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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 September 30, 2001

or

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

COMMISSION FILE NUMBER 000-29809

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

|                                |  |                       
|------------------------------- |  | ----------------------
|DELAWARE                        |  | 52-1769077            
|(state or other jurisdiction of |  | (IRS Employer         
|incorporation or organization)  |  | 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 October 31, 2001 there were outstanding 33,017,013 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 September 30, 2001

Table of Contents

|                                                                                   |                         |                                                                    |    |      |   | 
|---------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------------ | -- | ---- | - | 
|                                                                                   |                         |                                                                    |    | PAGE
|                                                                                   |                         |                                                                    |    |     
|PART I FINANCIAL INFORMATION                                                       |                         |                                                                    |    |     
|Item 1. Financial Statements                                                       |                         |                                                                    | 1  |     
|                                                                                   |                         | Condensed Consolidated Balance Sheets as of                        |    |      |   | 
|                                                                                   |                         | September 30, 2001 and December 31, 2000                           |    |      | 1 | 
|                                                                                   |                         | Condensed Consolidated Statements of Operations for                |    |      |   | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |                         | the three months and nine months ended September 30, 2001 and 2000 |    |      | 2 | 
|                                                                                   |                         | Condensed Consolidated Statements of Cash Flows for                |    |      |   | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |                         | the nine months ended September 30, 2001 and 2000                  |    |      | 3 | 
|                                                                                   |                         | Notes to Condensed Consolidated Financial Statements               |    |      | 4 | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Item 2. Managements Discussion and Analysis of Financial Condition
and Results of |                         |                                                                    | 13 |     
|Operations                                                                         |                         |                                                                    | 13 |     
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                 |                         |                                                                    | 37 |     
|PART II OTHER INFORMATION                                                          |                         |                                                                    |    |     
|Item 1. Legal Proceedings                                                          |                         |                                                                    | 37 |     
|Item 2. Changes in Securities and Use of Proceeds                                  |                         |                                                                    | 37 |     
|Item 3. Defaults Upon Senior Securities                                            |                         |                                                                    | 38 |     
|Item 4. Submission of Matters to a Vote of Security Holders                        |                         |                                                                    | 38 |     
|Item 5. Other Information                                                          |                         |                                                                    | 38 |     
|Item 6. Exhibits and Reports on Form 8-K                                           |                         |                                                                    | 38 |     
|                                                                                   | (a) Exhibits            |                                                                    |    | 38   |  
|                                                                                   | (b) Reports on Form 8-K |                                                                    |    | 38   |  
|SIGNATURES                                                                         |                         |                                                                    | 39 |     





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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)

|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |         |               |         |  
|----------------------------- | ------------------------------------------------------------------------ | -------------------------------------------- | ------------------------- | --------------------------------------------------------- | ------- | ------------- | ------- | ------------ | ------- | ------------- | ------- | -
|                              |                                                                          |                                              |                           |                                                           |         | September 30, |         | December 31,
|                              |                                                                          |                                              |                           |                                                           |         | 2001          |         | 2000        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |         | (As restated)
|                              |                                                                          |                                              |                           |                                                           |         | (unaudited)  
|                              |                                                                          |                                              |                           |                                                           |         |              
|                              | ASSETS                                                                   |                                              |                           |                                                           |         |               |         |              |        
|Current assets                |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              | Cash and cash equivalents                                                |                                              | $                         | 93,134                                                    |         |               | $       | 102,197      |        
|                              | Accounts receivable, net of allowance
of $1,619 and $1,541, respectively |                                              |                           | 24,713                                                    |         |               |         | 20,613       |        
|                              | Deferred income taxes                                                    |                                              |                           | 1,976                                                     |         |               |         | 2,066        |        
|                              | Other current assets                                                     |                                              |                           | 3,585                                                     |         |               |         | 2,919        |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              | Total current assets      |                                                           |         | 123,408       |         |              |         | 127,795       |        
|Other assets                  |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              | Property and equipment, net                                              |                                              |                           | 10,221                                                    |         |               |         | 4,744        |        
|                              | Goodwill, net                                                            |                                              |                           | 11,494                                                    |         |               |         | 2,510        |        
|                              | Other intangibles, net                                                   |                                              |                           | 10,455                                                    |         |               |         | 1,212        |        
|                              | Deferred income taxes                                                    |                                              |                           | 1,229                                                     |         |               |         | 1,302        |        
|                              | Other non-current assets, net                                            |                                              |                           | 580                                                       |         |               |         | 759          |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              | Total other assets        |                                                           |         | 33,979        |         |              |         | 10,527        |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              |                           | Total assets                                              |         | $             | 157,387 |              |         | $             | 138,322 |  
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              | LIABILITIES AND SHAREHOLDERS EQUITY                                     |                                              |                           |                                                           |         |               |         |              |        
|Current liabilities           |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              | Accounts payable                                                         |                                              | $                         | 3,471                                                     |         |               | $       | 4,080        |        
|                              | Income taxes payable                                                     |                                              |                           |                                                          |         |               |         | 1,143        |        
|                              | Accrued expenses                                                         |                                              |                           | 10,037                                                    |         |               |         | 7,572        |        
|                              | Short-tem debt                                                           |                                              |                           | 4,000                                                     |         |               |         |             |        
|                              | Current portion of long-term debt                                        |                                              |                           | 39                                                        |         |               |         | 61           |        
|                              | Current portion of notes payable                                         |                                              |                           | 225                                                       |         |               |         | 225          |        
|                              | Current portion of notes payable to shareholders                         |                                              |                           | 2,468                                                     |         |               |         | 67           |        
|                              | Current portion of deferred rent                                         |                                              |                           | 281                                                       |         |               |         |             |        
|                              | Current portion of deferred revenues                                     |                                              |                           | 8,676                                                     |         |               |         | 7,586        |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              | Total current liabilities |                                                           |         | 29,197        |         |              |         | 20,734        |        
|Other liabilities             |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              | Long-term debt, net of current portion                                   |                                              |                           |                                                          |         |               |         | 23           |        
|                              | Note payable, net of current portion                                     |                                              |                           |                                                          |         |               |         | 225          |        
|                              | Notes payable to shareholders, net of current portion                    |                                              |                           | 469                                                       |         |               |         | 18           |        
|                              | Deferred rent, net of current portion                                    |                                              |                           | 2,439                                                     |         |               |         |             |        
|                              | Deferred revenues, net of current portion                                |                                              |                           | 984                                                       |         |               |         | 446          |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              | Total other liabilities   |                                                           |         | 3,892         |         |              |         | 712           |        
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              |                           | Total liabilities                                         |         |               | 33,089  |              |         |               | 21,446  |  
|Commitments and contingencies |                                                                          |                                              |                           |                                                           |         |               |         |             
|Shareholders equity          |                                                                          |                                              |                           |                                                           |         |               |         |             
|                              | Preferred stock, $0.01 par value; 5,000,000                              |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          | shares authorized, none issued               |                           |                                                           |        |               |         |              |        |              
|                              | Common stock, $0.01 par value; 65,000,000                                |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          | shares authorized, 33,058,772 shares issued  |                           |                                                           |         |               |         |              |         |              
|                              |                                                                          | at September 30, 2001; and 30,883,477 shares |                           |                                                           |         |               |         |              |         |              
|                              |                                                                          | issued and outstanding at December 31, 2000  |                           |                                                           | 331     |               |         |              | 309     |              
|                              | Additional paid-in capital                                               |                                              |                           | 151,044                                                   |         |               |         | 140,025      |        
|                              | Deferred compensation, net                                               |                                              |                           | (1,004                                                    | )       |               |         | (1,637       | )      
|                              | Accumulated other comprehensive loss                                     |                                              |                           | (11                                                       | )       |               |         | (28          | )      
|                              | Accumulated deficit                                                      |                                              |                           | (24,494                                                   | )       |               |         | (20,741      | )      
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              | Total shareholders equity before stock                                  |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          | subscriptions
receivable and treasury stock  |                           |                                                           | 125,866 |               |         |              | 117,928 |              
|                              |                                                                          |                                              |                           | Less: stock subscriptions receivable                      |         |               | (1,112  | )            |         |               | (1,052  | )
|                              |                                                                          |                                              |                           | Less: treasury stock, at cost (93,200 shares at September |         |               |         |              |         |               |         |  
|                              |                                                                          |                                              |                           | 30, 2001 and no shares at December 31, 2000)              |         |               | (456    | )            |         |               |        |  
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              |                           | Total shareholders equity                                |         |               | 124,298 |              |         |               | 116,876 |  
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        
|                              |                                                                          |                                              |                           | Total liabilities and shareholders equity                |         | $             | 157,387 |              |         | $             | 138,322 |  
|                              |                                                                          |                                              |                           |                                                           |         |               |         |              |        

