlands, Japan and China. We also have a
subsidiary in India, that is primarily devoted to research and development
activities. We plan to continue to expand our international operations by
establishing additional foreign offices, hiring additional personnel and
recruiting additional international resellers. Our international sales are
primarily generated through indirect sales channels. Revenues derived from
customers located outside the United States and Canada, most of which are
denominated in U.S. dollars, accounted for approximately 12% and 18% of our
total revenues for the six months ended June 30, 2001 and 2000, respectively.

As part of maintaining our current growth plans, we expect to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we will need to generate significant
increases in revenues to achieve and maintain consistent profitability.
Although the acquisition of Smart Storage is expected to have an accretive
effect on our earnings by the end of 2001, excluding one-time costs of the
merger, there will be an integration period that includes certain transition
costs. This transition period may include additional one-time costs of the
transaction, including the possible write-down of redundant assets or assets
determined to be of limited strategic value to the combined company. Although
our revenues have grown substantially in recent years, we may not be able to
sustain the year over year growth rates we have historically achieved. In
addition, we may not be able to generate sufficient revenues in future periods
to be profitable for those periods. We moved our headquarters to a new facility
in June 2001, and incurred substantial one-time costs associated with the move,
including a lease termination fee related to our previous headquarters
facility. The new headquarters facility represents a significant increase in
our monthly lease obligations.

Acquisition of Smart Storage

On March 29, 2001, we acquired Smart Storage in a transaction accounted
for as a pooling of interests. Pursuant to the merger agreement, we issued
3,081,108 shares of Common Stock to the former Smart Storage shareholders in
exchange for all the outstanding shares of Smart Storages capital stock (of
the shares issued, 308,087 are being held in escrow for a period of twelve
months to secure certain indemnification obligations of certain former Smart
Storage shareholders). In addition, we have reserved 468,219 shares of Common
Stock for issuance upon the exercise of the outstanding options to purchase
Smart Storage common stock, which we assumed as part of the merger agreement.
Our financial results and related information include the activities of Smart
Storage for all periods presented.

9



---



Products acquired from Smart Storage include standards-based DVD and CD
storage management software. These product offerings enable companies to
increase the availability of information for their employees and customers by
utilizing diverse networking architectures; networked servers such as Windows
NT, UNIX and NetWare; and storage devices including CD-ROM, CD-R, DVD-ROM,
DVD-R and DVD-RAM media.

The acquisition of Smart Storage is expected to provide significant
benefits to the Company, particularly with respect to employees, technology and
infrastructure. The Smart Storage acquisition provided us with a highly
respected and proven research and development staff, including a dedicated
research and development arm in India, and with new market opportunities in one
of the fastest growing sectors of the storage market-rich media and streaming
video. In addition, Smart Storage has a well-developed international
infrastructure and sales channel. We anticipate the acquisition of Smart
Storage will be accretive to our earnings by the end of 2001, excluding certain
one-time costs.

Products Released in 2001

In March 2001, we announced that we had internationalized our DiskXtender
and EmailXtender products. By internationalizing our products, we empower
enterprises worldwide with the ability to localize or port our proven and
reliable online data storage, access and e-mail management solutions into other
languages. This is part of our ongoing strategy to be a leading worldwide
player in the e-mail and storage management industry. DiskXtender, which is
currently available in English and Japanese, provides intelligent, automated
and virtually infinite storage management and enables companies to readily
access critical enterprise data while reducing total costs of ownership.
EmailXtender is currently available in English, German and Italian, and
provides a secure, cost-effective system for efficiently capturing, storing and
retrieving e-mail messages and attachments. This solution enables organizations
to reduce e-mail server backup time and bottlenecks, eliminate message-size and
mailbox-size restrictions and protect business-critical e-mail from virus
attacks. EmailXtender will soon be available in French and Spanish.

In April 2001, we announced the availability of VideoXtender, a new
automated digital content management solution designed to meet the rapidly
growing storage and data accessibility requirements of the professional video
and broadcasting industries. VideoXtender provides broadcasters, media asset
management organizations and digital media application developers with direct
and fast access to rich media assets and streaming video on managed storage
devices, and a scalable, open systems architecture that utilizes cost-effective
and secure DVD-RAM, Magnetic Optical (MO) and tape storage media. VideoXtender
supports both digital broadcasting and media asset management. In video
broadcasting or real-time applications, VideoXtender integrates with playback
video servers and broadcast automation systems to provide online access to
secondary storage. For media asset management or non-real-time applications,
VideoXtender integrates with media asset management and video production
solutions to provide direct access to an organizations vast archive resource
of digital content that would normally be kept off-line.

Subsequent Event

On July 20, 2001 we entered into an Agreement and Plan of Merger with
UniTree Software, Inc., a California corporation, and the principal
stockholders of UniTree named therein. Pursuant to the terms of the merger
agreement, on July 25, 2001, OTG Software acquired UniTree through the merger
of UniTree with and into OTG Software.

We acquired all of the outstanding shares of UniTrees Series A and Series
B common stock for approximately $20 million, comprised of $6.0 million in
cash, $4.8 million in promissory notes and 1,466,667 shares of common stock.
In addition, OTG Software agreed to pay the Series A stockholders of UniTree up
to $2,000,000 in cash and up to 222,222 shares of its common stock in the event
certain financial results are met for the calendar year 2001. The merger
agreement further provided that 266,667 shares of our common stock to be issued
to the former UniTree stockholders will be held in escrow for a period of time
not to exceed three years to secure certain indemnification obligations of the
former UniTree stockholders. This acquisition is expected to be neutral to the
combined financial statements in 2001, and nominally accretive to the combined
financial statements by the end of 2002.

UniTree is a provider of advanced technology for UNIX and Linux-based data
storage and database storage management. UniTree develops storage software
solutions that cost-effectively manage our growing volumes of data.

10



---



RESULTS OF OPERATIONS

The following section pertains to activity included in our Condensed
Consolidated Statements of Operations (which are contained in Part I, Item 1 of
this report), comparing results of operations for the three and six months
ended June 30, 2001 with the three and six months ended June 30, 2000. As
mentioned previously, the Companys historical results, together with related
information, have been restated to include the activity of Smart Storage for
all periods presented.

