<PAGE>   1
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
   
                                AMENDMENT NO. 1
    
   
                                       TO
    
   
                                  FORM 10-K/A
    
 
     (MARK ONE)
 
     [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
                     FOR THE FISCAL YEAR ENDED JULY 3, 1998
 
     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
 
                         COMMISSION FILE NO. 000-23169
 
                             SEAGATE SOFTWARE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                            ------------------------
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      77-0397623
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
 
               915 DISC DRIVE                                      95066
          SCOTTS VALLEY, CALIFORNIA                             (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (831) 438-6550
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
  SERIES A PREFERRED STOCK, $.001 PAR VALUE PER SHARE COMMON STOCK, $.001 PAR
                                VALUE PER SHARE
 
     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 [ ]
 
   
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A.  [X]
    
 
     The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of July 3, 1998 was $4,705,604. Shares of Common Stock held by
each officer, each director, and each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
 
     The number of shares outstanding of the registrant's Common Stock as of
July 3, 1998 was 975,567.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     None.
 
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<PAGE>   2
 
                                     PART I
 
CERTAIN FORWARD-LOOKING INFORMATION
 
   
     The information contained in this Form 10-K/A includes forward-looking
statements. Since this information is based on current expectations that involve
risks and uncertainties, actual results could differ materially from those
expressed in the forward-looking statements. Various important factors known to
Seagate Software, Inc. (the "Company" or "Seagate Software") that could cause
such material differences are identified in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results" contained in Item 7 of
this Form 10-K/A. Certain sections of this Form 10-K/A have been identified as
containing forward-looking statements. The reader is cautioned that other
sections and other sentences not so identified may also contain forward-looking
information.
    
 
ITEM 1. BUSINESS
 
GENERAL
 
     The Company develops and markets software products and provides related
services enabling business users and information technology ("IT") professionals
to store, access and manage enterprise information. Headquartered in Scotts
Valley, California, the Company has over 40 offices and operations in 17
countries worldwide. The Company is a majority-owned and consolidated subsidiary
of Seagate Technology, Inc. (the "Parent Company" or "Seagate Technology"), a
data technology company that provides products for storing, managing and
accessing digital information on computer systems. As of July 3, 1998, the
Parent Company and one of its subsidiaries held 99.7% of the Company's
outstanding capital stock. On a diluted basis, the outstanding minority
interests of the Company amounted to approximately 17.8%, which consisted of
Common Stock and options to purchase its Common Stock issued pursuant to the
Seagate Software 1996 Stock Option Plan (the "Option Plan"). Such options to
purchase the Company's Common Stock are held by certain employees, directors and
consultants of the Company and the Parent Company.
 
     The Company believes that managing the exponential growth of information
and the growing need for information infrastructures combined with increasingly
decentralized decision making are key challenges inherent in today's
client/server computing environments. The Company's strategy is to respond to
these challenges by offering Enterprise Information Management ("EIM") software
solutions which consist of three core components -- Information Delivery,
Information Analysis and Information Availability. The purpose of EIM is to
integrate departmental information, optimize decision-making and ensure
consistent access to information by providing comprehensive data availability
and protection. Seagate Software is comprised of two operating groups,
Information Management Group ("IMG") and Network & Storage Management Group
("NSMG"), each focused on the growing need for superior EIM.
 
     IMG offers business intelligence ("BI") software solutions featuring the
Delivery and Analysis components of EIM. IMG's products include features such as
query and reporting, automated report scheduling and distribution, information
delivery across the World Wide Web, on-line analytical processing ("OLAP"),
forecasting, statistical analysis, discovery and data mining.
 
     NSMG offers network and storage management software solutions, which focus
on the Availability component of EIM by enabling IT professionals to manage
distributed network resources and to secure and protect enterprise data. NSMG's
products include features such as system backup, disaster recovery, migration,
replication, automated client protection, storage resource management,
scheduling, event correlation and desktop management.
 
     The Company's strategy is to deliver a comprehensive EIM solution to its
customers by developing a technology roadmap that leverages the core
competencies of its BI and network and storage management products. Combinations
of EIM components are available today in a number of integrated solutions from
the Company. Seagate Backup Exec, Seagate Desktop Management Suite, Seagate
Manage Exec and Seagate NerveCenter provide the combination of Information
Availability and Information Analysis by integrating
 
                                        1
<PAGE>   3
 
technology from Seagate Crystal Reports. Seagate Crystal Reports, Seagate
Crystal Info and Seagate Holos provide a combination of technology that delivers
Information Delivery and Information Analysis solutions.
 
PRODUCTS
 
     Seagate Software offers a breadth of BI and network and storage management
products featuring EIM functionality:
 
  EIM PRODUCTS FOR BUSINESS INTELLIGENCE
 
     - Seagate Crystal Reports for Microsoft BackOffice(TM) -- Generates a set
       of top-requested reports to ease systems administration functions for the
       Microsoft BackOffice family of products.
 
     - Seagate Crystal Info(TM) -- Provides decision-makers with shared access
       to reporting and analysis capabilities, so users get fast access to
       business information without having to interact with the database.
       Whether using a Web browser or Windows, users can schedule, view and
       analyze reports and multidimensional OLAP cubes in a secure environment.
       This product contains an enterprise-friendly multi-tier architecture to
       lower network traffic and increase user productivity.
 
     - Seagate Crystal Reports(TM) -- Provides query and report writing
       functions for Windows. A developer and end-user tool, Seagate Crystal
       Reports allows users to access most types of PC and structured query
       language data and design a variety of reports and integrate them into
       database applications.
 
     - Seagate Holos(R) -- Provides a flexible OLAP development environment for
       rapidly delivering a range of applications that focus on key business
       issues and accurately reflect business processes. These "business-aware"
       applications allow enterprises to harness and analyze the increasing
       volumes of data and guide users to the information to improve
       decision-making.
 
  EIM PRODUCTS FOR NETWORK AND STORAGE MANAGEMENT
 
     - Seagate Backup Exec(R) Desktop Editions -- Provides complete
       plug-and-play backup and restore functions for desktop users running
       Microsoft Windows NT Workstation, Windows 98, Windows 95, Windows 3.x and
       DOS.
 
     - Seagate Backup Exec(R) Server and Enterprise Editions -- Provides a
       backup and restore solution for server and network users running Novell
       NetWare, Microsoft Windows NT LANs and workstations.
 
     - Seagate Backup Exec(R) Storage Migrator -- Facilitates the proactive
       management of inactive data by migrating it from on-line storage (such as
       disk drives) to near-line devices (such as optical drives) or to archival
       storage resources (such as tape devices) over user-defined periods of
       time through a multi-tier hierarchical storage management ("HSM")
       application delivering enterprise functionality to client/server
       environments.
 
     - Seagate Client Exec(TM) -- Protects critical client data on workstations
       and laptops. Users receive automatic, regular and transparent protection
       of their critical data, and administrators have the flexibility to
       control which users are protected, what type of data is protected and
       when the protection should occur.
 
     - Seagate Desktop Management Suite(TM) -- Provides a fully integrated suite
       of software solutions including network inventory, software distribution,
       remote control, network backup and software metering.
 
     - Seagate ExecView(TM) -- Provides an integrated cross-platform storage
       management console for enterprise networks using Microsoft Windows NT and
       Novell NetWare. Users can manage both Seagate Backup Exec for NetWare and
       Seagate Backup Exec for Windows NT servers from a single console.
 
     - Seagate Manage Exec(TM) -- Centralizes enterprise administration by
       providing IT professionals with a unique view of servers worldwide and
       real-time problem analysis through a proactive server health monitoring,
       alerting and reporting solution.
                                        2
<PAGE>   4
 
     - Seagate NerveCenter(R) -- Provides an enterprise-event automation
       solution for Windows NT and UNIX environments.
 
     - Seagate WinINSTALL(TM) -- Provides a script-free, automated software
       distribution tool for 16- and 32-bit applications.
 
     The Company provides its software products to customers under
non-exclusive, non-transferable license agreements (including shrink-wrap
licenses for certain products). As is customary in the software industry, in
order to protect its intellectual property rights, the Company does not sell or
transfer title to its software products to customers. The Company enters into
both object-code only and source-code licenses of its products. Under the
Company's current standard end-user license agreement, licensed software may be
used solely for the customers' internal operations and only at specified sites,
which may be comprised of a stand-alone computer, a single network server with
multiple terminals or multiple network servers with multiple terminals.
 
STRATEGIC RELATIONSHIPS
 
     The Company has developed strategic relationships with a number of
application software developers and computer hardware manufacturers that sell
and support the Company's products as well as integrate the Company's products
into their operating system platforms. Such strategic relationships have been
established with Compaq, Hewlett-Packard, IBM, Informix, Microsoft, Netscape,
Novell, Oracle, PeopleSoft and Seagate Technology's original equipment
manufacturer ("OEM") tape drive operations.
 