See accompanying Notes to Condensed Consolidated Financial Statements.

1



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

|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |     |        |        | 
|---------------------------------- | ------------------------------------------ | --------------- | ---------------------------- | ------------ | - | ------------------- | ------ | ------------------- | - | ------------- | ------ | ------ | - | ------ | ------ | ------------- | --- | ------ | ------ | 
|                                   |                                            |                 |                              |              |   | Three Months        |        | Nine Months        
|                                   |                                            |                 |                              |              |   | Ended September 30, |        | Ended September 30,
|                                   |                                            |                 |                              |              |   | 2001                |        | 2000                |   | 2001          |        | 2000  
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |       
|                                   |                                            |                 |                              |              |   |                     |        |                     |   | (As restated) |        |        |   |        |        | (As restated)
|                                   |                                            |                 |                              |              |   | (unaudited)         |        | (unaudited)        
|                                   |                                            |                 |                              |              |   |                     |        |                    
|Revenues                           |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Software licenses                          |                 | $                            | 11,877       |   |                     | $      | 11,168              |   |               | $      | 33,259 |   |        | $      | 28,719        |    
|                                   | Services                                   |                 |                              | 4,692        |   |                     |        | 3,267               |   |               |        | 13,159 |   |        |        | 8,469         |    
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            |                 | Total revenues               |              |   | 16,569              |        |                     |   | 14,435        |        |        |   | 46,418 |        |               |     | 37,188 |       
|Cost of revenues                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Software licenses                          |                 |                              | 2,102        |   |                     |        | 851                 |   |               |        | 4,166  |   |        |        | 2,051         |    
|                                   | Services                                   |                 |                              | 1,684        |   |                     |        | 1,161               |   |               |        | 4,989  |   |        |        | 3,446         |    
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            |                 | Total cost of revenues       |              |   | 3,786               |        |                     |   | 2,012         |        |        |   | 9,155  |        |               |     | 5,497  |       
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            |                 |                              | Gross profit |   |                     | 12,783 |                     |   |               | 12,423 |        |   |        | 37,263 |               |     |        | 31,691 | 
|Operating expenses                 |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Sales and marketing                        |                 |                              | 7,746        |   |                     |        | 5,708               |   |               |        | 22,128 |   |        |        | 15,876        |    
|                                   | Research and development                   |                 |                              | 4,510        |   |                     |        | 3,305               |   |               |        | 13,027 |   |        |        | 8,552         |    
|                                   | General and administrative                 |                 |                              | 2,603        |   |                     |        | 1,834               |   |               |        | 7,146  |   |        |        | 5,305         |    
|                                   | Merger-related costs                       |                 |                              |             |   |                     |        |                    |   |               |        | 1,585  |   |        |        |              |    
|                                   | Amortization of acquired intangible assets |                 |                              | 394          |   |                     |        | 208                 |   |               |        | 810    |   |        |        | 347           |    
|                                   | Write-off of acquired in-process research  |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            | and development |                              |              |  |                     |        |                     |  |               |        |        |  |        |        |               | 620 |       
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            |                 | Total operating expenses     |              |   | 15,253              |        |                     |   | 11,055        |        |        |   | 44,696 |        |               |     | 30,700 |       
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|Loss from operations               |                                            |                 | (2,470                       | )            |   |                     | 1,368  |                     |   |               | (7,433 | )      |   |        | 991    |              
|Other income (expense)             |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Interest income                            |                 |                              | 814          |   |                     |        | 1,111               |   |               |        | 3,305  |   |        |        | 2,384         |    
|                                   | Interest expense                           |                 |                              | (15          | ) |                     |        | (16                 | ) |               |        | (46    | ) |        |        | (656          | )  
|                                   | Foreign exchange gain (loss)               |                 |                              | 84           |   |                     |        | (48                 | ) |               |        | (18    | ) |        |        | (52           | )  
|                                   | Other expense                              |                 |                              |             |   |                     |        |                    |   |               |        | (152   | ) |        |        |              |    
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|                                   |                                            |                 | Total other income (expense) |              |   | 883                 |        |                     |   | 1,047         |        |        |   | 3,089  |        |               |     | 1,676  |       
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|Income (loss) before income taxes  |                                            |                 | (1,587                       | )            |   |                     | 2,415  |                     |   |               | (4,344 | )      |   |        | 2,667  |              
|Income tax expense (benefit)       |                                            |                 | 796                          |              |   |                     | 312    |                     |   |               | (531   | )      |   |        | 333    |              
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|Net income (loss)                  |                                            | $               | (2,383                       | )            |   | $                   | 2,103  |                     |   | $             | (3,813 | )      |   | $      | 2,334  |              
|                                   |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |               |    
|Net income (loss) per common share |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Basic                                      |                 | $                            | (0.07        | ) |                     | $      | 0.07                |   |               | $      | (0.12  | ) |        | $      | 0.09          |    
|                                   | Diluted                                    |                 | $                            | (0.07        | ) |                     | $      | 0.07                |   |               | $      | (0.12  | ) |        | $      | 0.08          |    
|Shares used for computation        |                                            |                 |                              |              |   |                     |        |                     |   |               |        |        |   |        |        |              
|                                   | Basic                                      |                 |                              | 32,630       |   |                     |        | 28,837              |   |               |        | 31,707 |   |        |        | 26,374        |    
|                                   | Diluted                                    |                 |                              | 32,630       |   |                     |        | 32,084              |   |               |        | 31,707 |   |        |        | 29,604        |    

See accompanying Notes to Condensed Consolidated Financial Statements.