The table below presents the line items included in our Condensed
Consolidated Statements of Operations as a percentage of total revenues. This
table excludes merger-related costs related to our acquisition of Smart Storage
in March 2001, amortization expenses associated with certain intangible assets
resulting from our acquisition of xVault in April 2000 and amortization
expenses associated with Smart Storages acquisition of certain intangible
assets in 1999 and the first quarter 2000.

|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|----------------------------------- | ---------------------------- | ---------------------------- | ------------ | -- | --- | -------------- | - | -------------- | --- | ------------- | --- | ---- | --- | -- | - | ------------- | --- | -- |  | 
|                                    |                              |                              |              |    |     | Three Months   |   | Six Months    
|                                    |                              |                              |              |    |     | Ended June 30, |   | Ended June 30,
|                                    |                              |                              |              |    |     | 2001           |   | 2000           |     | 2001          |     | 2000
|                                    |                              |                              |              |    |     |                |   |               
|                                    |                              |                              |              |    |     |                |   |                |     | (As restated) |     |      |     |    |   | (As restated)
|                                    |                              |                              |              |    |     | (unaudited)    |   | (unaudited)   
|Revenues                            |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |              
|                                   
|                                   
|                                   
|                                   
|                                    | Software licenses            |                              |              | 70 | %   |                |   | 75             | %   |               |     | 72   | %   |    |   | 77            | %  
|                                   
|                                   
|                                   
|                                   
|                                    | Services                     |                              |              | 30 |     |                |   | 25             |     |               |     | 28   |     |    |   | 23            |    
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|                                    |                              | Total revenues               |              |    | 100 |                |   |                | 100 |               |     |      | 100 |    |   |               | 100 |   
|                                   
|                                   
|                                   
|                                   
|                                   
|Cost of revenues                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |              
|                                   
|                                   
|                                   
|                                   
|                                    | Software licenses            |                              |              | 7  |     |                |   | 6              |     |               |     | 7    |     |    |   | 5             |    
|                                   
|                                   
|                                   
|                                   
|                                    | Services                     |                              |              | 11 |     |                |   | 10             |     |               |     | 11   |     |    |   | 10            |    
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|                                    |                              | Total cost of revenues       |              |    | 18  |                |   |                | 16  |               |     |      | 18  |    |   |               | 15  |   
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|                                    |                              |                              | Gross profit |    |     | 82             |   |                |     | 84            |     |      |     | 82 |   |               |     | 85 | 
|                                   
|                                   
|                                   
|                                   
|                                   
|Operating expenses                  |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |              
|                                   
|                                   
|                                   
|                                   
|                                    | Sales and marketing          |                              |              | 48 |     |                |   | 45             |     |               |     | 48   |     |    |   | 45            |    
|                                   
|                                   
|                                   
|                                   
|                                    | Research and development     |                              |              | 28 |     |                |   | 23             |     |               |     | 29   |     |    |   | 23            |    
|                                   
|                                   
|                                   
|                                   
|                                    | General and administrative   |                              |              | 15 |     |                |   | 15             |     |               |     | 15   |     |    |   | 15            |    
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|                                    |                              | Total operating expenses     |              |    | 92  |                |   |                | 83  |               |     |      | 92  |    |   |               | 83  |   
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|Income (loss) from operations       |                              |                              | (10          | )  |     |                | 1 |                |     |               | (10 | )    |     |    | 2 |              
|                                   
|                                   
|                                   
|                                   
|                                   
|Other income (expense)              |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |              
|                                   
|                                   
|                                   
|                                   
|                                    | Interest income              |                              |              | 7  |     |                |   | 9              |     |               |     | 8    |     |    |   | 6             |    
|                                   
|                                   
|                                   
|                                   
|                                    | Interest expense             |                              |              |   |     |                |   |               |     |               |     |     |     |    |   | (3            | )  
|                                   
|                                   
|                                   
|                                   
|                                    | Foreign exchange gain (loss) |                              |              |   |     |                |   |               |     |               |     |     |     |    |   |              |    
|                                   
|                                   
|                                   
|                                   
|                                    | Other income (expense)       |                              |              | (1 | )   |                |   |               |     |               |     | (1   | )   |    |   |              |    
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|                                    |                              | Total other income (expense) |              |    | 5   |                |   |                | 8   |               |     |      | 7   |    |   |               | 3   |   
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|Income (loss) before income taxes   |                              |                              | (4           | )  |     |                | 9 |                |     |               | (2  | )    |     |    | 5 |              
|                                   
|                                   
|                                   
|                                   
|Provision (credit) for income taxes |                              |                              | (2           | )  |     |                |  |                |     |               | (1  | )    |     |    |  |              
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 
|Net income (loss)                   |                              |                              | (2           | )% |     |                | 9 | %              |     |               | (1  | )%   |     |    | 5 | %            
|                                    |                              |                              |              |    |     |                |   |                |     |               |     |      |     |    |   |               |     |    |  | 

Revenues

Our revenues consist of software license revenues and services revenues.
Software license revenues are derived primarily from licenses of our software
products. Services revenues are derived primarily from contracts for software
maintenance and technical support and, to a lesser extent, consulting, training
and other professional services.

Total revenues increased 32% to $15.9 million for the three months ended
June 30, 2001 from $12.1 million for the comparable period in 2000, and
increased 31 % to $29.8 million for the six months ended June 30, 2001 from
$22.8 million for the comparable period in 2000. We believe that this increase
was due to increases in demand for storage management access solutions such as
those that OTG provides, our approach toward selling to departmental and
divisional customers and the increasing need for services and products that
provide access to stored data in business decision making. However, the
percentage increase in total revenues achieved on a year over year basis may
not necessarily be indicative of future results.

Software license revenues  Software license revenues increased 22% to
$11.1 million for the three months ended June 30, 2001 from $9.1 million for
the three months ended June 30, 2000, and represented 70% of total revenues for
the three months ended June
30, 2001 as compared to 75% of total revenues for the comparable period in
2000. The increase in software license revenues was primarily due to an
increase in overall demand for data storage management products, increased
market acceptance of our products, introduction of new products and continued
expansion of sales through our indirect distribution channels. Software
license revenues for the three months ended June 30, 2001 increased 8% to $11.1
million compared with $10.3 million for the three months ended March 31, 2001,
and software license revenues for the six months ended June 30, 2001 increased
22% to $21.4 million compared with $17.6 million for the six months ended June
30, 2000. The increase for the first six months of 2001 over the first six
months of 2000 and the increase over the first quarter of 2001, were primarily
due to the same factors mentioned for the quarter-over-quarter increase.

11



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For the three months ended June 30, 2001 we recognized $3.3 million of
software license revenue under new arrangements with payment terms extending up
to six months. An additional $2.0 million of software license revenue was
recognized under a purchase order from one distributor customer under a
previously established arrangement, with payment terms for $1.0 million
extending up to three months and $1.0 million extending up to six months. The
total software license revenues from new and previously established
arrangements with extended payment terms of $5.3 million represents 48% of our
software revenues for the three months ended June 30, 2001. The comparable
amounts for the three months ended September 30, 2000, December 31, 2000 and
March 31, 2001 were $5.3 million and 51%, $4.6 million and 50%, and $3.7
million and 36%, respectively. As mentioned above, extended payment term
contracts are primarily with select OEMs and resellers.