     The Company's strategic relationship with Microsoft includes the bundling
of its leading BI and storage management products with selected Microsoft
products. Seagate Crystal Reports is bundled with Microsoft BackOffice products
and developer tools such as Microsoft Visual Basic, and Seagate Crystal Info is
bundled in BackOffice Server 4.0. Additionally, the Company developed the backup
utility for Microsoft Windows 98 and is developing the system disaster recovery
and backup utilities for Windows NT 5.0. The Company has also developed the HSM
technology to be included in Windows NT Server 5.0.*
 
RESEARCH AND DEVELOPMENT
 
     The Company incurred research and development expenses of approximately
$47,173,000, $42,842,000 and $36,897,000 in 1998, 1997 and 1996, respectively.
Certain of the research and development expenses, which have not been material
to date, are funded by the Company's customers. The Company is pursuing its
product development objectives by continuing its emphasis on internally
developing new software products and product enhancements, acquiring products,
technologies and businesses complementary to the Company's existing product
lines and forming alliances with leading technology companies.*
 
SALES AND MARKETING
 
     The Company employs a multi-faceted sales strategy. The Company utilizes
direct sales forces and certain indirect sales channels, such as distributors
and OEM relationships, for sales of its selected products to end users. These
distributors and OEMs may also sell other products that are complementary to or
compete with those of the Company. The Company provides sales and marketing
programs to encourage the sale of its products, but there can be no assurance
that its distributors and OEMs will not place a higher priority on competing
products. Agreements with its distributors and OEMs are generally non-exclusive
and may be terminated by either party without cause. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results."
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                        3
<PAGE>   5
 
     The Company generally markets its products domestically and overseas
through a network of wholly-owned subsidiaries. These subsidiaries utilize
authorized distributors and direct sales forces. The Company adapts certain
products for foreign markets, including translation and documentation, and the
Company prepares marketing and sales support programs accordingly. The Company
has organized its sales management into geographical regions to increase the
effectiveness of its sales efforts. Each region has offices established in
cities and countries near its largest existing or prospective partners and
customers. There are four regions: the Americas, Europe/Middle East/Africa,
Japan, and Asia/Pacific.
 
     The Company's marketing efforts are designed to increase awareness and
consideration of, and to generate leads for, the Company's products. Marketing
activities include print advertising in trade and technical publications,
on-line advertising on the World Wide Web, cooperative marketing with
distributors and resellers, participation in seminars and tradeshows, mailings
to end users and other public relations efforts. The Company's marketing groups
produce or oversee the production of substantially all of the on-line and print
product literature, brochures, advertising and similar marketing and promotional
material for the Company.
 
     Revenue from one third party customer, Ingram Micro Inc., accounted for
22%, 18% and 16% of the Company's total revenues in 1998, 1997 and 1996,
respectively. Indirect revenues, which include sales to distributors and OEMs,
were 69%, 63% and 70% of total revenues during 1998, 1997 and 1996,
respectively. Revenues outside of the Americas were 32%, 30% and 11% of total
revenues during 1998, 1997 and 1996, respectively.
 
     During 1998 the Company generated export revenues from the United States of
approximately $66,250,000. Revenues and expenses from the Company's operations
outside of the Americas were approximately $26,809,000 and $52,143,000,
respectively, as translated to the U.S. dollar from foreign currencies. The
principal currency for such operations is the British pound. The Company
believes that its exposure to foreign currency fluctuations is not material and
does not engage in foreign currency hedging programs.*
 
TECHNICAL SUPPORT AND MAINTENANCE
 
     The Company's technical support groups, located at various sites around the
world, including the U.S., Canada and Europe, provide pre-sale, installation and
post-sale support to current users and potential customers evaluating the
Company's products. Certain technical support groups also offer seven-day,
24-hour toll-free telephone services. The Company believes that effective
technical support during product evaluation substantially contributes to product
acceptance, and that post-sale support has been, and will continue to be, a
substantial factor in maintaining customer satisfaction.*
 
     The Company offers maintenance programs for certain of its software
products, which may consist of product enhancements, updated products and
technical support. Generally, customers renew maintenance and support on an
annual basis by paying a maintenance fee. Maintenance revenue implicit in new
product sales and recurring maintenance charges are recognized ratably over the
period the maintenance and support services are to be provided.
 
COMPETITION
 
     The business intelligence and network and storage management software
markets in which the Company competes are comprised of numerous competitors, and
the Company expects competition to increase.* The Company has recently
experienced increased competition from additional entrants into its markets,
including companies that specialize in the development, marketing and support of
information management and network and storage management software products.
Many of the Company's current and prospective
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                        4
<PAGE>   6
 
competitors have significantly greater financial, technical and marketing
resources than the Company. In addition, many prospective customers may have the
internal capability to implement solutions to their problems.
 
     The competitive factors affecting the market for the Company's software
products include the following: product functionality; performance and
reliability; demonstrable economic benefits for users relative to cost; price;
quality of customer support and user documentation and ease of installation;
vendor reputation; experience; and financial stability. The Company believes
that it currently competes effectively with respect to these factors. The
Company's ability to remain competitive will depend, to a great extent, upon its
ongoing performance in the areas of product development and customer support.*
To be successful in the future, the Company must respond promptly and
effectively to the challenges of technological change and its competitors'
innovations by continually enhancing its own product offerings.* Performance in
these areas will, in turn, depend upon the Company's ability to attract and
retain highly qualified technical personnel in a competitive market for
experienced and talented software developers.* The Company also expects to
continue its strategy of identifying and acquiring business intelligence and
network and storage management assets and technologies and businesses that have
developed such products and technologies.*
 
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
 
     The Company by and through its Parent Company and/or predecessor companies,
has been awarded four (4) United States patents and has three (3) United States
and three (3) foreign patent applications pending. Because software technology
changes rapidly, the Company believes that the improvement of existing products,
reliance upon trade secrets and unpatented proprietary know-how and development
of new products are generally more important than patent protection. The Company
nevertheless believes that patents are of value to its business and intends to
continue its efforts to obtain patents, when available, in connection with its
research and development programs.* There can be no assurance that any patents
obtained will provide substantial protection or be of commercial benefit to the
Company, or that their validity will not be challenged.
 
     The Company's license agreements have restrictions in place to protect and
defend the Company's intellectual property. The Company realizes that although
it has incorporated these restrictions, there is a possibility for unauthorized
use of its software. In addition to relying on these contractual rights, the
Company has an ongoing trademark registration program in which it registers
certain of its product names, slogans, and logos in the United States and in
some foreign countries.
 
EMPLOYEES
 
     As of July 3, 1998, the Company employed approximately 1,800 persons. The
Company's success is highly dependent on its ability to attract and retain
qualified employees. Competition for qualified employees is intense in the
software industry. None of the Company's employees are represented by a labor
union or are the subject of a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that its employee relations are
good.
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                        5
<PAGE>   7
 
ITEM 2. PROPERTIES
 
     Seagate Software's executive offices are located in Scotts Valley,
California. Principal facilities are located in Florida, California, Canada and
the United Kingdom. A major portion of the Company's facilities are occupied
under leases that expire at various times through 2008. The following is a
summary of square footage leased by the Company:
 
                                   FACILITIES
 
<TABLE>
<CAPTION>
                                                                 TOTAL
                          LOCATION                            SQUARE FEET
                          --------                            -----------
<S>                                                           <C>
North America
  California
     Central California.....................................      53,429
     Northern California....................................      16,084(1)
  Colorado..................................................      18,348
  Mid-Continent.............................................       7,607
  Northeast USA.............................................      33,428
  Southeast USA.............................................     121,112(2)
  Other USA.................................................       5,481(3)
  Canada....................................................     140,044
                                                               ---------
          Total North America...............................     395,533
Europe
  England...................................................      39,141
  Germany...................................................       6,858(4)
  Other Europe..............................................      10,379
                                                               ---------
          Total Europe......................................      56,378
Asia
  Australia.................................................      11,233
  Japan.....................................................       6,938
  Hong Kong.................................................       2,206
  Other Pacific Rim.........................................       3,885
                                                               ---------
          Total Asia........................................      24,262
                                                               ---------
          Total.............................................     476,173
                                                               =========
</TABLE>
 
---------------
(1) Excludes approximately 44,361 square feet of space leased to others.
 
(2) Excludes approximately 5,000 square feet of unoccupied space.
 
(3) Excludes approximately 19,206 square feet of unoccupied space.
 
(4) Excludes approximately 3,263 square feet of space leased to others.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral agreement
and infringement of a Vedatech U.K. copyright in the Japanese translation of one
of the Company's products (the "Complaint") and seeking monetary and injunctive
relief. No specific damage amount has yet been claimed. The Company has hired
local counsel in the U.K., reviewed documents and conducted interviews. The
Company filed an initial response in the U.K. court on January 13, 1998 and is
now in the discovery process. The Company believes the Complaint has no merit
and intends to vigorously defend the action. However, if an unfavorable outcome
were to arise, there can be no assurance that such outcome would not have a
material adverse effect on the Company's liquidity, financial position or
results of operations.
 