2



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

|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |        |   |               |        |  
|---------------------------------------------------- | -------------------------------------------------- | ------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------- |  | ------------------- | ------- | ------ | - | ----- | ------ | ------ | - | ------------- | ------ | -
|                                                     |                                                    |                                             |                                                           |                                                      |  | Nine Months        
|                                                     |                                                    |                                             |                                                           |                                                      |  | Ended September 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)                                    |                                                    |                                             |                                                           |                                                      |  |                     | (3,813  | )      |   |       | 2,334  |       
|                                                     | 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                |                                                      |  |                     |         |        |   | 1,016 |        |        |   | 347           |       
|                                                     |                                                    |                                             | Depreciation and amortization                             |                                                      |  |                     |         |        |   | 1,758 |        |        |   | 1,023         |       
|                                                     |                                                    |                                             | Gain or loss on disposal of assets                        |                                                      |  |                     |         |        |   | 152   |        |        |   |              |       
|                                                     |                                                    |                                             | Stock compensation expense                                |                                                      |  |                     |         |        |   | 477   |        |        |   | 540           |       
|                                                     |                                                    |                                             | Deferred cash compensation expense                        |                                                      |  |                     |         |        |   | 242   |        |        |   |              |       
|                                                     |                                                    |                                             | Provision for bad debts and returns                       |                                                      |  |                     |         |        |   | 831   |        |        |   | 818           |       
|                                                     |                                                    |                                             | Deferred income taxes                                     |                                                      |  |                     |         |        |   | (587  | )      |        |   | (1,104        | )     
|                                                     |                                                    |                                             | Changes in certain assets and liabilities                 |                                                      |  |                     |         |        |   |       |        |        |   |               |       
|                                                     |                                                    |                                             |                                                           | Accounts receivable, net                             |  |                     |         |        |   |       | (4,660 | )      |   |               | (7,209 | )
|                                                     |                                                    |                                             |                                                           | Other current and noncurrent assets                  |  |                     |         |        |   |       | (383   | )      |   |               | (1,714 | )
|                                                     |                                                    |                                             |                                                           | Accounts payable and accrued expenses                |  |                     |         |        |   |       | 962    |        |   |               | 1,020  |  
|                                                     |                                                    |                                             |                                                           | Income taxes payable                                 |  |                     |         |        |   |       | (496   | )      |   |               | 1,447  |  
|                                                     |                                                    |                                             |                                                           | Deferred revenues                                    |  |                     |         |        |   |       | 534    |        |   |               | 2,061  |  
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|                                                     |                                                    |                                             |                                                           | Net cash provided by (used for) operating activities |  |                     |         |        |   |       | (3,967 | )      |   |               | 183    |  
|Cash flows from investing activities                 |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|                                                     | Purchases of property and equipment                |                                             |                                                           |                                                      |  |                     |         | (4,558 | ) |       |        | (3,084 | )
|                                                     | Acquisition of UniTree, net of cash acquired       |                                             |                                                           |                                                      |  |                     |         | (5,000 | ) |       |        |       |  
|                                                     | Acquisition of xVault, net of cash acquired        |                                             |                                                           |                                                      |  |                     |         |       |   |       |        | (1,731 | )
|                                                     | Acquisition of intangible assets                   |                                             |                                                           |                                                      |  |                     |         |       |   |       |        | (830   | )
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|                                                     |                                                    |                                             |                                                           | Net cash used for investing activities               |  |                     |         |        |   |       | (9,558 | )      |   |               | (5,645 | )
|Cash flows from financing activities                 |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|                                                     | Net proceeds from initial public offering          |                                             |                                                           |                                                      |  |                     |         |       |   |       |        | 87,035 |  
|                                                     | Direct costs of secondary public offering          |                                             |                                                           |                                                      |  |                     |         | (146   | ) |       |        |       |  
|                                                     | Proceeds from other issuances of common stock      |                                             |                                                           |                                                      |  |                     |         | 1,334  |   |       |        | 534    |  
|                                                     | Borrowings under note payable to bank              |                                             |                                                           |                                                      |  |                     |         | 4,397  |   |       |        |       |  
|                                                     | Repayments on note payable to bank                 |                                             |                                                           |                                                      |  |                     |         | (397   | ) |       |        | (5,000 | )
|                                                     | Repayments on note payable                         |                                             |                                                           |                                                      |  |                     |         | (225   | ) |       |        |       |  
|                                                     | Borrowings under long-term debt                    |                                             |                                                           |                                                      |  |                     |         |       |   |       |        | 485    |  
|                                                     | Repayments on long-term debt                       |                                             |                                                           |                                                      |  |                     |         | (45    | ) |       |        | (1,795 | )
|                                                     | Repayments on stockholders notes                  |                                             |                                                           |                                                      |  |                     |         | (17    | ) |       |        | (9,834 | )
|                                                     | Repurchase of common stock                         |                                             |                                                           |                                                      |  |                     |         | (456   | ) |       |        |       |  
|                                                     | Distributions to stockholders                      |                                             |                                                           |                                                      |  |                     |         |       |   |       |        | (1,160 | )
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|                                                     |                                                    |                                             |                                                           | Net cash provided by financing activities            |  |                     |         |        |   |       | 4,445  |        |   |               | 70,265 |  
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|Effect of changes in foreign exchange rates          |                                                    |                                             |                                                           |                                                      |  |                     | 17      |        |   |       | 50     |       
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|Net increase (decrease) in cash and cash equivalents |                                                    |                                             |                                                           |                                                      |  |                     | (9,063  | )      |   |       | 64,853 |       
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       
|Cash and cash equivalents at end of period           |                                                    |                                             |                                                           |                                                      |  | $                   | 93,134  |        |   | $     | 69,149 |       
|                                                     |                                                    |                                             |                                                           |                                                      |  |                     |         |        |   |       |        |       

See accompanying Notes to Condensed Consolidated Financial Statements.

3



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##### 



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 or OTG), UniTree Software, Inc.
(UniTree), Smart Storage, Inc. (Smart Storage), OTG Sales, Inc. (OTG Sales) and
OTG E-Mail Corp. (OTG E-Mail). OTG Software, UniTree, Smart Storage, OTG Sales
and OTG E-Mail are sometimes 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 and disclosure of contingent 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. Our products
empower storage by combining storage with access and e-mail management and 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 UniTree on July 25, 2001. The acquisition of UniTree was
accounted for using the purchase method of accounting; therefore, the assets
acquired and liabilities assumed from UniTree were adjusted to fair value as of
July 25, 2001 and consolidated with our balance sheet as of that date.
Activity of the former UniTree entity is recognized in our financial
results beginning July 26, 2001. See Note 3
for additional information.

4



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##### 



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 nine month periods ended September 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, $0.01 par value per share (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 that we assumed pursuant to the
terms 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 September 30, 2001, there was no remaining liability for such
benefits.

The products we 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 March 28, 2001, 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., attorneys 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 described 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.

5



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##### 



For the three month period ended September 30, 2000, Smart Storages
revenues and net loss were $2.3 million and $0.5 million, respectively. For
the nine month period ended September 30, 2000, Smart Storages revenues and
net loss were $7.2 million and $0.4 million, respectively.

3. Acquisition of UniTree Software, Inc.

On July 25, 2001, we acquired 100 percent of the outstanding common shares
of UniTree in a transaction accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. The results of UniTrees operations
have been included in the Companys consolidated financial statements since
that date. UniTree is a provider of advanced technology for UNIX and
Linux-based data storage and database storage management. UniTree develops
storage software solutions that manage growing volumes of data. In this
acquisition, OTG Software acquired a staff of engineers and sales personnel
with considerable experience in UNIX and Linux data storage management
software. OTG expects to be able to expand its own data storage and access
management software further in these growing markets. We also expect to be
able to take advantage of UniTrees in-process development efforts in database
management software for Oracle and DB2 database management programs in future
product sales.