Services revenues  Services revenues increased 61% to $4.8 million or 30%
of total revenues for the three months ended June 30, 2001 from $3.0 million or
25% of total revenues for the comparable period in 2000. Services revenues
increased 63% to $8.5 million or 28% of total revenues for the six months ended
June 30, 2001 from $5.2 million or 23% of total revenues for the comparable
period in 2000. These increases were primarily due to increased sales of
maintenance and technical support contracts on new license sales, increased
renewals of maintenance contracts by our installed base of licensees and, to a
lesser extent, increased demand for consulting, training and other professional
services. In 2000, we began to require that at least one year of customer
maintenance support be purchased with new license purchases. This policy became
effective in September 2000 for sales attributable to OTG Software and Smart
Storage has followed a similar policy since January 2001.

Cost of revenues

Cost of software license revenues consists primarily of royalties, media,
manuals and distribution costs. Cost of services revenues consists primarily of
personnel-related costs in providing maintenance and technical support,
consulting and training to customers. Gross margin on software license revenues
is substantially higher than gross margin on services revenues, reflecting the
low materials, packaging and other costs of software products compared with the
relatively high personnel costs associated with providing maintenance and
technical support, consulting and training services. Cost of services revenues
varies based upon the mix of maintenance and technical support, consulting and
training services.

Cost of software license revenues  Including amortization expense of
approximately $69,000 per quarter associated with intangible assets acquired by
Smart Storage in 1999 and the first quarter of 2000, the cost of software
license revenues increased 59% to $1.2 million for the three months ended June
30, 2001 from $0.7 million for the three months ended June 30, 2000 and
increased 72% to $2.1 million for the six months ended June 30, 2001 from $1.2
million for the six months ended June 30, 2000. This increase was due primarily
to an increase in sales of products with higher royalty expenses. Gross margin
on software license revenues decreased to 90% for the three months ended June
30, 2001 from 92% for the three months ended June 30, 2000 and to 90% for the
six months ended June 30, 2001 from 93% for the six months ended June 30, 2000.
The gross margin on software license revenues may vary from period to period
based on changes in the mix of products comprising software license revenues
with certain products having higher royalty rates than other products. We
anticipate that the amortization expense associated with the intangible assets
acquired by Smart Storage in 1999 and the first quarter of 2000 will continue
through the first half of 2002. We do not expect any significant improvements
in gross margin on future software license revenues.

Cost of services revenues  Cost of services revenues increased 43% to
$1.7 million for the three months ended June 30, 2001 from $1.2 million for the
three months ended June 30, 2000, and increased 45% to $3.3 million for the six
months ended June 30, 2001 from $2.3 million for the six months ended June 30,
2000 due primarily to personnel additions in our customer support, training and
consulting organizations and to increased demand for the related services.
Gross margin on services revenues increased to 64% and to 61% for the three
months and six months ended June 30, 2001 from 60% and 56% for the three months
and six months ended June 30, 2000, respectively, due primarily to a
proportionately higher level of revenues from maintenance which bear higher
gross margins than revenues from consulting services and to efficiencies gained
in the customer support and consulting services areas. The gross margins on
services revenues may vary from period to period related to changes in the mix
of maintenance and technical support, consulting and training comprising
services revenues.

12



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Operating Expenses

Sales and marketing  Sales and marketing expenses consist of salaries,
related benefits, commissions, consultant fees, tradeshow, advertising and
other costs associated with our sales and marketing efforts. Sales and
marketing expenses increased 42% to $7.7 million for the three months ended
June 30, 2001 from $5.4 million for the three months ended June 30, 2000. The
increase in sales and marketing expenses is attributable to an increase in the
number of sales and marketing employees and increases in spending on marketing
programs, including the acceleration of the Companys partner conference
program for 2001 from the fourth quarter to the second quarter and the
acceleration of certain sales and marketing efforts because of the acquisition
of Smart Storage. Sales and marketing expenses increased 41% to $14.4 million
for the six months ended June 30, 2001 from $10.2 million for the six months
ended June 30, 2000. As a percentage of total revenues, sales and marketing
expenses increased to 48% for the three and six month periods ended June 30,
2001 from 45% for the three and six month periods ended June 30, 2000. We
intend to continue to expand our global sales and marketing infrastructure,
and, accordingly, we expect the absolute dollar amount of sales and marketing
expenses to increase in future periods.

Research and development  Research and development expenses consist primarily
of salaries, related benefits and other software engineering-related costs.
Research and development expenses increased 64% to $4.5 million for the three
months ended June 30, 2001 from $2.7 million for the three months ended June
30, 2000, and increased 62% to $8.5 million for the six months ended June 30,
2001 from $5.2 million for the six months ended June 30, 2000. The increase was
primarily due to an increase in the number of research and development
personnel and to an acceleration of certain development efforts accomplished
because of the acquisition of Smart Storage. As a percentage of total
revenues, research and development expenses increased to 28% for the three
months ended June 30, 2001 from 23% for the three months ended June 30, 2000,
and to 29% for the six months ended June 30, 2001 from 23% for the six months
ended June 30, 2000. We believe that a significant level of research and
development investment is required to remain competitive and expect the
absolute dollar amount of these expenses will continue to increase in future
periods.

General and administrative  General and administrative expenses consist
primarily of salaries, related benefits, fees for professional services, such
as legal and accounting services, and bad debt expenses. General and
administrative expenses increased 32% to $2.4 million for the three months
ended June 30, 2001 from $1.8 million for the three months ended June 30, 2000,
and increased 31% to $4.5 million for the six months ended June 30, 2001 from
$3.5 million for the six months ended June 30, 2000, due primarily to
additional personnel costs and other expenses associated with our efforts to
support the continued expansion of our operations. General and administrative
expenses were approximately 15% of total revenues for each of the periods
presented due primarily to the acceleration of certain general and
administrative efforts incurred because of the acquisition of Smart Storage. We
expect general and administrative expenses to decrease as a percentage of total
revenues by the end of 2001, but we expect the absolute dollar amount of
general and administrative expenses to continue to increase as our operations
expand.

The Company incurred approximately $1.6 million in merger related costs
associated with its acquisition of Smart Storage during the first quarter of
2001 and approximately $208,000 in both the first and second quarters of 2001
associated with the amortization of certain intangibles in connection with its
acquisition of xVault in April 2000. These amounts increased total operating
expenses by $69,000 in the second quarter of 2001 over the second quarter of
2000 and increased total operating expenses by $1.9 million in the first half
of 2001 over the first half of 2000.

Other income  Other income decreased on a net basis to $0.9 million for the
three months ended June 30, 2001, from $1.0 million for the three months ended
June 30, 2000, primarily because of the loss of approximately $152,000
associated with the disposal of certain assets in June of 2001. Other income
increased on a net basis to $2.2 million for the six months ended June 30,
2001, from $0.6 million for the six months ended June 30, 2000, due to a number
of factors. First, we used proceeds from our initial public offering in March
2000 to repay outstanding balances under our credit facility, retire our senior
subordinated notes and retire notes payable to certain shareholders,
eliminating related interest expense. Further, the conversion of our
convertible subordinated notes into Common Stock in conjunction with our
initial public offering eliminated related interest expense. In addition, the
remaining proceeds from our initial public offering as well as the net proceeds
of our secondary public offering in November 2000 increased our levels of cash
and cash equivalents available for investment, resulting in increased interest
income. For at least the near future, we believe falling interest rates will
negatively affect interest income earned on our cash and cash equivalents.