                                        6
<PAGE>   8
 
     In addition to the foregoing, the Company is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     As of July 3, 1998, the Company had outstanding 975,567 shares of Common
Stock held by 225 shareholders and 54,633,333 shares of Series A Preferred Stock
(including shares exchangeable to Series A Preferred Stock) held by the Parent
Company and one of its subsidiaries. There is no established public trading
market for any class of the Company's securities.
 
     The Company has not paid any dividends on any of its capital stock and does
not anticipate that any cash dividends will be declared in the foreseeable
future.*
 
ITEM 6. SELECTED FINANCIAL DATA
 
   
     The consolidated financial data with respect to the fiscal years ended July
3, 1998, June 27, 1997 and June 28, 1996 are derived from the audited
Consolidated Financial Statements of the Company that are included or
incorporated by reference in this Form 10-K/A. The consolidated financial data
set forth below with respect to the fiscal years ended June 30, 1995 and July 1,
1994 are derived from the Consolidated Financial Statements of the Company that
are not included in this Form 10-K/A. The following data should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-K/A and in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
    
 
   
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED
                                        -------------------------------------------------------
                                        JULY 3,     JUNE 27,    JUNE 28,    JUNE 30,    JULY 1,
                                          1998        1997        1996        1995       1994
                                        --------    --------    --------    --------    -------
                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>         <C>
Revenues..............................  $293,226    $216,950    $141,586    $92,796     $30,696
Gross profit..........................   242,766     169,161     112,567     70,417      23,556
Income (loss) from operations.........     6,125     (60,296)   (137,806)   (80,166)    (11,068)
Net loss..............................    (9,270)    (53,963)   (129,668)   (82,864)     (6,884)
Net loss per common share (basic and
  diluted)............................    (56.33)    (796.93)
Total assets..........................   138,997     147,331     201,598    101,928      20,854
Stockholders' equity..................  $ 57,106    $ 63,355    $115,602    $47,215     $ 6,978
Weighted average common shares
  outstanding.........................   164,571      67,714
</TABLE>
    
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                        7
<PAGE>   9
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
CERTAIN FORWARD-LOOKING INFORMATION
 
   
     Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") of Seagate Software and
contained elsewhere in this Form 10-K/A are forward-looking statements based on
current expectations, and entail various risks and uncertainties that could
cause actual results to differ from those projected in such forward-looking
statements. Certain of these risks and uncertainties are set forth below in the
sections entitled "Liquidity and Capital Resources" and "Factors Affecting
Seagate Software's Future Operating Results". Certain sections in this Form
10-K/A have been identified as containing forward-looking statements. The reader
is cautioned that other sections and other sentences not so identified may also
contain forward-looking information.
    
 
OVERVIEW
 
     Seagate Software develops and markets software products and provides
related services enabling business users and information technology
professionals to manage enterprise information. Headquartered in Scotts Valley,
California, Seagate Software has over 40 offices and operations in 17 countries
worldwide. The Company is a majority-owned and consolidated subsidiary of
Seagate Technology, Inc. (the "Parent Company" or "Seagate Technology"), a data
technology company that provides products for storing, managing and accessing
digital information on computer systems. As of July 3, 1998, the Parent Company
and one of its subsidiaries held 99.7% of Seagate Software's outstanding capital
stock. On a fully converted basis the outstanding minority interests of Seagate
Software amounted to approximately 17.8%, which consisted of common stock and
options to purchase its common stock issued pursuant to the 1996 Stock Option
Plan (the "Option Plan") and common stock subject to repurchase. Such options
and stock are held by certain current and former employees, directors and
consultants of Seagate Software and Seagate Technology.
 
     Seagate Software was incorporated in Delaware in November 1993 and
commenced operations in May 1994 pursuant to Seagate Technology's merger with
Crystal Computer Services, Inc., a company engaged in developing and marketing
report writing software. From August 1994 to June 1996, Seagate Technology
acquired eight software companies, which were engaged in developing and
marketing business intelligence ("BI") or network and/or storage management
software products. In February 1996, Seagate Technology merged with Conner
Peripherals, Inc. in a transaction accounted for as a pooling-of-interests. In
connection with the merger, Seagate Technology purchased the outstanding
minority interests in Conner's storage management software operations under
Arcada Holdings, Inc. ("Arcada") for $85.1 million, which resulted in
allocations to goodwill and other intangibles for $47.4 million, write off of
in-process research and development of $43.9 million and a deferred tax
liability of $6.3 million.
 
     In April 1996, the Parent Company consolidated its software operations into
Seagate Software. In June 1998, the Company acquired all of the outstanding
capital stock of Eastman Software Storage Management Group, Inc. , a company
engaged in developing, producing and marketing hierarchical storage management
products for the Windows NT platform. The purchase price of approximately
$10,000,000 was paid in cash which resulted in allocations to goodwill and other
intangibles of $3.2 million and a write off of in-process research and
development of $6.8 million. Seagate Software accounted for the acquisition
using the purchase method, and the results of operations of Eastman are only
included in Seagate Software's operations since the acquisition was completed.
 
   
     Seagate Software operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996 ended
on June 28, 1996. Fiscal 1998 was comprised of 53 weeks and fiscals 1997 and
1996 were comprised of 52 weeks. All references to years in this Form 10-K/A
represent fiscal years unless otherwise noted.
    
 
                                        8
<PAGE>   10
 
BUSINESS COMBINATIONS
 
   
  Valuation Methodology
 
     In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of the
cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price properly
attributed to incomplete research and development projects that should be
expensed according to the requirements of Interpretation 4 of SFAS No. 2.
 
     Intangible assets were identified through (i) analysis of the acquisition
agreement, (ii) consideration of the Network & Storage Management Group's
intentions for future use of the acquired assets, and (iii) analysis of data
available concerning Arcada's products, technologies, markets, historical
financial performance, estimates of future performance and the assumptions
underlying those estimates. The economic and competitive environment in which
the Network & Storage Management Group and Arcada operate was also considered in
the valuation analysis.
 
     Specifically, purchased research and development ("purchased R&D") was
identified and valued through extensive interviews and discussions with the
Network & Storage Management Group and Arcada management and the analysis of
data provided by Arcada concerning Arcada's developmental products, their
respective stage of development, the time and resources needed to complete them,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each purchased R&D project. A portion of the purchase price
was allocated to the developmental projects based on the appraised fair values
of such projects.
 
ARCADA SOFTWARE, INC.
 
  Overview
 
     As of the acquisition date, Arcada had spent a significant amount of money
on research and development related to the re-development efforts to add
features and utilities to the Desktop, NetWare and Windows NT products such as
disk grooming, hierarchical storage management, upgraded graphical user
interfaces, file and server replication, and server mirroring in order to
continue to meet increasingly complex user needs.
 
     In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate purchased existing products from Arcada, since the
majority of the original underlying code and base technology for the NetWare and
Windows NT product families was completed in the 1990 time frame, the
technologies, as of the date of valuation, were desperately in need of, and
therefore, as mentioned above, was undergoing significant re-development.
 
  Assumptions
 
     Revenue
 
     Future revenue estimates were generated for the following product families:
(i) Desktop, (ii) NetWare, and (iii) Windows NT. Aggregate revenue for Arcada
products was estimated to be approximately $94 million for the ten and one-half
months ending December 31, 1996. Revenues were estimated to increase to
approximately $161 million and $233 million for calendar years 1997 and 1998
when most of the in-process projects were expected to be complete and shipping.
Thereafter, revenue was estimated to increase at rates ranging from 35% to 40%
for calendar years 1999 through 2002. Revenue estimates were based on (i)
aggregate revenue growth rates for the business as a whole, (ii) individual
product revenues, (iii) growth rates for the storage management software market,
(iv) the aggregate size of the storage management
 
                                        9
<PAGE>   11
 
software market, (v) anticipated product development and introduction schedules,
(vi) product sales cycles, and (vii) the estimated life of a product's
underlying technology. The estimated product development cycle for the new
products ranged from 12 to 18 months.
 
     Operating expenses
 
     Operating expenses used in the valuation analysis of Arcada included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate Software and Arcada's
overall business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
 
     Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies ranged from approximately
5% to 30% (30% for Desktop, 10% for NetWare, and 5% for Windows NT). Seagate
Software's cost of goods sold was 20% for fiscal 1996, 22% for fiscal 1997, and
17% for fiscal 1998.
 
     General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies ranged from
12% in calendar 1996 to 8% in calendar 1998 and beyond.
 
     Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 30% throughout the estimation period.
 
     Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 5% of revenue for the developed
technologies and 3% of revenue for the in-process technologies throughout the
estimation period.
 
     In addition, as of the date of acquisition, Seagate Software management
anticipated the costs to complete the Desktop, NetWare, and Windows NT
technologies at approximately $6.8 million, $4.5 million, and $7.5 million,
respectively. Since the acquisition date, all projects originally acquired from
Arcada were commercially released prior to the end of the fourth quarter of
fiscal 1997.
 