The purchase price for UniTree consisted of 1,466,667 shares of the
Companys Common Stock valued at $9.2 million and
an additional $6.0 million in cash. The Company also issued $4.8 million in promissory notes bearing interest
at 7% per annum, payable over eighteen months, subject to the continued
employment of certain UniTree employees. Of the $4.8 million, $2.6 million has
been allocated as additional purchase price, resulting in an aggregate purchase
price of $17.8 million. The remaining $2.2 million represents a compensatory
arrangement that is being recorded ratably over the eighteen month term of the
note increasing the note payable balance reflected in the financial statements.

The value of the 1,466,667 shares of our Common Stock issued to the
stockholders of UniTree was determined based on the average market price of a
share of the Companys Common Stock over the three day period before the date
of the acquisition. Of the 1,466,667 shares issued, 266,667 shares are to be
held in escrow for a period of time not to exceed three years to secure certain
indemnification obligations of the former UniTree stockholders. Additional
payments of up to 222,222 shares of Common Stock and $2.0 million in cash are
required to be made to the former UniTree stockholders if certain financial
results of UniTree are achieved for the year 2001.

6



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##### 



The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of the acquisition of UniTree.
The Company is in the process of obtaining third-party valuations of certain intangible assets; thus,
the allocation of the purchase price is subject to adjustment.

|                       |                           |   |                  |        |  
|---------------------- | ------------------------- | - | ---------------- | ------ | -
|                       |                           |   | At July 25, 2001
|                       |                           |   | (unaudited)     
|                      
|Current assets         |                           | $ | 1,376            |       
|Property and equipment |                           |   | 109              |       
|Goodwill               |                           |   | 9,368            |       
|Intangible assets      |                           |   | 9,825            |       
|                       |                           |   |                  |       
|                       | Total assets acquired     |   |                  | 20,678 |  
|                       |                           |   |                  |       
|Current liabilities    |                           |   | (1,463           | )     
|Long-term liabilities  |                           |   | (1,372           | )     
|                       |                           |   |                  |       
|                       | Total liabilities assumed |   |                  | (2,835 | )
|                       |                           |   |                  |       
|                       | Aggregate purchase price  |   | $                | 17,843 |  
|                       |                           |   |                  |       

The $9.8 million intangible asset represents acquired technology with an
estimated useful life of four to five years. The Company anticipates that
there will be an in process research and development write off in accordance
with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method during the fourth
quarter of 2001 upon the completion of the third party valuation. Of the $9.4 million
of goodwill, we do not expect any of the amount to be deductible for tax
purposes.

The unaudited pro forma financial information following this paragraph was prepared as if
the acquisition of UniTree occurred as of the beginning of each period
presented. This information includes a one-time charge of stock compensation
expense of $2.2 million related to the sale of shares to certain UniTree
employees in June 2001. In addition, this information includes $1.7 million
and $2.2 million for the nine month periods ended September 30, 2001 and
September 30, 2000, respectively, of amortization expenses associated with
certain intangible assets and other expenses associated with the UniTree
acquisition. In the opinion of the Companys management, all adjustments
necessary to present fairly such information have been made based on the terms
and structure of the transaction. The table of information following
this paragraph is presented for
illustrative purposes only and does not necessarily represent the financial
results that would have resulted had the acquisition actually occurred on the
date indicated nor are the results indicative of the future results of
operations or financial condition of the Company on a consolidated basis. In
addition, this information is based upon information and assumptions available
at the time of the filing of this report, including fair values of assets
acquired and the liabilities assumed from UniTree as part of the acquisition
which are subject to further study and analysis.

7



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##### 



|                  |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        | 
|----------------- |  | ------------------- | ------ | ------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | 
|                  |  | Three Months        |        | Nine Months        
|                  |  | Ended September 30, |        | Ended September 30,
|                  |  | 2001                |        | 2000                |  | 2001 |        | 2000
|                  |  |                     |        |                     |  |      |        |     
|                  |  | (unaudited)         |        | (unaudited)        
|                  |  |                     |        |                    
|Revenues          |  | $                   | 16,674 |                     |  | $    | 15,114 |      |  | $ | 47,723 |   |  | $ | 39,053 | 
|Net income (loss) |  |                     | (2,838 | )                   |  |      | 1,429  |      |  |   | (7,031 | ) |  |   | 227    | 
|                  |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        | 
|EPS  Basic       |  | $                   | (0.09  | )                   |  | $    | 0.05   |      |  | $ | (0.21  | ) |  | $ | 0.01   | 
|                  |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        | 
|EPS  Diluted     |  | $                   | (0.09  | )                   |  | $    | 0.04   |      |  | $ | (0.21  | ) |  | $ | 0.01   | 
|                  |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |        | 

4. New Accounting Pronouncements

In July 2001, the FASB issued Statement No. (FAS) 141, Business
Combinations, and FAS 142, Goodwill and Other Intangible Assets. FAS 141
requires 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 also specifies
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.

In connection with the acquisition of UniTree in July 2001, the Company
has adopted the provisions of FAS 141 and is required to adopt the provisions
of FAS 142 effective January 1, 2002. Furthermore, the goodwill related to the
acquisition of UniTree will not be amortized, but will continue to be evaluated
for impairment in accordance with the appropriate pre-FAS 142 accounting
literature. The goodwill and intangible assets related to the acquisition of
xVault in April 2000 will continue to be amortized and tested for impairment in
accordance with the appropriate pre-FAS 142 accounting requirements prior to
the adoption on FAS 142.

5. Shareholders Equity

(a)  Common Stock

As discussed in Note 3, on July 25, 2001, we issued 1,466,667 shares of
Common Stock to acquire UniTree, including 266,667 shares to be held in escrow
for a period of time not to exceed three years to secure certain
indemnification obligations of the former UniTree stockholders. In addition,
up to 222,222 shares of Common Stock will be issued to the former UniTree stockholders subject to the achievement of certain
financial results of UniTree.

8



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##### 



As discussed in Note 2, on March 29, 2001, we issued 3,081,108 shares of
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 outstanding
options to purchase Smart Storage common stock, that we assumed pursuant to the
terms of the merger agreement.

During the three months ended September 30, 2001, employee exercises of
stock options resulted in proceeds of approximately $91,000 and the issuance of
84,281 shares of Common Stock. During the nine months ended September 30,
2001, employee exercises of stock options resulted in proceeds of $1.1 million
and the issuance of 646,451 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
shareholders meeting on May 31, 2001, the shareholders approved an additional
increase of 1,500,000 in the number of shares of Common Stock available for
awards under the 2000 Stock Incentive Plan.

(c)  Treasury stock

In September 2001, the Company began acquiring shares of its Common Stock
in connection with a stock repurchase program announced on September 17, 2001
(Stock Repurchase Program). The Stock Repurchase Program authorizes the
Company to repurchase up to 1,000,000 shares of its Common Stock from time to
time on the open market starting September 17, 2001. The Company had
repurchased 93,200 shares of Common Stock under this program as of September
30, 2001 at an aggregate cost of approximately $456,000.

6.     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.