Provision for income taxes  OTG Software was treated as a subchapter S
corporation for federal and state income tax purposes prior to its initial
public offering in March 2000. Under subchapter S of the Internal Revenue Code,
OTG Softwares income was allocated and taxable to its shareholders.
Accordingly, OTG Software did not recognize any federal or state income taxes
prior to the consummation of its initial public offering. Upon consummation of
the initial public offering, OTG Software ceased to be treated as a
subchapter S corporation. Accordingly, OTG Software has been subject to federal
and state income taxes since our initial public offering. Smart Storage was
subject to regular income taxes for all periods presented.

13



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We assumed net operating loss carryforwards (NOLs) of approximately $2.1
million through our acquisition of Smart Storage. We expect to use these NOLs,
which are subject to certain limitations on use, in future periods depending on
future levels of taxable income. In addition, our acquisition of Smart Storage
resulted in certain expenses which are not deductible for income tax purposes
such that our estimated effective income tax rate for 2001 will be
approximately 65% of our income (loss) before income taxes.

Net income (loss) per common share  For the three months ended June 30, 2001
we recorded a net loss per common share of ($0.00) on both a basic and a
diluted basis. For the three months ended June 30, 2000 we recognized net
income per common share of $0.01 on both a basic and diluted basis. For the
six months ended June 30, 2001 we recorded a net loss per common share of
($0.05) on both a basic and a diluted basis, as compared to a net income per
common share of $0.01 on both a basic and diluted basis for the six months
ended June 30, 2000. The increase in the loss per common share reflects a
substantial increase in operating expenses, as discussed above, partially
offset by higher interest income, an income tax benefit and more shares of
common stock outstanding for the three months and six months ended June 30,
2001. As discussed above, we recognized certain one-time costs in both 2001 and
2000, including costs of our merger with Smart Storage, purchase accounting
adjustments associated with our acquisition of xVault and purchase accounting
adjustments related to Smart Storages acquisition of certain intangible assets
in February 2000. Excluding such merger and acquisition related costs, our pro
forma net loss per common share on both a basic and diluted basis would have
been ($0.01) for the three months and six months ended June 30, 2001 as
compared to pro forma net income per common share on both a basic and diluted
basis of $0.04 for the three months and six months ended June 30, 2000.

Recently issued accounting standards  In April 2001, the Emerging Issues
Task Force (EITF), a body with authority to establish generally accepted
accounting principles, issued a conclusion on certain items discussed in EITF
Issue No. 00-14, Accounting for Certain Sales Incentives. This issue
addresses when consideration from a vendor to an entity that resells the
vendors products is an adjustment of the selling prices of the vendors
products to the reseller, a net adjustment to revenues, or a cost incurred by
the vendor for assets or services provided by the reseller and, therefore, an
element of cost or expense in the vendors statement of operations. Examples of
activities that fall within the scope of this issue include cooperative
marketing arrangements, certain types of price protection, product introduction
and brand development arrangements. We do not believe the adoption of this
standard would have a material impact on our financial condition or results of
operations.

In July 2001, the FASB issued Statement No. (FAS) 141, Business
Combinations, and FAS 142, Goodwill and Other Intangible Assets. FAS 141 will
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. FAS 141 will also specify
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be
accounted for separately. FAS 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of FAS 142.
FAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.

The Company is required to adopt the provisions of FAS 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
and is required to adopt the provisions of FAS 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001, but before FAS 142 is adopted in full will not
be amortized, but will continue to be evaluated for impairment in accordance
with the appropriate pre-FAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized and tested for impairment in accordance with the
appropriate pre-FAS 142 accounting requirements prior to the adoption of FAS
142.

FAS 141 will require, upon adoption of FAS 142, that we evaluate our
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in FAS 141 for recognition apart from goodwill.
Upon adoption of FAS 142, we will be required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, we will be
required to test the intangible asset for impairment in accordance with the
provisions of FAS 142 on the date of adoption, with any impairment write off
recognized as the cumulative effect of a change in accounting principle in the
first interim period.

14



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In connection with the transitional goodwill impairment evaluation, FAS
142 will require us to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To accomplish this
assessment, we must identify our reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. We will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting units carrying amount. To the extent a reporting units carrying
amount exceeds its fair value, an indication exists that the reporting units
goodwill may be impaired, and we must perform the second step of the
transitional impairment test. In the second step, we must compare the implied
fair value of the reporting units goodwill, determined by allocating the
reporting units fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in
accordance with FAS 141, to its carrying amount, both of which would be measure
as of the date of adoption. This second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in our statement of operations. Finally, any
unamortized negative goodwill existing at the date FAS 142 is adopted must be
written off as the cumulative effect of a change in accounting principle.

As of the date of adoption, we expect to have unamortized identifiable
intangible assets which will be subject to the transition provisions of FAS 141
and 142. Because of the extensive effort needed to comply with adopting FAS
141 and 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on our financial statements at the date of this
report, including whether any transitional impairment losses will be required
to be recognized as the cumulative effect of a change in accounting principle.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2001 our cash and cash equivalents totaled $99.0 million,
representing 70% of total assets. As of December 31, 2000 our cash and cash
equivalents totaled $102.2 million, which represented 74% of total assets. As
of June 30, 2001 we had interest-bearing debt outstanding of $348,000 related
primarily to notes payable to certain shareholders and banks. As of December
31, 2000 we had interest-bearing debt outstanding of $619,000 related primarily
to notes payable to certain shareholders and banks.

For the first six months of 2001, net cash used for operating activities
increased to approximately $1.0 million as compared to net cash used for
operating activities for the first six months of 2000 of $0.6 million. The
increase in cash used for operating activities primarily reflects payments of
$1.1 million for merger related costs associated with the acquisition of Smart
Storage, partially offset by changes in other assets and liabilities associated
with operations. One of the factors affecting our ability to generate positive
cash flows from operating activities is our ability to collect on accounts
receivable when they become due, including sales with extended payment terms.
In addition, even if our collection efforts are ultimately successful, the
timing of receipts may impact cash flows during a quarterly period. In March
2001, we were obligated to begin making income tax payments. The timing and
extent of any future income tax payments are dependent on the amount of our
taxable income, if any. As mentioned above, we assumed certain tax benefits
through our acquisition of Smart Storage. Payments of income taxes could have a
material adverse affect on our net cash flows from operating activities in
future periods.

For the first six months of 2001, net cash used for investing activities
decreased to $3.1 million from $4.1 million for the first six months of 2000.
The results for the first six months of 2000 include payments totaling $2.6
million to acquire certain intangible assets. In addition, we purchased
approximately $3.1 million of property and equipment in the first half of 2001,
as compared to similar purchases of $1.5 million in the first half of 2000. We
expect to continue to invest in property and equipment in the ordinary course
of business as required.