     Effective tax rate
 
     The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
 
     Discount rate
 
     The discount rates selected for Arcada's developed and in-process
technologies were 15% and 17.5%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (approximately 13% to 15% at the date of acquisition) and (ii)
the Weighted Average Return on Assets (approximately 18%). The discount rate
utilized for the in-process technology was determined to be higher than
Seagate's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than Seagate's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
 
                                       10
<PAGE>   12
 
     EASTMAN SOFTWARE STORAGE MANAGEMENT GROUP.
 
  Overview
 
     Eastman Software SMG's two primary products are OPEN/stor for Windows NT
and AvailHSM for NetWare. By integrating Eastman's product line, Seagate will be
able to convert their Storage Migrator product into a stand-alone HSM
application for Windows NT environments. As of the date of acquisition, the
Company abandoned the AvailHSM product and technology due to dated features and
functionality; the valuation analysis did not include a fair value for the
AvailHSM product.
 
     As for OPEN/stor at the date of acquisition, the Company planned to phase
out the product over the following 12 to 15 months. Seagate's purpose for the
acquisition was for the next generation technologies that were underway at
Eastman, referenced by project names Sakkara and Phoenix. These projects were
complete re-writes of Eastman's prior generation technology that would allow the
product to be sold stand-alone upon completion.
 
     In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate purchased existing products from Eastman, the
existing products did not operate on a stand-alone basis. Therefore, as
mentioned above, all of the original underlying code and base technology for the
next generation products were in the process of being completely re-written as
date of valuation.
 
  Assumptions
 
     Revenue
 
     Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately $3.9
million and $7.1 million for fiscal years 1999 and 2000 when most of the
in-process projects were expected to be complete and shipping. Thereafter,
revenue was estimated to increase at rates ranging from 20% to 30% for fiscal
years 2001 through 2006. Revenue estimates were based on (i) aggregate revenue
growth rates for the business as a whole, (ii) individual product revenues,
(iii) growth rates for the storage management software market, (iv) the
aggregate size of the storage management software market, (v) anticipated
product development and introduction schedules, (vi) product sales cycles, and
(vii) the estimated life of a product's underlying technology.
 
     Operating expenses
 
     Operating expenses used in the valuation analysis of Eastman included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate and Eastman's overall
business model, specific product results, including both historical and expected
direct expense levels (as appropriate), and an assessment of general industry
metrics was conducted.
 
     Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies was estimated to be
approximately 5% throughout the estimation period. Seagate Software's cost of
goods sold was 20% for fiscal 1996 and 22% for fiscal 1997.
 
     General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
 
                                       11
<PAGE>   13
 
     Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
 
     Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 5% of revenue for the developed and
in-process technologies throughout the estimation period.
 
     In addition, as of the date of acquisition, Seagate Software's management
anticipated the costs to complete the in-process technologies at approximately
$1.8 million.
 
     Effective tax rate
 
     The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
 
     Discount rate
 
     The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the Weighted Average Cost of
Capital (approximately 15% at the date of acquisition) and (ii) the Weighted
Average Return on Assets (approximately 18%). The discount rate utilized for the
in-process technology was determined to be higher than Seagate's WACC due to the
fact that the technology had not yet reached technological feasibility as of the
date of valuation. In utilizing a discount rate greater than Seagate's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
 
CALYPSO SOFTWARE SYSTEMS, INC.
 
     Calypso is a software developer in the enterprise network/system management
market. Calypso provides software which is designed to enable companies to
automate the management of their distributed applications. At the date of
acquisition, Calypso had two main products: Maestro Vision ("Maestro") and
Atrium Extendible Management System ("EMS") for Spectrum. Both existing
products, as of the acquisition date, were planned to be phased out over the
following 24 months. Calypso, at the acquisition date, was in the process of
developing the next generation Atrium EMS product that can be sold stand-alone.
Both Maestro and Atrium EMS for Spectrum were originally designed for use only
on certain system platforms, Cabletron and Spectrum, respectively. However,
Atrium EMS (stand-alone) would allow systems managers on any system platform to
distribute software; monitor CPU, memory, and operating system administration;
manage applications, file systems, and print services; and perform UNIX and NT
system administration.
 
     As of the date of acquisition, Calypso had undergone or was in the process
of undergoing the re-write of code in C+, adding navigator capabilities,
developing web server and browser interoperability, developing CORBA
interoperability, and developing Network OLE/COM interoperability for Atrium EMS
(stand-alone). The estimated cost to complete, at the date of acquisition, was
approximately $750,000. These in process research and development projects were
successfully completed prior to a restructuring of operations in the third
quarter of fiscal 1997. As a result of this restructuring and a change in
Seagate Software's strategic direction, in the first quarter of fiscal 1998
Seagate Software disposed of all the developed and in process technologies
originally acquired from Calypso.
 
ONDEMAND SOFTWARE, INC.
 
     OnDemand develops and markets electronic software distribution products
involved in network management in the client/server environment. OnDemand's
flagship product is WinINSTALL. As of the date of
 
                                       12
<PAGE>   14
acquisition, OnDemand was in the process of developing the next generation of
WinINSTALL Version 6.0. A significant feature of Version 6.0 (not available by
any competitive product) was a rollback with clone capability, which would allow
the user to selectively return a PC to a previous state upon installation
failure or upon user demand. In order for WinINSTALL Version 6.0 to become a
commercially viable product, OnDemand, as of the valuation date, had undergone
or was in the process of undergoing significant development efforts, including
(i) developing rollback facilities, including clone capability, (ii) expanding
global editor to be included in the WinINSTALL registry file, (iii) improving
WinINSTALL Remote to ease package generation and distribution, (iv) adding a
feature that would allow optional electronic mail notification on installation
failure and on installation refusals due to reaching license limitations, and
(v) expanding copy options and interactive install displays, adding substitution
variables, and allowing version control of backup files.
 
     As of the date of acquisition, Seagate Software management anticipated the
costs to complete WinINSTALL Version 6.0 at approximately $920,000. Since the
acquisition date, the acquired in-process research and development from OnDemand
has been completed and the related products have been released prior to the end
of fiscal 1997.
 
    
     HOLISTIC SYSTEMS LTD. Holistic's sole software product is Holos -- a
product that enables users to develop and utilize the wide variety of
applications found in large scale management information systems. As of the date
of acquisition, Holistic was in the process of developing the next generation of
Holos, version 6.0, which was planned for release during the summer of 1997.
 
     As of the date of acquisition, Holistic had undergone or was in the process
of undergoing the re-write of the front-end code of the system from C to C++,
the re-write of the back-end code of the system in C, and the creation of the
Holos product to be object oriented. The estimated cost to complete, at the date
of acquisition, was approximately $3.5 million.
 
     Since the acquisition date, the project originally acquired from Holistic
was commercially released as planned, fourth quarter of fiscal 1997.
 
RESTATEMENT OF FINANCIAL STATEMENTS
 
   
     Seagate Software had previously allocated a portion of goodwill to
developed technology and evaluated the impairment of goodwill based on the
revenues from the related software. Using this method, Seagate Software recorded
write-downs and write-offs of goodwill in fiscal 1997 in the amount of
$10,259,000. Seagate Software has re-evaluated its methodology and determined
that goodwill should not be allocated to developed technology under Accounting
Principles Board Opinion 17, "Intangible Assets". As a result, Seagate Software
has made adjustments to decrease the amounts of goodwill previously written-down
and written-off from $10,259,000 to $6,173,000 in fiscal 1997. The additional
goodwill of $4,086,000 is being amortized over the remaining estimated useful
lives of approximately 5 years. The effect of this adjustment on previously
reported consolidated financial statements as of and for the years ended July 3,
1998 and June 27, 1997 is as follows (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                          AS REPORTED                    AS RESTATED
                                                  ----------------------------   ----------------------------
                                                  JULY 3, 1998   JUNE 27, 1997   JULY 3, 1998   JUNE 27, 1997
                                                  ------------   -------------   ------------   -------------
<S>                                               <C>            <C>             <C>            <C>
Amortization of goodwill........................   $  15,421       $  27,202      $  16,201       $  23,465
Income (loss) from operations...................       6,905         (64,033)         6,125         (60,296)
Net income (loss)...............................      (8,490)        (57,700)        (9,270)        (53,963)
Basic and diluted (loss) per share..............      (51.59)        (852.11)        (56.33)        (796.93)
Goodwill and other intangible assets, net.......      53,879          75,306         56,836          79,043
Accumulated deficit.............................    (289,175)       (280,685)      (286,218)       (276,948)
</TABLE>
    
 
FISCAL YEAR 1998 VERSUS FISCAL YEAR 1997
 
   
     REVENUES. Total revenues increased 35% to $293,226,000 in 1998 from
$216,950,000 in 1997. License revenues grew 33% to $243,285,000 in 1998 from
$183,556,000 in 1997 due primarily to increased sales of
    
 
                                       13
<PAGE>   15
Seagate Backup Exec, the Network & Storage Management Group business's leading
storage management product featuring backup and restore solutions for
Microsoft's Windows NT Server and Windows NT Workstation operating systems.
License revenue growth was also due to increased sales of Seagate Crystal
Reports and Seagate Crystal Info, the Information Management Group's leading
business intelligence products featuring enterprise report writing and
scheduling technologies. Seagate Software continued to expand both its indirect
and direct sales channels. Indirect revenues, which include distribution and OEM
sales, increased 37% to $203,273,000 in 1998 from $147,991,000 in 1997 while
direct revenues, which include corporate licensing and other direct sales to
users, increased 30% to $89,953,000 in 1998 from $68,959,000 in 1997. Revenues
increased within the Americas 30% to $198,820,000 in 1998 from $153,368,000 in
1997 and internationally 48% to $94,407,000 in 1998 from $63,582,000 in 1997,
which was due in part to Seagate Software's continued expansion of its European
distribution channel. Revenues from Seagate Technology decreased 5% primarily
due to fewer unit shipments to Seagate Technology's OEM tape drive operations.
Total maintenance, support and other revenues grew 61% to $44,472,000 in 1998
from $27,632,000 in 1997 primarily due to increases in the sales of maintenance
agreements and training and consulting services resulting from a larger
installed customer base.
 