9



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##### 



7.     Line of Credit

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. As of September 30, 2001, we had borrowed
$4.0 million under the line of credit. The line of credit balance was
subsequently paid off in its entirety in October 2001.

8.     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.

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.

10



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##### 



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.

9.     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 nine months ended September 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              |        | Nine Months              
|                             |                      |                                       |                                                         |       | Ended September 30,       |        | Ended September 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 |                                                         | $     | (2,383                    | )      |                           | $    | 2,103 |        |      | $     | (3,813 | )      |   | $    | 2,334 |       
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|Shares used for computation: |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |     
|                             |                      | Weighted average shares of            |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|                             |                      |                                       | Common Stock
outstanding (basic)                        |       |                           | 32,630 |                           |      |       | 28,837 |      |       |        | 31,707 |   |      |       | 26,374 | 
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|                             |                      | Incremental shares related            |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|                             |                      |                                       | to outstanding stock
options                            |       |                           |       |                           |      |       | 3,247  |      |       |        |       |   |      |       | 3,230  | 
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|                             |                      | Weighted average                      |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|                             |                      |                                       | equivalent shares of
Common Stock
outstanding (diluted) |       |                           | 32,630 |                           |      |       | 32,084 |      |       |        | 31,707 |   |      |       | 29,604 | 
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|Net income (loss) per        |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |     
|                             | common share-basic   |                                       | $                                                       | (0.07 | )                         |        | $                         | 0.07 |       |        | $    | (0.12 | )      |        | $ | 0.09 |      
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       
|Net income (loss) per        |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |     
|                             | common share-diluted |                                       | $                                                       | (0.07 | )                         |        | $                         | 0.07 |       |        | $    | (0.12 | )      |        | $ | 0.08 |      
|                             |                      |                                       |                                                         |       |                           |        |                           |      |       |        |      |       |        |        |   |      |       |       

11



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##### 



10.     Comprehensive Income (Loss)

We recognized a comprehensive income (loss) of ($2.4) million and $2.2
million for the three months ended September 30, 2001 and 2000, respectively,
and recognized a comprehensive income (loss) of ($3.8) million and $2.4 million
for the nine months ended September 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.

11.     Segment Information and Related Disclosures

Our operations consist of one business segment providing on-line data
storage and data access software solutions for business applications, e-mail management and related services. For
the three months ended September 30, 2001 and 2000, our revenues from foreign
countries represented 12% and 10%, respectively, of our total revenues, and for
the nine months ended September 30, 2001 and 2000, our revenues from foreign
countries represented 12% and 15%, respectively, of our total revenues.

12.     Related Party Transactions

In the three months and nine months ended September 30, 2001, we made
payments totaling $16,000 and $80,000, 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 nine months ended September 30, 2001, the
Company recorded interest expense on notes payable to certain shareholders
totaling $48,000 and $61,000, respectively.

13.     Supplemental Information  Condensed Consolidated Statements of Cash Flows

|                                 |                                               |                                                                                                                     |   |                     |       |                     |   |      |   |      |   |       |       |  |   |     |       | 
|-------------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | - | ------------------- | ----- | ------------------- | - | ---- | - | ---- | - | ----- | ----- |  | - | --- | ----- | 
|                                 |                                               |                                                                                                                     |   | Three months        |       | Nine months        
|                                 |                                               |                                                                                                                     |   | ended September 30, |       | ended September 30,
|                                 |                                               |                                                                                                                     |   | 2001                |       | 2000                |   | 2001 |   | 2000
|                                 |                                               |                                                                                                                     |   |                     |       |                     |   |      |   |     
|                                 |                                               |                                                                                                                     |   | (in thousands)      |       | (in thousands)     
|                                 |                                               |                                                                                                                     |   | (unaudited)         |       | (unaudited)        
|                                 |                                               |                                                                                                                     |   |                     |       |                    
|Cash paid during the period for: |                                               |                                                                                                                     |   |                     |       |                     |   |      |   |      |   |       |       |  |   |    
|                                 | Income taxes                                  |                                                                                                                     | $ | 59                  |       |                     | $ | 10   |   |      | $ | 1,025 |       |  | $ | 26  |      
|                                 | Interest                                      |                                                                                                                     | $ | 1                   |       |                     | $ | 6    |   |      | $ | 18    |       |  | $ | 690 |      
|Material non-cash transactions:  |                                               |                                                                                                                     |   |                     |       |                     |   |      |   |      |   |       |       |  |   |    
|                                 | Issuance of Common Stock related to the       |                                                                                                                     |   |                     |       |                     |   |      |   |      |   |       |       |  |   |     |      
|                                 |                                               | July 2001 acquisition of UniTree                                                                                    |   | $                   | 9,216 |                     |   | $    |  |      |   | $     | 9,216 |  |   | $   |      | 
|                                 | Issuance of notes payable related to the July |                                                                                                                     |   |                     |       |                     |   |      |   |      |   |       |       |  |   |     |      
|                                 |                                               | 2001 acquisition of UniTree                                                                                         |   | $                   | 2,627 |                     |   | $    |  |      |   | $     | 2,627 |  |   | $   |      | 
|                                 | 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 | 
|                                 | 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 |  |   | $   |      | 

12



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14.     Class Action Lawsuit

On July 26, 2001, a class action lawsuit was filed in the Southern
District of New York naming OTG Software, officers of the Company who signed
the registration statement in connection with our initial public offering and
the managing underwriters of the initial public offering as defendants. The
complaint alleges that the Companys initial public offering registration
statement and final prospectus contained material misrepresentations and/or
omissions, related in part to additional, excessive and undisclosed commissions
allegedly received by our underwriters from investors to whom the underwriters
allegedly allocated shares of the public offering. Since this initial
complaint was filed, two other complaints making similar or
identical allegations have been filed in that court on September 5,
2001 and September 18, 2001.

These cases are at an early stage, and the Company has not formally
responded to the allegations. However, we intend to defend the Company and its
officers vigorously. Our management believes that it is not possible at the
current time 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. 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:

13



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| |  |  | 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 and data access software solutions for business applications, e-mail
management and related services. 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; in
March 2001 we acquired Smart Storage, as discussed below; and in July 2001 we
acquired UniTree, 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 have since renamed
xVault 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 nine months ended September 30, 2001, we recognized a net loss
of approximately $0.9 million before giving effect to approximately $2.9
million in expenses associated with one-time merger and acquisition costs
associated with our acquisition of Smart Storage and with the amortization of
acquisition costs associated with our acquisitions of xVault and UniTree, and
the related tax effect of these costs. As of September 30, 2001, we had an
accumulated deficit of $24.5 million.

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

14



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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. Distributors and resellers resell our products either as
stand-alone products or in connection with their own software solutions. 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.

We offer extended payment terms to certain customers, primarily select
OEMs, distributors 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 September 30,
2001, net amounts due from such arrangements totaled $9.8 million, an increase
of approximately 7.7% 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 on substantially all of the Companys
products. 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.

15



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We currently have sales and services offices in the United States and
Canada 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 foreign
countries, most of which are denominated in U.S. dollars, accounted for
approximately 12% and 15% of our total revenues for the nine months ended
September 30, 2001 and 2000, respectively.