For the first six months of 2001, net cash provided by financing
activities was $826,000, attributable primarily to proceeds from employee
exercises of stock options of $1.1 million and proceeds resulting from a note
payable with a bank of $0.4 million, offset by payments on the note payable to
the bank of $622,000. For the first six months of 2000, net cash provided by
financing activities was $70.3 million, including proceeds of $87.4 million
from our initial public offering offset by repayments of certain debt
obligations totaling $16.6 million and distributions to certain shareholders of
$1.2 million. In April 2001 we retired a note payable to a bank with a payment
of $0.4 million.

In October 2000 we amended and restated our commercial credit facility
with PNC Bank. Under the amended loan agreement, the maximum available
borrowing under the revolving line of credit was increased from $5 million to
$10 million, including a $5 million sub-line of credit for establishing letters
of credit. The maximum borrowings under the loan agreement at any time,
including amounts under the revolving line of credit and the sub-line of
credit, are limited to the lesser of $10 million or 80% of qualified accounts
receivable, as defined in the agreement. Borrowings under the line of credit
bear interest at the prime rate or LIBOR rate plus 2.5%, as selected by us, and
are secured by certain of our assets.

15



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We believe that our current cash, cash equivalents and anticipated cash
flows from future operating activities, collectively, will satisfy our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.

RISK FACTORS

There are a number of important factors that could affect our business and
future operating results, including, without limitation, the factors set forth
below, and the information contained in this report should be read in light of
such factors. Any of the following factors could harm our business and our
future operating results.

We may not be able to sustain our current revenue growth rates

Although our revenues have grown rapidly in recent years, we may not be
able to maintain this rate of revenue growth because of the difficulty of
maintaining high percentage increases as our base of revenue increases. In
addition, general economic conditions, growing competition, lower-than-expected
market acceptance of Microsoft products, such as Windows NT or Windows 2000, or
the failure of the markets for storage area networks, storage service providers
or network attached storage to develop, could also affect our revenue growth.

Our operating results have fluctuated in the past, and they are likely to
fluctuate significantly in the future. Quarterly comparisons of our financial
results are not necessarily meaningful and you should not rely on them as an
indication of our future performance

Our revenues in any quarter will depend substantially on orders we
receive, ship and determine to be collectable in that quarter. In addition, we
typically receive a significant portion of orders during the last month of each
quarter, and we cannot predict whether those orders will be placed, fulfilled
and shipped in that period. If we have lower revenues than we expect, we
probably will not be able to reduce our operating expenses in time to
compensate for any revenue shortfall. Therefore, any significant shortfall in
revenues or delay of customer orders could have an immediate adverse effect on
our operating results in that quarter.

In addition to changes in general economic conditions, factors that could
affect our operating results include:



| |  | the unpredictability of the timing and level of sales through our indirect
sales channels;                                                                                    
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and magnitude of large orders;                                                                                                                                     
| |  | changes in the mix of our sales, including the mix between higher margin
software licenses and lower margin services;                                                         
| |  | the timing and amount of our marketing, sales and product development
expenses;                                                                                               
| |  | the cost and time required to develop new software products and new versions
of our existing software products;                                                               
| |  | the introduction, timing and market acceptance of new products introduced by
us or our competitors;                                                                           
| |  | changes in data storage and networking technology or the introduction of
new operating system upgrades, which could require us to
modify our products or develop new
products;
| |  | the growth rate of Windows NT;                                                                                                                                                
| |  | the rate of adoption of Windows 2000;                                                                                                                                         
| |  | the rate of adoption of storage area networks;                                                                                                                                
| |  | pricing policies, including levels of discounts, payment terms and
distribution terms;                                                                                        
| |  | the failure of customers, especially those to whom we have granted extended
payment terms, to pay amounts owed when due, and;                                                 
| |  | the timing and size of additional acquisitions, if any.                                                                                                                       

In addition, our efforts to expand our software product suite, sales and
marketing activities, direct and indirect distribution channels and maintenance
and technical support functions and to pursue strategic relationships or
acquisitions may not succeed or may prove more expensive than we anticipate. As
a result, we cannot predict our future operating results with any degree of
certainty and our operating results may vary significantly from quarter to
quarter.

Fluctuations in our operating results are likely to affect our stock price
in a manner that may be unrelated to our long-term operating performance.

Our business significantly depends on the acceptance of Windows NT and Windows
2000 to run computer networks, and a decrease in their rates of acceptance
could cause our revenues to decline

16



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For the foreseeable future, we expect a substantial majority of our
revenues to continue to come from sales of our Windows NT-based data storage
software products. As a result, we depend on the growing use of Windows NT for
computer networks. If the deployment of Windows NT does not increase as we
anticipate, or if it decreases, our revenues could decline. In addition, if
users do not accept Windows 2000, or if there is a wide acceptance of other
existing or new operating systems, including Microsoft products, our business
would suffer.

Windows 2000 may not gain market acceptance. In addition, users of
previous versions of Windows NT may decide to migrate to another operating
system due to these delays or improved functionality of another operating
system. We have expended significant resources on the development of Windows
2000-compatible versions of our product suite and our future success depends
upon sales of this product suite. If users of Windows 2000 networks do not
widely adopt and purchase our products, our revenue and business will suffer.

Our business will depend upon the development of the emerging market for
storage area networks, and if this market fails to develop, or develops more
slowly than we anticipate, or if our products are not widely accepted in this
market, our business will suffer

Our future growth and profitability may depend upon the widespread
acceptance of storage area networks as an enterprise-wide data storage method
and the acceptance of our products for use in such networks. Accordingly,
widespread adoption of storage area networks may be critical to our future
success. The market for storage area networks has only recently begun to
develop and evolve. Because this market is new, it is difficult to predict its
potential size or growth rate. Potential customers that have invested
substantial resources in their existing data storage management systems may be
reluctant or slow to adopt a new approach like storage area networks. Our
success in generating revenues in this emerging market will depend, among other
things, on our ability to educate potential original equipment manufacturers
and system integrators, as well as potential end-users, about the benefits of
storage area networks and our data storage management solutions when deployed
in the storage area network environment. Furthermore, although we are
attempting to position our products as a standard for data storage management
on storage area networks, if we are unsuccessful in doing so, competing
standards may emerge that may be preferred by original equipment manufacturers,
systems integrators or end-users.

We have experienced significant growth in our business and our failure to
manage this growth or any future growth could harm our business

We continue to increase the scope of our operations and have grown our
headcount substantially through internal growth and acquisitions. As of June
30, 2001, our employees totaled 400 and as of December 31, 2000 and 1999 our
employees totaled 385 and 233, respectively. Our productivity and the quality
of our products may be adversely affected if we do not integrate and train our
new employees quickly and effectively, including work forces obtained by
acquiring other companies. We also cannot be sure that our revenues will
continue to grow at a rate sufficient to absorb the costs associated with a
larger overall headcount.