     During 1998 Seagate Software generated export revenues from the United
States of approximately $66,250,000. Revenues and expenses from Seagate
Software's operations outside of the Americas were approximately $26,809,000 and
$52,143,000, respectively, as translated to the U.S. dollar from foreign
currencies. The principal currency for such operations is the British pound.
Seagate Software believes that its exposure to foreign currency fluctuations is
not material and does not engage in foreign currency hedging programs.*
 
     COST OF REVENUES. The decrease in the cost of license revenues to
$16,963,000 in 1998 from $17,535,000 in 1997, representing 7% and 10% of related
license revenues, respectively, and the decrease in the cost of license revenues
from Seagate Technology was due primarily to reductions in product packaging and
documentation costs resulting from a shift in mix to CD-ROMs from disks and
increased sales of higher-margin server products. The increase in the cost of
maintenance, support and other revenues to $19,687,000 in 1998 from $6,560,000
in 1997, representing 44% and 24% of related service revenues, respectively, was
primarily due to expansion of Seagate Software's professional services workforce
necessary to support the growth in training and consulting revenues. The lower
service revenue margins in 1998 were primarily due to increased spending for
additional personnel and new facilities to support higher levels of customer
support services, such as training, consulting and preferred technical support.
The decrease in the amortization of developed technology to $13,271,000 in 1998
from $21,860,000 in 1997, representing 5% and 10% of total revenues,
respectively, was primarily due to write-downs of certain developed technologies
amounting to approximately $6,918,000 during 1997 as a result of asset values
that had become impaired based on reductions in estimated future cash flows.
 
     Unamortized software costs for developed technology were reviewed under the
guidance of SFAS No. 86 for potential impairment. Seagate Software compares the
undiscounted future cash flows on a product by product basis to the unamortized
costs including goodwill. Unamortized costs, including goodwill, in excess of
undiscounted future cash flows are recorded as an impairment loss. Impairment
losses in 1997 were caused by a number of factors including Seagate Software's
business decision to stop selling products or technologies such as DOS, new
acquisitions, or new product designs. Additionally in 1997, Seagate Software
incurred a write-off related to the decision to close down and sell one of its
acquisitions, Calypso Software Systems, Inc. The write-off was to the expected
net realizable value. Seagate Software is not currently generating any revenues
from any products for which the related developed technology has been impaired.
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       14
<PAGE>   16
 
     SALES AND MARKETING. The increase in sales and marketing expenses to
$129,343,000 in 1998 from $107,706,000 in 1997, representing 44% and 50% of
total revenues, respectively, was primarily due to expansion of Seagate
Software's sales force and increases in advertising, promotion, including
allocations from Seagate Technology for the proportional cost of television and
newspaper advertisements and technical support costs necessary to support
revenue growth. Such increases were partially offset by reductions in workforce
in 1997 within the Network & Storage Management Group business unit due to
facility consolidations.
 
     RESEARCH AND DEVELOPMENT. The increase in research and development expenses
to $47,173,000 in 1998 from $42,842,000 in 1997, representing 16% and 20% of
total revenues, respectively, was primarily due to increases in personnel and
related expenses, new product development and localization costs, partially
offset by facility consolidations and reductions in workforce in 1997 within the
Network and Storage Management Group business unit.
 
     GENERAL AND ADMINISTRATIVE. The increase in general and administrative
expenses to $37,124,000 in 1998 from $36,861,000 in 1997, representing 13% and
17% of total revenues, respectively, was primarily due to increases in personnel
and related expenses and legal costs, partially offset by facility
consolidations and reductions in workforce in 1997 within the Network & Storage
Management Group business unit.
 
     WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of its
acquisitions, Seagate Software has acquired a number of projects and products
that were considered in-process research and development on the date of
acquisition. Seagate Software determined that purchased in-process technology
had not reached technological feasibility as no working model or detail program
design existed at the time of purchase, and no alternative uses had been
identified. Accordingly, in-process research and development was expensed when
acquired. During 1998, $6,800,000 of in-process research and development was
written off in connection with the purchase of Eastman Software Storage
Management Group, Inc. During 1997, total write-offs of in-process research and
development were $2,613,000. Seagate Software incurred this charge in connection
with additional amounts paid with respect to the June 1996 acquisition of
Holistic Systems, Ltd. ("Holistic").
 
     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. The decrease in the
amortization of goodwill and other intangibles to $16,201,000 in 1998 from
$23,465,000 in 1997, representing 6% and 11% of total revenues, respectively,
was primarily due to decreases in amortization expense based on lower levels of
intangible assets and write-downs and write-offs of the carrying value of
developed technology of approximately $1,900,000 in 1998 versus $6,173,000 in
1997 as a result of asset values that had become impaired based on reductions in
estimated future cash flows.
 
     Long-lived assets other than developed technology, including associated
goodwill, are assessed for impairment under the guidance of Statement of
Financial Accounting Standards Board No. 121 ("SFAS 121"), and any write-offs or
write-downs are included in amortization of goodwill and other intangibles.
Goodwill not within the scope of SFAS 121 is assessed for impairment under the
guidance of Accounting Principles Board No. 17, and any write-offs or
write-downs are also included in amortization of goodwill and other intangibles.
Developed technology acquired in business combinations is assessed for
impairment under the guidance of Statement of Financial Accounting Standards
Board No. 86, and any related write-offs or write-downs are included in costs of
revenues. During fiscal 1997 and 1998, Seagate Software recorded impairment
charges for write-offs and write-downs of acquired intangible assets and
goodwill, exclusive of amounts relating to developed technology included in
costs of revenues, as follows:
 
     In 1997, Seagate Software determined that it would abandon and discontinue
selling substantially all of the current and future products and technologies
obtained in the 1994 acquisition of Palindrome Corporation in favor of selling
and supporting the current and future products and technologies obtained in the
1996 acquisition of Arcada Holdings, Inc. Additionally, in 1997, Seagate
Software decided to close down and sell Calypso Software Systems, Inc. and to
abandon and discontinue sales of the developed and future DOS products and
technologies acquired from Frye Computer Systems, Inc. In connection with these
determinations, Seagate Software recorded impairment charges to write-off and
write-down goodwill amounting to approximately $6.2 million.
 
                                       15
<PAGE>   17
 
     In 1998, Seagate Software capitalized the acquired assembled workforce in
most of its acquisitions. When Seagate Software reviews the carrying value of
its intangibles, if there remains less than 5% of the original assembled
workforce the related intangible assets is deemed impaired. In fiscal 1998,
Seagate Software wrote-off a total of $1.9 million relating to the capitalized
assembled workforces and the associated goodwill for Network Computing, Inc.,
Netlabs, Inc. and Creative Interaction Technologies, Inc. because less than 5%
of the original assembled workforces remained.
 
     RESTRUCTURING. Restructuring charges were $2,524,000 in 1997, representing
1% of total revenues. The restructuring charges were incurred as a result of
reorganizations and closures within the Network & Storage Management Group unit
for the reduction of personnel, write-off or write-down of equipment,
intangibles and other assets, closure of duplicate facilities, fees for legal
and accounting services, contract cancellations and other related expenses.
 
     UNUSUAL ITEMS. Unusual items of $13,446,000 were recognized during 1997,
representing 6% of total revenues. In connection with the June 1996 acquisition
of Holistic, $18,000,000 of funds were placed in escrow pending the outcome of
certain purchase price contingencies. Prior to the expiration of the contingency
period, Seagate Software elected to release the funds to the Holistic
shareholders even though certain contingencies had not been met. Of the
$18,000,000 total contingency payment, the Company recorded $13,446,000 as
compensation expense for amounts paid to former Holistic shareholders who were
employees of Seagate Software and recorded the remaining $4,554,000 paid to
non-employee shareholders as additional purchase price.
 