As part of maintaining our current growth plans, we expect to continue 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. We
also expect to incur additional transition costs associated with the
integration of UniTree. The transition periods for the acquisition of Smart
Storage and UniTree may include additional one-time costs of each 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 UniTree

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 all of the outstanding
shares of UniTrees Series A and Series B common stock for approximately $17.8
million, comprised of $6.0 million in cash, 1,466,667 shares of Common Stock
and notes payable. The Company issued $4.8 million in promissory notes,
payable over eighteen months, which are contingent upon the continued service
of certain key UniTree employees. Of the $4.8 million, $2.6 million has been
allocated as a portion of the  purchase price. The remaining $2.2 million represents
a compensatory arrangement and is being recorded ratably over an eighteen month
period. In addition, OTG Software agreed to pay the Series A stockholders of
UniTree up to $2,000,000 in cash and up to an additional 222,222 shares of
Common Stock in the event certain financial results of UniTree 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. Exclusive of
certain acquisition costs, this acquisition is expected to be nominally
accretive to net income of our consolidated financial statements by the end of
2002.

16



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##### 



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 growing volumes of data.

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 pursuant to the terms of the
merger agreement. Our financial results and related information include the
activities of Smart Storage for all periods presented.

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.

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 ready access to 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 assist companies in restoring business-critical
e-mail after virus attacks. EmailXtender will soon be available in French and Spanish.

17



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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 many 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.

In October 2001, we announced the availability of DiskXtender Database
Edition (DXDB), a new, patent-pending storage management and access software
for databases. DXDB addresses the issue of the increasing growth of many
enterprises large databases, such as Oracle 8i, by delivering a highly
scalable, online storage solution that is designed to allow administrators
to virtually expand their database storage capacity with true, query-level
database transparency. DXDB can aid database administrators in increasing
database performance and reliability by moving infrequently accessed data
within database tablespaces to high capacity, cost-effective storage devices,
while maintaining one virtualized view of the database. Since DXDB does not
require modifications to database structures or schema, users can access all of
the data, no matter its age or the frequency of its use, without any changes to
SQL queries or applications. Migration of infrequently accessed data reduces
backup and recovery time, and can improve query performance for active data.
An optional DXDB module provides additional disaster recovery capabilities,
such as writing additional copies of the data to virtualized storage in remote
data centers. Finally, snapshot capability allows the administrator to make a
point-in-time copy of the DXDB filesystem, directory, or individual files and
move it to another, possibly remote, database instance for secure storage and
accessibility of data.

During the third
quarter of 2001, we entered into new partnerships with certain
leading Network Attached Storage (NAS) hardware device manufacturers to sell our storage virtualization
solution, DiskXtender, through their channels. DiskXtenders storage
virtualization technology aggregates the NAS pool created as multiple NAS
storage devices are installed on a network, and then provides a centralized
location for data access. The NAS pool is viewable as a virtual single drive
on a network, so it simplifies storage management for network administrators as
well as file management for end users. In addition, many forms of data from distributed
network services can be consolidated on to a single, centrally managed server
so front-end applications can benefit from single virtualized view of data.
Consolidating and virtualizing data enables fast access to business-critical
data stored on a network, while lowering the total cost of ownership associated
with managing information assets.

18



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##### 



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 nine months
ended September 30, 2001 with the three and nine months ended September 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 amortization expenses associated with certain intangible assets
and other expenses associated with our acquisition of UniTree in July 2001,
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        |    | Nine Months        
|                                    |                              |                              |              |    | Ended September 30, |    | Ended September 30,
|                                    |                              |                              |              |    | 2001                |    | 2000                |    | 2001          |    | 2000         
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              |                              |              |    |                     |    |                     |    | (As restated) |    | (As restated)
|                                    |                              |                              |              |    | (unaudited)         |    |                     |    |               |    |               |  |  |  | (unaudited)
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |               |  |  |  |            
|Revenues                            |                              |                              |              |    |                     |    |                     |    |               |    |               |  |  |  |             |    |     |    |    |   
|                                    | Software licenses            |                              |              | 72 | %                   |    |                     | 77 | %             |    |               |  |  |  |             | 72 | %   |    |    | 77 | %  
|                                    | Services                     |                              |              | 28 |                     |    |                     | 23 |               |    |               |  |  |  |             | 28 |     |    |    | 23 |    
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              | Total revenues               |              |    | 100                 |    |                     |    | 100           |    |               |  |  |  |             |    | 100 |    |    |    | 100 |   
|Cost of revenues                    |                              |                              |              |    |                     |    |                     |    |               |    |               |  |  |  |             |    |     |    |    |   
|                                    | Software licenses            |                              |              | 12 |                     |    |                     | 5  |               |    |               |  |  |  |             | 9  |     |    |    | 5  |    
|                                    | Services                     |                              |              | 10 |                     |    |                     | 8  |               |    |               |  |  |  |             | 11 |     |    |    | 9  |    
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              | Total cost of revenues       |              |    | 22                  |    |                     |    | 13            |    |               |  |  |  |             |    | 19  |    |    |    | 14  |   
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              |                              | Gross profit |    |                     | 78 |                     |    |               | 87 |               |  |  |  |             |    |     | 81 |    |    |     | 86 | 
|Operating expenses                  |                              |                              |              |    |                     |    |                     |    |               |    |               |  |  |  |             |    |     |    |    |   
|                                    | Sales and marketing          |                              |              | 47 |                     |    |                     | 40 |               |    |               |  |  |  |             | 48 |     |    |    | 43 |    
|                                    | Research and development     |                              |              | 26 |                     |    |                     | 23 |               |    |               |  |  |  |             | 28 |     |    |    | 23 |    
|                                    | General and administrative   |                              |              | 16 |                     |    |                     | 13 |               |    |               |  |  |  |             | 15 |     |    |    | 14 |    
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              | Total operating expenses     |              |    | 88                  |    |                     |    | 75            |    |               |  |  |  |             |    | 91  |    |    |    | 80  |   
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|Income (loss) from operations       |                              |                              | (10          | )  |                     |    | 12                  |    |               |    |               |  |  |  | (10         | )  |     |    | 6  |   
|Other income (expense)              |                              |                              |              |    |                     |    |                     |    |               |    |               |  |  |  |             |    |     |    |    |   
|                                    | Interest income              |                              |              | 5  |                     |    |                     | 8  |               |    |               |  |  |  |             | 7  |     |    |    | 6  |    
|                                    | Interest expense             |                              |              |   |                     |    |                     |   |               |    |               |  |  |  |             |   |     |    |    | (2 | )  
|                                    | Foreign exchange gain (loss) |                              |              | 1  |                     |    |                     |   |               |    |               |  |  |  |             |   |     |    |    |   |    
|                                    | Other income (expense)       |                              |              |   |                     |    |                     |   |               |    |               |  |  |  |             |   |     |    |    |   |    
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|                                    |                              | Total other income (expense) |              |    | 5                   |    |                     |    | 7             |    |               |  |  |  |             |    | 7   |    |    |    | 5   |   
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|Income (loss) before income taxes   |                              |                              | (5           | )  |                     |    | 19                  |    |               |    |               |  |  |  | (3          | )  |     |    | 10 |   
|Provision (credit) for income taxes |                              |                              | (2           | )  |                     |    |                    |    |               |    |               |  |  |  | (1          | )  |     |    |   |   
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              
|Net income (loss)                   |                              |                              | (3           | )% |                     |    | 19                  | %  |               |    |               |  |  |  | (2          | )% |     |    | 10 | % 
|                                    |                              |                              |              |    |                     |    |                     |    |               |    |              

Each amount in the above table represents the dollar amount for that item
as a percentage of total revenue for the respective period. Subtotals are also
presented as a percentage of revenue and therefore may not, in some cases, be arithmetically derived from the
relevant components within the above table.