Our future success and our ability to sustain our revenue growth also
depend upon the continued service of our executive officers and other key sales
and research and development personnel. The loss of any of our executive
officers or key employees, especially Richard A. Kay, F. William Caple and
Ronald W. Kaiser, could adversely affect our business and slow our product
development processes. Although we have employment agreements with these
executives, these agreements do not obligate them to remain employed by us. We
do not have key person life insurance policies covering any of our employees.
Furthermore, we must continue to hire large numbers of highly qualified
individuals. Competition for these individuals is intense, and we may not be
able to attract, assimilate or retain additional highly qualified personnel in
the future.

To achieve our business objectives, we may recruit and employ skilled
technical professionals from other countries to work in the United States.
Limitations imposed by federal immigration laws and the availability of visas
could compromise our ability to attract necessary qualified personnel. This may
have a negative effect on our business and future operating results.

Our revenues depend primarily on sales of licenses for one product line, our
XtenderSolutions product suite, and a decline in sales of licenses for this
product suite could cause our revenues to fall

We have derived the substantial majority of our revenue from the sale of
our XtenderSolutions product suite. Sales of our XtenderSolutions products
represent a substantial portion of our total revenues. We expect that these
products will continue to account for a large portion of our revenues for the
foreseeable future. Accordingly, our business and future operating results
depend on the continued market acceptance of our XtenderSolutions products and
future enhancements to these products. Any factors adversely
affecting the pricing or demand for or market acceptance of our
XtenderSolutions products, including competition or technological change, could
cause our revenues to decline and our business and future operating results to
suffer.

17



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Our multiple distribution channels are subject to many risks that could
adversely affect our sales

Direct sales: We have increased our efforts to grow our direct sales force
to sell our products, especially to large customers. Direct sales involve a
number of risks, including:



| |  | longer sales cycles, typically three to six months;                                 
|- |  | ------------------------------------------------------------------------------------
| |  | our need to hire, train, retain and motivate our sales force; and                   
| |  | the length of time it takes our new sales representatives to begin
generating sales.

Indirect sales: We expect that a significant portion of our revenues will
continue to come from indirect sales. These include sales to original equipment
manufacturers that incorporate our data storage management software into
systems they sell. We also expect future revenues from distributors and
value-added resellers that sell our software, often bundled with their own
software or services. We have no control over the shipping dates or volumes of
our original equipment manufacturers, value-added resellers or distributors
ship, and they have no obligation to ship systems incorporating our software.
They generally have no minimum sales requirements and can terminate their
relationship with us on short notice. We develop customized versions of our
products for some of our original equipment manufacturers to be included in
their systems software and other products. Developing products for these
original equipment manufacturers causes us to divert resources from other
activities that are also important to our business. If these versions do not
result in substantial revenues, our business and financial results could be
adversely affected.

Our original equipment manufacturers could choose to compete with us or with
each other, which could harm our business

Our original equipment manufacturers, value-added resellers and
distributors could choose to develop their own data storage management products
and incorporate those products into their systems or product offerings in lieu
of our products. In addition, the original equipment manufacturers that we do
business with may compete with one another. To the extent that one of our
original equipment manufacturer customers views the products we have developed
for another original equipment manufacturer as competitive, it may decide to
stop doing business with us, which could harm our business.

Overlapping sales efforts may lead to inefficiencies and may adversely affect
our relationships with those who sell our products

Our original equipment manufacturers, value-added resellers, distributors
and direct sales force might target the same sales opportunities, which could
lead to an inefficient allocation of sales resources. This would result in us
marketing similar products to the same end-users. These overlapping sales
efforts could also adversely affect our relationships with our original
equipment manufacturers, value-added resellers, distributors and other sales
channels and result in them being less willing to market our products
aggressively, and could compromise margins on products we sell directly.

The market for outsourced data storage software over the Web is new and
evolving, and if this market fails to develop, or if our products are not
widely accepted in this market, our business could suffer

Part of our strategy is to offer outsourced data storage software to
customers over the Web. In this business model, customers who wish to reduce
their in-house hardware and maintenance costs would pay us or a third party
using our products to provide metered or leased data storage capacity and
management. If this business model does not gain acceptance among potential
customers, we will not be able to implement this strategy successfully. The
market for electronic outsourced data storage software has only recently begun
to emerge and we cannot be sure that it will develop or grow. Among other
things, the development of this market could be limited by:



| |  | concerns over the reliability and security of the Web, especially as a
means of moving data that is critical to the customers business; and                   
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | customer reluctance to cede control over the hardware and network
infrastructure used to store important data and to rely on systems provided by
a third party.

In 2000 we began to provide outsourced data storage service through
OnlineStor.com and do not have any significant experience in the market for
these services. We are expending certain resources to develop the market for
these services and if this market fails to develop, or if we are not able to
penetrate it successfully, we will not realize any return on this investment,
and our business may suffer.

18



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If we encounter system failures or other difficulties in providing outsourced
data storage services, we could be exposed to liability and our reputation
could suffer

We depend upon a hardware and networking infrastructure to deliver
outsourced data storage capacity to our customers. If this infrastructure
fails, or customers otherwise experience difficulties or delays in retrieving
data, we could face liability claims from them and our reputation could be
damaged. We currently do not develop the hardware and networking infrastructure
ourselves, but rather contract with third parties, such as storage service
providers and application service providers, to supply these components on our
behalf. For this reason, we are dependent on the performance of the systems
deployed and maintained by these parties, whom we will not control. In some
cases, we might contract directly with the customer to provide the outsourced
services; in other cases, we might act as a reseller for application service
providers, storage service providers or others. In either case, we would expect
to include contractual provisions limiting our liability to the customer for
system failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We also expect
that we would carry liability insurance to cover problems of this nature, but
we cannot guarantee that insurance will be available or that the amounts of our
coverage will be sufficient to cover all potential claims.

Other companies have developed or may choose to develop competing products and
potential customers for our products may choose to develop internal data
storage management capabilities or satisfy their needs with a traditional data
back-up solution, any of which could cause our revenues and our business to
suffer

We face a variety of competitors that offer products with some of our
products features. Some potential customers may elect to internally develop
capabilities similar to those provided by our products rather than buying them
from us or another outside vendor. Although our products generally enhance
traditional data back-up capabilities offered by companies such as VERITAS
Software, Legato Systems, Computer Associates International and IBM, our
products may compete against traditional back-up solutions when a potential
customer seeks to address its storage needs with only a data back-up solution.
Furthermore, VERITAS Software has recently begun to offer a Windows NT-based
product that competes with DiskXtender and a Microsoft Exchange-based back-up
product for e-mail attachments that competes with EmailXtender. If potential
customers choose to develop their own capabilities, choose a traditional data
back-up solution or purchase a competing product, our revenues and business
will suffer.