     Seagate Software released the funds prior to the expiration of the
contingency period, because in order to position the Information Management
Group business unit for future growth and product development, Seagate Software
needed to begin an aggressive plan to integrate the operations of Holistic.
These activities resulted in the diversion of the attention of certain Holistic
employees from their responsibilities at Holistic. As such, Holistic's ability
to achieve the purchase price contingencies necessary to trigger the $18,000,000
contingency payment was impaired. Seagate Software believed that the Holistic
employees should not be penalized, because they had sacrificed achievement of
their individual goals in order to meet the overall needs of Seagate Software.
Accordingly, Seagate Software elected to make the full payment of $18,000,000.
 
     INTEREST AND OTHER, NET. Total interest and other, net decreased to a net
expense of $10,000 in 1998 from a net expense of $2,381,000 in 1997,
representing 0% and 1% of total revenues, respectively. The decrease in interest
and other, net was primarily due to lower interest expense on a lower level of
outstanding borrowings from Seagate Technology and an increase in foreign
exchange gains.
 
     INCOME TAXES. Seagate Software recorded a $15,385,000 provision for income
taxes at an effective rate of 252% in 1998 compared with a $8,714,000 benefit
from income taxes at an effective rate of 14% for 1997. The effective rate used
to record the provision for income taxes in 1998 was greater than the statutory
rate primarily due to foreign tax rates that were in excess of the U.S.
statutory tax rate, increases in the valuation allowance for deferred tax assets
and goodwill amortization for certain acquisitions that were not deductible for
tax purposes. The effective rate used to record the benefit from income taxes in
1997 was less than the statutory rate primarily due to increases in the
valuation allowance for deferred tax assets and goodwill amortization for
certain acquisitions that were not deductible for tax purposes.
 
FISCAL YEAR 1997 VERSUS FISCAL YEAR 1996
 
     REVENUES. Total revenues increased 53% to $216,950,000 in 1997 from
$141,586,000 in 1996. The increase in licensing revenues was due in part to
growth in the market for business intelligence and information technology
infrastructure management software products and related services, expansion of
Seagate Software's European distribution channels and market demand for Network
& Storage Management Group's Seagate Backup Exec, a storage management product
that supports Microsoft's Windows NT operating system. The increase in
maintenance, support and other revenues was due in part to higher training and
consulting revenues resulting from a larger customer base. Additionally, the
1997 results included a full year of operations for the 1996 acquisitions of
OnDemand Software, Inc. ("OnDemand") and Holistic. These 1996 acquisitions
accounted for increases in licensing, licensing from Seagate Technology and
maintenance, support
                                       16
<PAGE>   18
 
and other revenues of approximately $26,039,000, $842,000 and $14,758,000,
respectively, in 1997 as compared with 1996.
 
     During 1997 Seagate Software generated export revenues from the United
States of approximately $44,129,000. Revenues and expenses from Seagate
Software's operations outside of the Americas were approximately $18,896,000 and
$23,938,000, respectively, as translated to the U.S. dollar from foreign
currencies. The principal currency for such operations is the British pound.
 
     COST OF REVENUES. The cost of revenues increased to $47,789,000 in 1997
from $29,019,000 in 1996, representing 22% and 20% of total revenues,
respectively. The majority of the increase in absolute dollars was due to an
increase in the amortization of acquired developed technology due to a higher
level of intangible assets and an increase in the Information Management Group's
costs related to service revenues and related costs resulting from the inclusion
of a full year of operations in 1997 of the 1996 acquisition of Holistic.
Additionally, in 1997 Seagate Software wrote off and wrote down certain
developed technologies amounting to approximately $6,918,000 as a result of
asset values that had become impaired based on Seagate Software's phasing out of
certain products.
 
     In 1997, the unamortized software costs for developed technology were
reviewed under the guidance of SFAS No. 86 for potential impairment. Seagate
Software compared the net realizable value on a product by product basis to the
unamortized costs including goodwill. Impairments were caused by a number of
factors including Seagate Software's business decision to stop selling
technologies such as DOS, new acquisitions, or new product designs. Additionally
in 1997, Seagate Software incurred a write-off related to the decision to close
down and sell one of its acquisitions, Calypso Software Systems, Inc. The
write-off was to the expected net realizable value.
 
     SALES AND MARKETING. Sales and marketing costs increased to $107,706,000 in
1997 from $71,129,000 in 1996, representing 50% of total revenues in both
periods. The increase in absolute dollars was due to increased personnel,
advertising and promotion costs necessary to support revenue growth and the
expansion of Seagate Software's European distribution channel. Additionally, the
1997 results included a full year of operations for Seagate Software's 1996
acquisitions compared with a partial year of operations in 1996.
 
     RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$42,842,000 in 1997 from $36,897,000 in 1996, representing 20% and 26% of total
revenues, respectively. The increase in absolute dollars was primarily due to
increases in personnel and related expenses, new product development and
localization costs, partially offset by facility consolidations and reductions
in workforce within the Network & Storage Management Group business unit.
Additionally, the 1997 results included a full year of operations for Seagate
Software's 1996 acquisitions compared with a partial year of operations in 1996.
 
     GENERAL AND ADMINISTRATIVE. Total general and administrative expenses
increased to $36,861,000 in 1997 from $22,852,000 in 1996, representing 17% and
16% of total revenues, respectively. The increase in absolute dollars was
primarily due to increases in personnel and related expenses and increases in
corporate administrative expenses and information systems necessary to support
Seagate Software's growth. Additionally, the 1997 results included a full year
of operations for Seagate Software's 1996 acquisitions compared with a partial
year of operations in 1996.
 
     WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. During 1997, total
write-offs of in-process research and development were $2,613,000. Seagate
Software incurred this charge in connection with additional amounts paid with
respect to the June 1996 acquisition of Holistic. During 1996, total write-offs
of in-process research and development were $96,958,000, which resulted from
Seagate Software's 1996 acquisitions.
 
     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles increased to $23,465,000 in 1997 from $13,035,000 in 1996,
representing 11% and 9% of total revenues, respectively. The increase in
absolute dollars was primarily due to increased amortization expense on a higher
level of intangible assets and write-downs and write-offs of the carrying value
of goodwill and other intangible assets of approximately $10,259,000 based on
shortfalls of estimated future cash flows.
 
                                       17
<PAGE>   19
 
     Long-lived assets other than developed technology, including associated
goodwill, are assessed for impairment under the guidance of Statement of
Financial Accounting Standards Board No. 121 ("SFAS 121"), and any write-offs or
write-downs are included in amortization of goodwill and other intangibles.
Goodwill not within the scope of SFAS 121 is assessed for impairment under the
guidance of Accounting Principals Board No. 17, and any write-downs or
write-offs are also included in amortization of goodwill and other intangibles.
Developed technology acquired in business combinations is assessed for
impairment under the guidance of Statement of Financial Accounting Standards
Board No. 86, and any related write-offs or write-downs are included in costs of
revenues. During 1997 and 1996, Seagate Software recorded impairment charges for
write-off and write-downs of acquired intangible assets and goodwill, exclusive
of amounts relating to developed technology included in costs of revenues, as
follows:
 
     In 1997, Seagate Software determined that it would abandon and discontinue
selling substantially all of the current and future products and technologies
obtained from the 1994 acquisition of Palindrome Corporation in favor of selling
and supporting the current and future products and technologies obtained from
the 1996 acquisition of Arcada Holdings, Inc. Additionally, in 1997, Seagate
Software decided to close down and sell Calypso Software Systems, Inc. and to
abandon and discontinue sales of the developed and future products and
technologies acquired from Frye Computer Systems, Inc. In connection with these
determinations, Seagate Software recorded write-offs and write-downs of goodwill
amounting to approximately $6.2 million.
 
     In 1996, the former owner of Frye Computer Systems, Inc., a 1995
acquisition, Mr. Frye, left Seagate Software. With his departure, Seagate
Software decided to release Mr. Frye from his remaining non-compete period and
to not use the Frye name trademark in future periods. As a result, the remaining
carrying value of the intangible assets relating to the covenant not to compete
and the trademark, and associated goodwill, totaling $2.2 million were written
off in their entirety. Seagate Software is not currently generating revenue from
any products for which the related developed technology has been impaired.
 
     RESTRUCTURING. Restructuring charges were $9.5 million in fiscal 1996 and
$2.5 million in fiscal 1997. The 1996 restructuring charges pertain to the
acquisition of Arcada Holdings, Inc. in February 1996. As a result of the
acquisition, Seagate Software had obtained duplicate technologies and product
lines in data protection and storage management software as those assets
acquired in the Palindrome Corporation (Palindrome) acquisition in fiscal 1995.
Seagate Software determined that it would be beneficial to consolidate the
world-wide sales, marketing, research and development, technical support and
other operations and administrative functions of its network and storage
management business. A restructuring plan was approved by the Board of Directors
in March 1996 and the plan resulted in facility closures and staff reductions of
43 at the Arcada facilities in Westboro, Massachusetts, the United Kingdom and
France, as well as staff reductions of 69 at the former Palindrome facility in
Naperville, Illinois. In addition, because Arcada had a better industry
reputation and superior products to those of Palindrome, Seagate Software's plan
and strategy going forward was to focus on the technologies and products
acquired from Arcada. The revenue and net operating loss relating to products
acquired from Palindrome for fiscal 1996 was $15.9 million and $2.1 million
respectively. For fiscal 1997, the revenue and net operating loss relating to
products acquired from Palindrome was $3.3 million and $3.7 million
respectively.
 