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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 15% to $16.6 million for the three months ended
September 30, 2001 from $14.4 million for the comparable period in 2000, and
increased 25% to $46.4 million for the nine months ended September 30, 2001
from $37.2 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 6% to
$11.9 million for the three months ended September 30, 2001 from $11.2 million
for the three months ended September 30, 2000, and represented 72% of total
revenues for the three months ended September 30, 2001 as compared to 77% 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 and access 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 September 30, 2001 increased 7% sequentially over
software license revenues of $11.1 million for the three months
ended June 30, 2001. Software license
revenues for the nine months ended September 30, 2001 increased 16% to $33.3
million compared with $28.7 million for the nine months ended September 30,
2000. The increase for the first nine months of 2001 over the first nine
months of 2000 and the increase over the second quarter of 2001, were primarily
due to the same factors mentioned for the quarter-over-quarter increase.

We recognized $4.0 million of software license revenue under new
arrangements with payment terms extending up to six months for the three months
ended September 30, 2001. We recognized an additional $1.8 million of software
license revenue under purchase orders from distributor customers under
previously established arrangements with payment terms extending up to six
months. The total software license revenues of $5.8 million from new and
previously established arrangements with extended payment terms represented 49%
of our software revenues for the three months ended September 30, 2001. The
comparable amounts for the three months ended June 30, 2001, March 31, 2001,
and December 31, 2000 were $5.3 million and 48%, $3.7 million and 36%, and $4.6
million and 50%, respectively. As mentioned above, extended payment term
contracts are entered into primarily with select OEMs, distributors and resellers.

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Services revenues  Services revenues increased 44% to $4.7 million or 28%
of total revenues for the three months ended September 30, 2001 from $3.3
million or 23% of total revenues for the comparable period in 2000. Services
revenues increased 55% to $13.2 million or 28% of total revenues for the nine
months ended September 30, 2001 from $8.5 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, an 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
substantially all of OTG Softwares products 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 147% to $2.1 million for the three months ended
September 30, 2001 from $0.9 million for the three months ended September 30,
2000 and increased 103% to $4.2 million for the nine months ended September 30,
2001 from $2.1 million for the nine months ended September 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 82%
for the three months ended September 30, 2001 from 92% for the three months
ended September 30, 2000 and to 87% for the nine months ended September 30,
2001 from 93% for the nine months ended September 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 certain intangible assets acquired by
Smart Storage in 1999 and the first quarter of 2000 will continue through the
first half of 2002.

Cost of services revenues  Cost of services revenues increased 45% to
$1.7 million for the three months ended September 30, 2001 from $1.2 million
for the three months ended September 30, 2000, and increased 45% to $5.0
million for the nine months ended

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September 30, 2001 from $3.4 million for the
nine months ended September 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 remained unchanged at 64% for the three
months ended September 30, 2001 and 2000, and increased to 62% for the nine
months ended September 30, 2001 from 59% for the nine months ended September
30, 2000, 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.

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 36% to $7.7 million for the three months ended
September 30, 2001 from $5.7 million for the three months ended September 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 certain sales and
marketing efforts because of the acquisition of Smart Storage and, to a lesser
extent, the acquisition of UniTree. Sales and marketing expenses increased 39%
to $22.1 million for the nine months ended September 30, 2001 from $15.9
million for the nine months ended September 30, 2000. As a percentage of total
revenues, sales and marketing expenses increased to 47% for the three months
ended September 30, 2001 from 40% for the three months ended September 30,
2000, and increased to 48% for the nine months ended September 30, 2001 from
43% for the comparable period in 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. Including amortization of certain deferred compensation expenses
associated with our acquisition of UniTree totaling approximately $0.2 million,
research and development expenses increased 36% to $4.5 million for the three
months ended September 30, 2001 from $3.3 million for the three months ended
September 30, 2000, and increased 52% to $13.0 million for the nine months
ended September 30, 2001 from $8.6 million for the nine months ended September
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
and, to a lesser extent, the acquisition of UniTree. As a percentage of total
revenues, research and development expenses increased to 27% for the three
months ended September 30, 2001 from 23% for the three months ended September
30, 2000, and to 28% for the nine months ended September 30, 2001 from 23% for
the nine months ended September 30, 2000. Although we have
achieved sequential reductions in research and development
expenses as a percentage of total revenues for the three months ended
March 31, 2001, June 30, 2001 and September 30, 2001 of 29%, 28% and
27%, respectively, 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.

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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 42% to $2.6 million for the three months
ended September 30, 2001 from $1.8 million for the three months ended September
30, 2000, and increased 35% to $7.1 million for the nine months ended September
30, 2001 from $5.3 million for the nine months ended September 30, 2000, due
primarily to two factors. First, during the third quarter of 2001 we incurred approximately
$0.3 million in costs associated with the restructuring of our corporate
entities and with the review of our internal information systems and programs.
We expect to realize tax benefits, cost savings, and operational efficiencies
from these efforts over the next year. Second, we continue to incur additional
personnel costs and other expenses associated with our efforts to support the
continued expansion of our operations, in particular our acquisitions of Smart
Storage and UniTree during 2001. General and administrative expenses were 16%
and 13% of total revenues for the three month periods ended September 30, 2001
and 2000, respectively, and were 15% and 14% of revenues for the nine month
periods ended September 30, 2001 and 2000, respectively. 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.

For the nine months ended September 30, 2001, we incurred approximately
$1.6 million in merger-related costs associated with our March 2001 acquisition
of Smart Storage. For the three and nine months ended September 30, 2001 the
Company incurred approximately $0.4 million associated with the amortization of
certain intangibles and other expenses in connection with our July 2001
acquisition of UniTree. For the three and nine months ended September 30, 2001
the Company incurred approximately $0.2 million and $0.6 million, respectively,
associated with the amortization of certain intangibles in connection with our
April 2000 acquisition of xVault, and approximately $0.1 and $0.2 million,
respectively, associated with the amortization of certain intangibles acquired
by Smart Storage in December 1999 and February 2000. These amounts increased
total operating expenses by $0.4 million in the third quarter of 2001 over the
third quarter of 2000 and increased total operating expenses by $1.7 million in
the first nine months of 2001 over the first nine months of 2000.

Other income  Other income decreased on a net basis to $0.9 million for
the three months ended September 30, 2001, from $1.0 million for the three
months ended September 30, 2000, primarily because of a decrease in interest
income attributable to a decrease in the return on invested cash and cash
equivalent assets associated with the continued program by the Federal Reserve
Board to reduce U.S. interest rates. Other income increased on a net basis to
$3.1 million for the nine months ended September 30, 2001, from $1.7 million
for the nine months ended September 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. Finally, the factors contributing to the overall increase in
other income were partially offset by a loss of approximately $0.2
million associated with the disposal of certain assets in June of 2001.
For at least the near future, we believe falling interest rates will
negatively affect interest income earned on our cash and cash equivalents.

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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.