In addition, Microsoft could develop competing products. Windows 2000
includes basic data storage management capabilities. Microsoft could compete
with us by enhancing and expanding these capabilities to offer an integrated
storage management capability within their basic operating system. This would
reduce or eliminate the need to purchase our products, which would cause our
revenues and business to suffer.

Our products must remain compatible with operating system software, network
hardware and software configurations, which are currently undergoing, and will
likely continue to undergo, significant change that could render our products
obsolete

The market for our data storage management software is characterized by
rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. Our products could be rendered obsolete if
products based on new technologies are introduced or new industry standards
emerge. We have expended significant resources to allow our products to take
advantage of the release of Windows 2000 and to prepare our products for the
emergence of storage area networks, and we expect to continue to do so. If
Windows 2000 and storage area networks are not widely adopted, our business and
future operating results will suffer.

As the emergence of storage area networks demonstrates, the computing
environments in which our products must operate are complex and change rapidly.
As a result, we cannot accurately estimate the life cycles of our software
products. New products and product enhancements can require long development
and testing periods, and depend significantly on our ability to hire and retain
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
product releases could result in lost revenues and significant additional
expense.

Our future success also depends, in part, on the compatibility of our
products with other vendors software and hardware products, particularly those
provided by Microsoft and storage area network manufacturers. Microsoft or
other vendors may change their products so that they will no longer be
compatible with our products. These vendors may also decide to bundle their
products with other competing products for promotional purposes. If that were
to happen, our business and future operating results might suffer as we might
be priced out of the market or no longer be able to offer commercially viable
products.

19



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We have experienced errors in our products in the past, and any such errors in
the future could harm our reputation and could cause customers to demand
refunds from us or assert claims for damages against us, which could harm our
business and future operating results

Because our software products are complex, they have in the past, and
could in the future, contain errors or bugs. Bugs can be detected at any point
in a products life cycle. In the past, we have devoted significant resources
to the detection and correction of errors and we expect to do so in the future.
While we continually test our products for errors and work with customers
through our customer support services and engineering personnel to identify and
correct bugs in our software, we expect that errors in our products, especially
new releases of our current products and new product offerings, will continue
to be found in the future. Any of these errors could be significant and could
harm our business and future operating results. Detection of any significant
errors may result in:



| |  | the loss of or delay in market acceptance and sales of our products;
|- |  | --------------------------------------------------------------------
| |  | diversion of development resources;                                 
| |  | injury to our reputation; or                                        
| |  | increased maintenance and warranty costs.                           

Because customers use our products to store and retrieve critical
information, we may be subject to significant liability claims if our products
do not work properly. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. However, these
limitations may not preclude all potential claims. Liability claims could
require us to spend significant time and money in litigation or pay significant
damages. Claims of this nature, whether or not successful, could seriously
damage our reputation and our business.

Our software products rely on our intellectual property, and any failure by us
to protect, or any misappropriation of, our intellectual property could enable
our competitors to market products with similar features that may reduce demand
for our products

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where we are seeking to
expand our operations and where the laws may not protect our proprietary rights
as fully as those in the United States. Our success and ability to compete
depend substantially upon our internally developed technology, which is
incorporated in the source code for our products. We protect our intellectual
property through a combination of copyright, trade secret and trademark law. We
have registered, or are in the process of registering, all of our trademarks
under applicable law. We generally enter into confidentiality or license
agreements with our employees, consultants and corporate partners, and control
access to our source code and other intellectual property and the distribution
of our software, documentation and other proprietary information. These
measures afford only limited protection and may be inadequate, especially
because employees such as ours are highly sought after and may leave our employ
with significant knowledge of our proprietary information. Others may develop
technologies that are similar or superior to our technology or design around
the copyrights and trade secrets we own.

Our products employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages as a result

We expect that our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. We do not conduct comprehensive patent searches to determine whether
technologies used in our products infringe upon patents or patent applications
held by others. In addition, we hire employees who may be privy to the
proprietary information of their prior employers. Although we believe that our
products do not employ technology that infringes any proprietary rights of
third parties, third parties nevertheless may claim that we infringe their
intellectual property rights. Regardless of whether these claims have any
merit, they could:



| |  | be time-consuming to defend;                                                                                              
|- |  | --------------------------------------------------------------------------------------------------------------------------
| |  | result in costly litigation;                                                                                              
| |  | divert our managements attention and resources;                                                                          
| |  | cause product shipment delays; or                                                                                         
| |  | require us to enter into royalty or licensing agreements, which may not be
available on terms acceptable to us, if at all.

A successful claim of product infringement against us or our failure or
inability to license the infringed or similar technology could
damage our business because we would not be able to sell our products without
redeveloping them or incurring significant additional expenses.

20



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The expansion of our international operations subjects our business to
additional economic and other risks that could have an adverse impact on our
revenue and business

For the six months ended June 30, 2001 and 2000, our revenues from foreign
countries represented 12% and 18%, respectively, of our total revenues. We plan
to continue to increase our international sales activities, but these
activities are subject to a number of risks, including:



| |  | greater difficulty in accounts receivable collection and longer collection
periods;                                                                                                                                    
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | political and economic instability;                                                                                                                                                                                    
| |  | greater difficulty in attracting distributors that market and support our
products effectively;                                                                                                                        
| |  | the need to comply with varying employment policies and regulations
which could make it more difficult and expensive to manage our headcount
if we need to establish more direct sales staff outside the United States;
| |  | weaker operating results from our international operations in our
quarters ending each September 30 due to the summer slowdown in Europe;                                                                              
| |  | increased difficulty in managing international management, distribution
and research operations that are increasingly international in nature and
significant to our growth and success                                
| |  | the effects of currency fluctuations.                                                                                                                                                                                  

As we seek to expand our international operations, if any of these risks
materialize, our revenues and our business could be adversely affected.

We may not be able to achieve the benefits that we hope to obtain from our
acquisitions or mergers

We cannot be certain that we will achieve any or all of the benefits we
anticipate as a result of the acquisitions or mergers we have undertaken,
including but not limited to the anticipated accretion to our earnings and
targeted revenue expectations. Acquisitions, including our acquisitions of
Smart Storage and Unitree Software, involve a number of special risks and
challenges, including:



| |  | diversion of management attention from our core business;                                                                                                                                           
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | integration of acquired company operations and employees with our
existing business, including coordination of geographically dispersed
operations;                                                 
| |  | incorporation of acquired company technology into our existing product
lines, including consolidating technology with duplicative functionality
or designed on different technological architecture;
| |  | loss or termination of employees, including potentially costly litigation
resulting from the termination of those employees;                                                                        
| |  | dilution of our then-current shareholders percentage ownership;                                                                                                                                    
| |  | assumption of liabilities of the acquired company, including potentially
costly litigation related to alleged liabilities of the acquired
company;                                                  
| |  | and the presentation of a unified corporate image to our customers and our
employees.                                                                                                               

Also, we have limited experience in significant acquisitions, and our
integration of the operations of Smart Storage and Unitree Software may take
longer and be more difficult than we anticipated, which could harm our
business.