     The non-cash restructuring charges included amounts for abandonment of the
Palindrome trademarks, impairment of the capitalized workforce intangible assets
pertaining to the acquisition of Palindrome because of the planned layoff of
personnel, write-off of a duplicate trade show booth, and write-off of obsolete
Palindrome marketing materials. Cash restructuring charges included amounts for
severance and benefits to terminated Palindrome employees, costs for facilities
lease termination, other contract cancellation fees, and merger related costs
incurred by Arcada in the acquisition of the Arcada minority interests by
Seagate Technology.
 
     The fiscal 1997 restructuring charges netted to $2.5 million, comprised of
a $3.4 million restructuring charge that included the closure of the Network &
Storage Management Group's facility located in Cupertino, California. This
facility closure resulted in cash charges for severance and benefits for 69
employee terminations and non-charges for excess facilities and the write down
of equipment. In addition, the
 
                                       18
<PAGE>   20
 
$3.4 million included amounts related to Seagate Software's decision, after
concluding a sale was no longer viable, to no longer pursue the technologies
acquired in the 1996 acquisition of Calypso Software Systems, Inc. (Calypso) and
to shutdown its operations. This decision resulted in cash charges for severance
and benefits for 35 employee terminations and non-cash charges for the write off
of certain remaining intangible assets of Calypso. The revenue and net operating
loss relating to Calypso for fiscal 1996 was $444,000 and $53,000 respectively.
For fiscal 1997, the revenue and net operating loss relating to Calypso was
$640,000 and $47,000 respectively.
 
     The restructuring charges recorded in fiscal 1997 were reduced by $957,000
for the reversal of amounts pertaining to the fiscal 1996 restructuring charges
as a result of a higher than planned number of voluntary employee terminations
without severance benefits prior to the facility shutdown and completion of
other aspects of the restructuring plan at less than the originally estimated
cost, net of an increase in the accrual for facilities lease payments due to
changes in estimates of the costs to terminate leases after facilities closure.
 
   
     A summary of Seagate Software's restructuring activities for fiscal years
1996, 1997 and 1998, and the first six months of fiscal 1999 is provided below
(in thousands):
    
<TABLE>
<CAPTION>
                       SEVERANCE
                          AND                                                           CONTRACT     LEGAL AND
                       EMPLOYEE                                                       CANCELLATION   ACCOUNTING    OTHER
                       BENEFITS    FACILITIES   EQUIPMENT   INVENTORY   INTANGIBLES       FEES          FEES      EXPENSES
                       ---------   ----------   ---------   ---------   -----------   ------------   ----------   --------
<S>                    <C>         <C>          <C>         <C>         <C>           <C>            <C>          <C>
1996 charges.........   $1,554       $1,571      $ 1,018      $ 300       $ 4,312         $ 67         $ 525       $ 155
Cash charges.........     (518)          --           --         --            --           --          (568)         --
Non-cash charges.....       --         (121)        (116)        --        (4,052)          --            --        (138)
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1996........    1,036        1,450          902        300           260           67           (43)         17
1997 charges.........      770          505          728         --         1,378           --            --         100
Cash charges.........     (975)        (915)          --         --            --           --            --          --
Non-cash charges.....       --          (72)         (44)        --        (1,378)          --            --          --
Adjustment...........     (351)         267         (172)      (300)         (260)         (67)           43        (117)
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1997........      480        1,235        1,414         --            --           --            --          --
Cash charges.........     (373)        (519)          (9)        --            --           --            --          --
Non-cash charges.....       --           --       (1,045)        --            --           --            --          --
Adjustment...........     (107)         467         (360)        --            --           --            --          --
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1998........       --        1,183           --         --            --           --            --          --
Cash charges
  (unaudited)........       --         (251)          --         --            --           --            --          --
                        ------       ------      -------      -----       -------         ----         -----       -----
Balance 1/1/99
  (unaudited)........   $   --       $  932      $    --      $  --       $    --         $ --         $  --       $  --
                        ======       ======      =======      =====       =======         ====         =====       =====
 
<CAPTION>
 
                        TOTAL
                       -------
<S>                    <C>
1996 charges.........  $ 9,502
Cash charges.........   (1,086)
Non-cash charges.....   (4,427)
                       -------
Reserves 1996........    3,989
1997 charges.........    3,481
Cash charges.........   (1,890)
Non-cash charges.....   (1,494)
Adjustment...........     (957)
                       -------
Reserves 1997........    3,129
Cash charges.........     (901)
Non-cash charges.....   (1,045)
Adjustment...........       --
                       -------
Reserves 1998........    1,183
Cash charges
  (unaudited)........     (251)
                       -------
Balance 1/1/99
  (unaudited)........  $   932
                       =======
</TABLE>
 
     Seagate Software's remaining restructuring reserves pertain to continuing
lease payments on facilities that were closed and abandoned as a result of the
Palindrome restructuring. Seagate Software has been unable to sublease these
facilities and anticipates that the remaining restructuring reserves will be
utilized over the period through lease termination in fiscal 2002.
 
     In fiscal 1996, Seagate Software recorded a restructuring reserve of
$9,502,000 for the following items:
 
     Severance and employee benefits ($1,554,000) -- Severance and employee
benefits included amounts for consolidation of operations and termination of
employees at the Arcada facilities in Westboro, Massachusetts, the United
Kingdom and France, as well as at the former Palindrome facility in Naperville,
Illinois.
 
     Excess facilities ($1,571,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities located in Naperville,
Westboro, the United Kingdom and France that are to be closed as a result of the
restructuring actions.
 
     Equipment ($1,018,000) -- This amount is a reserve for equipment at the
Naperville, Westboro, the United Kingdom and France facilities. It consists of
computer equipment, furniture and fixtures and software at these facilities that
will not be used after the locations are closed. All of the equipment provided
for in this reserve has been abandoned.
 
                                       19
<PAGE>   21
 
     Inventory ($300,000) -- This consists of obsolete packaging material that
will no longer be used and OEM inventory of $80,000 that will no longer be sold.
 
     Intangibles ($4,312,000) -- This write down consists of Palindrome
intangible assets of $3,534,000, $390,000 of developed technology related to
Atlas and $388,000 of goodwill related to the Sytron acquisition. The Palindrome
intangible assets were further broken down into trademark of $1,000,000,
workforce of $1,188,000, distribution network of $69,000 and goodwill of
$1,277,000. Seagate Software decided to pursue the Arcada brand name and
trademark and abandon the Palindrome trademark. As a result, Seagate Software
determined that it would lay off substantially all of the 121 employees of
Palindrome located at the Naperville facility. At the time of original purchase,
Seagate Software proportionally allocated goodwill to long-lived intangible
assets based upon the original purchase price. The amounts of goodwill included
in the restructuring reserve relate to the remaining unamortized goodwill
associated with the intangible assets written off.
 
     Contract Cancellation ($67,000) -- This $67,000 item is a canceled contract
for outsourced Technical Support with a vendor used by Palindrome.
 
     Legal/Accounting Fees ($525,000) -- This $525,000 represents and estimate
of the legal and accounting fees that were to be incurred by Arcada from the
acquisition of Arcada stock by Seagate Technology.
 
     Other ($155,000) -- This represents a trade show booth valued at $100,000
that is redundant and $55,000 worth of obsolete marketing materials.
 
     The above assets were not impaired in a prior period because their
impairment arose specifically from the restructuring actions taken as a result
of the acquisition of the minority interest in Arcada in the third quarter of
fiscal 1996. Prior to the acquisition, Palindrome products were marketed and
sold as part of the Seagate Software portfolio. Seagate Software has not
generated any income from these activities in subsequent periods.
 
     In fiscal 1997, Seagate Software recorded an additional restructuring
reserve of $3,481,000 that resulted primarily from the plan to shutdown
Manchester operations and the decision to try to sell the Calypso technology and
a separate decision to consolidate NSMG operations which resulted in the
shutdown of Seagate Software's facility in Cupertino, California.
 
     Severance and employee benefits ($770,000) -- Severance and employee
benefits included amounts for the shutdown and termination of employees at the
Cupertino, California facility due to a consolidation of operations and the
shutdown and termination of employees at the Calypso facility in Manchester, New
Hampshire due to a decision to no longer pursue the Calypso products and
technologies.
 
     Excess facilities ($505,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities closures in Manchester,
New Hampshire and Cupertino, California.
 