We assumed net operating loss carryforwards (NOLs) of approximately $2.1
million through our acquisition of Smart Storage, and NOLs of $3.2 million with
our acquisition of UniTree. We expect to use these NOLs, which are subject to
certain limitations on use, in future periods depending on future levels of
taxable income. We are also eligible for research and development tax credits
which will reduce our tax on future income. Finally, we incur certain
significant expenses such as stock compensation expense, goodwill amortization,
and direct costs of acquisitions that are not deductible for tax purposes.
Based on these considerations and the impact of the events of the third quarter of 2001, we have adjusted our estimated annual effective tax rate from approximately 65% as reported in the second quarter of 2001 to approximately 14% of our income (loss) before income taxes for the calendar year 2001.

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. The Company is required to apply the
consensuses of this EITF no later than the first quarter of 2002. 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
requires 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 also specifies
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

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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.

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.

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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.

On October 3, 2001, the FASB issued SFAS Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. SFAS No. 144
also supersedes the accounting and reporting provisions of APB Opinion NO. 30,
Reporting the Results of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. The
Statement is effective for the Companys fiscal year 2002. We do not believe
that the adoption of this standard will have a material impact on our financial
condition or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2001, our cash and cash equivalents totaled $93.1
million, representing 59% 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 September 30, 2001, we had interest-bearing debt outstanding of
$7.2 million, $4.0 million of which related to a draw on our revolving line of
credit, $2.9 million of which related to notes payable to shareholders
associated with our acquisition of UniTree, and the remaining $0.3 million of
which represents other notes payable arising primarily from our Smart
Storage acquisition. As of December 31, 2000, we had
interest-bearing debt outstanding of $0.6 million related primarily to notes
payable to certain shareholders and banks.

For the nine months ended September 30, 2001, net cash used for operating
activities was approximately $4.0 million as compared to net cash provided by
operating activities of $0.2 million for the nine months ended September 30,
2000. The change in cash used for operating activities primarily reflects the
net loss of $3.8 million for the first nine months of 2001 as compared to net
income of $2.3 million for the first nine months of 2000, requiring the Company
to fund its operations to the extent that expenses exceeded revenues, 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. The Company did
experience a slowdown in collections after the terrorist attacks of
September 11, 2001, resulting in lower than expected collections of receivables
during the last few weeks of the third quarter. Even though we believe our
collection efforts will ultimately be successful to the extent we have not
already established an allowance against

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our receivables, the timing of
receipts necessarily impacts cash flows during a given 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, and our ability to utilize certain tax benefits assumed in our
acquisitions of Smart Storage and UniTree are also dependent upon our ability
to generate taxable income against which to use these benefits. Payments of
income taxes could have a material adverse affect on our net cash flows from
operating activities in future periods.

For the nine months ended September 30, 2001, net cash used for investing
activities increased to $9.6 million as compared to $5.6 million for the nine
months ended September 30, 2000. The results for the first nine months of 2001
include payments totaling $5 million, net of cash acquired, to acquire UniTree
whereas the results for the first nine months of 2000 include payments of $2.6
million to acquire xVault and certain intangible assets acquired by Smart
Storage. In addition, we purchased approximately $4.6 million of property and
equipment in the first nine months of 2001, as compared to similar purchases of
$3.1 million in the first nine months of 2000. We expect to continue to invest
in property and equipment in the ordinary course of business as required.

For the nine months ended September 30, 2001, net cash provided by
financing activities was $4.4 million, attributable primarily to a $4.0 million
draw on our revolving line of credit used to help cover our operating
and acquisition costs during
the third quarter, proceeds from the exercise of stock options totaling $1.3
million, offset by net repayments of notes payable and other long term debt of
$0.3 million, payments of direct costs of our secondary public offering of over
$0.1 million, as well as the cost to repurchase common stock totaling $0.5
million pursuant to a repurchase program announced by the Company in September
2001. For the nine months ended September 30, 2000, net cash provided by
financing activities was $70.3 million, including proceeds of $87.0 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 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.

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.

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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, lower than expected acceptance of UNIX and Linux as
available platforms for our products, 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 UNIX
and Linux;                                                                                                                                       
| 
| |  | the rate of adoption of storage area networks;                                                                                                                                
| 
| |  | pricing policies, including levels of discounts, payment terms and
distribution terms;                                                                                        

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| |  | 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, Windows 2000, UNIX, and Linux to run computer networks, and a decrease in their rates of acceptance
could cause our revenues to decline

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. 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.

We expect the
percentage of our revenues attributable to UNIX- and Linux-based
products to increase over time. We have expended significant
resources developing and acquiring technology to make UNIX- and Linux-compatible versions of our products. If users of UNIX and Linux
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

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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
September 30, 2001, we had a total of 416 employees, compared to a total of 385
and 233 employees as of December 31, 2000 and 1999, 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.

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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.

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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.

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

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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, UNIX, and Linux and to prepare our products for the
emergence of storage area networks, and we expect to continue to do so. If
Windows 2000, UNIX, and Linux 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.

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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

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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.

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 nine months ended September 30, 2001 and 2000, our revenues from
foreign countries represented 12% and 15%, 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;

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| |  | 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; and
| 
| |  | 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, 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                                              
| 
| |  | 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 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.

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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
$39,000 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, officers of the Company 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 the Companys initial public offering registration
statement and final prospectus contained material misrepresentations and/or
omissions, related in part to additional, excessive and undisclosed commissions
allegedly received by our underwriters from investors to whom the underwriters
allegedly allocated shares of the public offering. Since this initial
complaint was filed, two other complaints making similar or identical
allegations have been filed in that court on September 5, 2001 and September 18, 2001.

These cases are at an early stage, and the Company has not formally
responded to the allegations. However, we intend to defend the Company and its
officers vigorously. Our management believes that it is not possible at the
current time 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 July 25, 2001, we acquired UniTree in a transaction accounted for as a
purchase. UniTree is a provider of advanced technology for UNIX and
Linux-based data storage and database storage management. Pursuant to the
merger agreement, we issued 1,466,667 shares of our Common Stock to the former
UniTree shareholders, paid $6.0 million in cash and issued $4.8 million in
promissory notes bearing interest at 7% per annum, payable over eighteen
months, subject to the continued employment of certain UniTree
employees in exchange for all the outstanding shares of UniTrees capital stock
(of the shares issued, 266,667 are being held in escrow for a period time not
to exceed three years to secure certain indemnification obligations of certain
former UniTree shareholders). See Note 3 to Notes to Condensed Consolidated
Financial Statements for additional information related to our purchase of
UniTree.

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Each of the UniTree shareholders who were issued shares of our Common
Stock was either an accredited investor as defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933 or received information required
to be provided by Rule 506 of Regulation D. These securities were issued in
reliance on the exemption from registration set forth in Rule 506 of Regulation
D. 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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

None.

(b)  Reports on Form 8-K

|                 |  |                                                                                                                                                               
|---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                    
|                
|October 22, 2001 |  | Items 5 and 7; related to our conference call for the
three months ended September 30, 2001.                                                                  

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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: November 14, 2001
|                                                                 
|Richard A. Kay President, Chairman and Chief Executive Officer    |  |                        
|                                                                 
|By: /s/ Ronald W. Kaiser                                          |  | Date: November 14, 2001
|                                                                 
|Ronald W. Kaiser Chief Financial Officer and Treasurer (Principal | 
|Financial Officer)                                                |  |                        

(this space intentionally left blank)

39