If we undertake additional acquisitions, they may be expensive and disruptive
to our business and could have an adverse effect on our business, future
operations and market price of our stock

We may continue to make investments in complementary companies, products
or technologies. We could have difficulty in integrating an acquired companys
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. If we make other types of acquisitions,
we could have difficulty in assimilating the acquired technology or products
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. We also expect
that we would incur substantial expenses if we acquired other businesses or
technologies. If we issue additional equity securities, our shareholders could
experience dilution and the market price of our stock may decline. As of the
date of this report, we have no agreements or understandings regarding any
future acquisitions.

21



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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not currently hold any derivative financial instruments and do not
invest in derivative financial instruments. We invest excess cash in
short-term, highly-liquid investments. In addition, excluding a note payable
that was retired in early April 2001, our only long-term indebtedness totals
$55,000 related to certain office equipment acquired under a capital lease. As
a result, we believe that our exposure to interest rate risk is not
material to our financial condition or results of operations.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 26, 2001, a class action lawsuit was filed in the
Southern District of New York naming OTG Software, our officers
who signed the registration statement in connection with our initial public
offering and the managing underwriters of our initial public offering as
defendants. The complaint alleges that our initial public offering
registration statement and final prospectus contained material
misrepresentations and/or omissions, related, in part, to additional, excessive
and undisclosed commissions received by our underwriters. We are still in the
process of reviewing the allegations. We intend to vigorously defend ourselves
and our officers. Therefore it is the position of our management that, at this
time, it is not possible to estimate the amount of a probable loss, if any,
that might result from this matter. Accordingly, no provision for this matter
has been made in our condensed consolidated financial statements.

Item 2. Changes in Securities and Use of Proceeds

On March 29, 2001, we acquired Smart Storage in a transaction accounted
for as a pooling of interests. Smart Storage is a provider of standards-based
DVD and CD storage management software. Pursuant to the merger agreement, we
issued 3,081,108 shares of our common stock to the former Smart Storage
shareholders in exchange for all the outstanding shares of Smart Storages
capital stock (of the shares issued, 308,087 are being held in escrow for a
period of twelve months to secure certain indemnification obligations of
certain former Smart Storage shareholders). In addition, we reserved 468,219
shares of common stock for issuance upon the exercise of the outstanding
options to purchase Smart Storage common stock, which we assumed as part of the
merger agreement. See Note 2 to Notes to Condensed Consolidated Financial
Statements for additional information related to our purchase of Smart Storage.

Each of the Smart Storage shareholders who were issued shares of our
common stock was either an accredited investor as defined in Rule 501 of the
Securities Act of 1933 or received information required to be provided by Rule
506. These securities were issued in reliance on the exemption from
registration set forth under Rule 506 of the Securities Act of 1933. No
underwriters were involved in the foregoing sales of securities.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Submission of Matters To a Vote of Security Holders

On May 31, 2001, we held our annual meeting of stockholders. Of
31,430,466 shares of common stock entitled to vote, 27,431,290 were present at
the meeting or represented by proxy. The following sets forth a description of
each matter voted on and the votes cast.

1.       A proposal to elect two (2) Class I directors for a three year
term.

For the above-referenced proposal, shares were voted as follows:

|                         |  |     |            |          |  |  |        | 
|------------------------ |  | --- | ---------- | -------- |  |  | ------ | 
|Class I Director Elected |  | FOR |            | WITHHELD
|                        
|Joseph R. Chinnici       |  |     | 27,410,878 |          |  |  | 27,012 | 
|                        
|                        
|                        
|                        
|                        
|Donald B. Hebb, Jr.      |  |     | 27,410,878 |          |  |  | 27,012 | 

22



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F. William Caple and John Burton continue to serve as Class II directors
of the company, and Richard A. Kay, Gabriel Battista and Geaton A. DeCesaris,
Jr. continue to serve as Class III directors of the company.

2.       A proposal to amend and restate our 2000 stock incentive plan,
increasing the number of shares authorized for
issuance under the plan from 1,834,071 to 3,334,071.

For the above-referenced proposal, 22,540,231 shares were voted for the
proposal, 4,894,782 were voted against the
proposal, and 2,877 shares were withheld.

3.       A proposal to continue our 2000 stock incentive plan.

For the above-referenced proposal, 26,410,606 shares were voted for the
proposal, 1,024,512 were voted against the
proposal, and 2,772 were withheld.

4.       A proposal to ratify our selection of KPMG, LLP as our
independent auditors for the current year.

For the above-referenced proposal, 27,342,550 shares were voted for the
proposal, 3,663 were voted against the proposal, and
91,677 shares were withheld.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits



| | 10.1 |  | Agreement and Plan of Merger By and Among OTG Software, Inc.,
OTG Acquisition Corp. and Smart Storage, Inc. and the Principal
Shareholders Named Herein dated March 22, 2001 (incorporated herein
by reference to Exhibit 2.1 filed with our Current Report on Form
8-K, dated April 12, 2001)
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.2 |  | Amendment No. 1 to lease agreement for facilities at 2600 Tower
Oaks Boulevard in Rockville, Maryland
(incorporated herein by reference to Exhibit 10.2 filed with our Form
10-Q, dated May 15, 2001)                                                                                         
|
| | 10.3 |  | Amended and Restated 2000 Stock Incentive Plan                                                                                                                                                                                                                                                

(b) Reports on Form 8-K

|               |  |                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|March 27, 2001 |  | Items 5 and 7; announcement that we were acquiring Smart Storage.                                                                                             
|              
|              
|              
|              
|              
|April 12, 2001 |  | Items 2 and 7; related to our acquisition of Smart Storage.                                                                                                   
|              
|              
|              
|              
|              
|April 25, 2001 |  | Item 7; related to our acquisition of Smart Storage.                                                                                                          
|              
|              
|              
|              
|              
|April 25, 2001 |  | Items 5 and 7; related to our earnings release for the three
months ended March 31, 2001.                                                                     
|              
|              
|              
|              
|              
|July 30, 2001  |  | Items 5 and 7; related to our earnings release for the three and six
months ended June 30, 2001 and announcement that we were
acquiring Unitree Software, Inc.
|              
|              
|              
|              
|              
|July 31, 2001  |  | Item 7; additional financial information related to the earnings release
for the three and six months ended June 30, 2001.                                    

23



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                                                                                     |      
|------------------------------------------------------------------------------------ | -----
|By:  /s/ Richard A. Kay                                                              | Date:
|                                                                                     |      
|Richard A. Kay President, Chairman and Chief Executive Officer                       |      
|                                                                                    
|By:  /s/ Ronald W. Kaiser                                                            |      
|                                                                                     |      
|Ronald W. Kaiser Chief Financial Officer and Treasurer (Principal Financial Officer) | Date:

(this space intentionally left blank)

24