     Equipment ($728,000) -- This equipment is in the Manchester and Cupertino
facilities that would not be used after the shutdowns. It consisted of largely
of computer equipment but also included amounts for furniture and fixtures and
software. All of the equipment provided for in this reserve has been abandoned.
 
     Intangibles ($1,378,000) -- This asset consisted of Calypso related
intangibles first capitalized upon the acquisition of Calypso in fiscal 1996.
The amounts written down included net developed technology of $1,086,000 and
assembled workforce of $292,000. These assets were written down based on
management's plan to sell Calypso and its products and technologies.
 
     Other ($100,000) -- This represents miscellaneous additional costs related
to the Manchester (Calypso) shutdown.
 
     The above assets were not impaired in a period prior to recording the
restructuring reserves because their impairment arose specifically from the
business decision and plan in the fourth quarter of fiscal 1997 to close the
Manchester (Calypso) facility and abandon that technology and the additional
decision to consolidate operations of the company and close the Cupertino
facility.
 
                                       20
<PAGE>   22
 
     UNUSUAL ITEMS. In connection with the June 1996 acquisition of Holistic,
Seagate Software recorded $13,446,000 in fiscal 1997, representing 6% of total
revenues, as compensation expense for amounts paid to former Holistic
shareholders who were employees of Seagate Software.
 
     INTEREST AND OTHER, NET. Total interest and other, net increased to a net
expense of $2,381,000 in 1997 from a net expense of $610,000 in 1996,
representing 1% and 0% of total revenues, respectively. The increase in interest
and other, net was primarily due to higher interest expense on a higher level of
outstanding borrowings from Seagate Technology.
 
     INCOME TAXES. Seagate Software recorded a $8,714,000 benefit from income
taxes at an effective rate of 14% in 1997 compared with a $8,748,000 benefit
from income taxes at an effective rate of 6% for 1996. The effective rate used
to record the benefit from income taxes in each fiscal year was less than the
statutory rate primarily due to increases in the valuation allowance for
deferred tax assets and charges in 1996 for in-process research and development
for certain acquisitions that were not deductible for tax purposes.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Seagate Software's total cash was $15,130,000 and $12,085,000 as of July 3,
1998 and June 27, 1997, respectively. The increase in cash was primarily due to
loan borrowings from the parent company of $261.9 million, cash provided by
operating activities and the sale of common stock under the Option Plan,
partially offset by a reduction in the Company's loan repayments to the parent
company of $274.8 million, acquisition of a business, purchases of property and
equipment and purchases of intangible assets. The Company's cash is maintained
in highly liquid operating accounts and primarily consists of bank deposits.
 
     Seagate Software's operations have been financed by cash flows from
operating activities and borrowings from Seagate Technology. Such borrowings are
available to Seagate Software under a Revolving Loan Agreement, between Seagate
Software and Seagate Technology, which was renewed on July 4, 1998 on
substantially the same terms and conditions as the prior agreement which was
dated June 28, 1996. Under the Revolving Loan Agreement, Seagate Technology
finances certain of Seagate Software's working capital requirements. The
Revolving Loan Agreement, which provides for maximum borrowings of up to
$60,000,000, is renewable every two years and expires on July 3, 2000. Beginning
in fiscal year 1999, the Company will pay interest at the LIBOR rate plus 2% per
annum on such borrowings; the Company previously paid interest at 6%. The loan
balance was $16,054,000 as of July 3, 1998.
 
     In addition to the Revolving Loan Agreement with Seagate Technology,
certain foreign subsidiaries have line of credit facilities with third party
financial institutions. These line of credit facilities provide for additional
borrowings of up to an equivalent of approximately $1,100,000 at July 3, 1998.
Interest rates payable on borrowings are based on local bank prime interest
rates. At July 3, 1998, there were no outstanding borrowings under any of these
lines of credit.
 
     During the year ended July 3, 1998, Seagate Software made investments in
property and equipment totaling approximately $10,387,000 for new office
facilities, leasehold improvements, computers, furniture and office equipment.
Seagate Software presently anticipates it will make investments in 1999 of
approximately $15,000,000 in property and equipment.* Additionally, product
development activities may include cash used to acquire technology.* Seagate
Software expects that such investments will be funded from existing cash
balances and cash flows from operations.*
 
     Seagate Software believes its current cash balances, its available
borrowings from Seagate Technology and cash flows generated from Seagate
Software's operations will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.*
Furthermore, Seagate Software anticipates that future operating and investing
activities may be financed by additional borrowings
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       21
<PAGE>   23
 
   
from Seagate Technology, equity financing or other sources.* Seagate Software
believes that additional financing from Seagate Technology will be available at
a reasonable cost.*
    
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which the Company currently is
required to adopt for transactions entered into after July 3, 1998. SOP 97-2 and
SOP 98-4 provide guidance on recognizing revenue on software transactions and
supersede SOP 91-1. The Company has assessed the impact of the requirements of
SOP 97-2 and SOP 98-4 and has changed certain of its policies and procedures.
The Company believes that the adoption of SOP 97-2 and SOP 98-4 will not have a
significant impact on the Company's revenues or results of operations.
 
     The Company intends to adopt Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131") during
fiscal 1999. Both standards will require additional disclosure, but will not
have a material effect on the Company's financial position or results of
operations.* SFAS 130 establishes standards for the reporting and display of
comprehensive income and is expected to first be reflected in the Company's
first quarter of 1999 interim financial statements. The components of
comprehensive income include net income and items that are currently reported
directly as a component of shareholders' equity such as changes in foreign
currency translation adjustments and changes in the fair value of
available-for-sale financial instruments. SFAS 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
SFAS 131 will first be reflected in the Company's 1999 Annual Report on Form
10-K.
 
     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. The Company has not yet determined the impact,
if any, of adopting this statement. The disclosures prescribed by SOP 98-1 will
be effective for the Company's consolidated financial statements for the fiscal
year ending June 30, 2000.
 
FACTORS AFFECTING FUTURE OPERATING RESULTS
 
     POTENTIAL FLUCTUATIONS IN ANNUAL AND/OR QUARTERLY OPERATING RESULTS. The
Company's future results of operations may be subject to substantial
fluctuations.* The Company operates with no backlog because its software
products are generally shipped shortly after orders are received. Annual and/or
quarterly sales and operating results therefore depend on the volume and timing
of and the ability to fill orders received within a given quarter, and such
factors are difficult to forecast.* The Company recognizes a substantial portion
of its revenue in the last month of each quarter and, therefore, may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall.* If revenue levels in a given year or quarter are below expectations,
the Company's operating results may be materially adversely affected.*
 
     The Company expects to experience significant fluctuations in annual and/or
quarterly operating results based upon a number of factors including, but not
limited to, (i) market acceptance of new products and product enhancements, (ii)
the Company's ability to develop, introduce and market new products and product
enhancements in a timely fashion, (iii) the timing of large orders, (iv)
increased competition, (v) changes in
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       22
<PAGE>   24
 
pricing policies by the Company and/or its competitors, (vi) the Company's
ability to control costs, (vii) the amount of one-time charges incurred in
future acquisitions, (viii) the Company's ability to integrate future
acquisitions into its operations, (ix) technological changes in the Company's
markets, (x) personnel changes and (xi) general economic factors.* Because of
these considerations, the Company believes that a period-to-period comparison of
its operations is not necessarily meaningful and should not be relied upon as
any indication of future performance.
 
     REVENUE CONCENTRATION. The Company derives a substantial majority of its
revenues from a limited number of software products and anticipates that revenue
from these products will continue to account for a majority of the Company's
revenues in the foreseeable future.* Broad market acceptance of such products is
therefore critical to the Company's future success, and failure to achieve broad
market acceptance of these products as a result of competition, technological
change or other factors would have a material adverse effect on the business,
operating results and financial condition of the Company.* The life cycle of
these products is difficult to estimate, and the Company's future financial
performance may depend in part on the successful development, introduction and
market acceptance of new products, applications and product enhancements.* There
can be no assurance that the Company will continue to be successful in marketing
its key products or any new products, applications or product enhancements.
Further, the Company derived 22% of its revenues from sales to its top customer,
Ingram Micro Inc., in 1998. A significant reduction in orders from this
customer, if not offset by increased sales to other customers, could have a
material adverse effect on the Company's business, operating results, or
financial condition.* Accordingly, there can be no assurance that the Company
will continue to be successful in marketing its products to such customer.
 
     NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The markets for the
Company's products are characterized by rapidly changing technology, changing
customer needs, evolving industry standards and frequent new product
introductions. The Company's future success will therefore depend on its ability
to design, develop, test and support new software products and enhancements on a
timely and cost effective basis.* There can be no assurance that the Company
will be successful in developing and marketing new products that respond to
technological changes and changing customer needs, or that the Company's new
products will achieve market acceptance. If the Company is unable for
technological or other reasons to develop and introduce new products in a timely
manner in response to changing market conditions or customer requirements, the
Company's business, operating results or financial condition could be materially
adversely affected. If potential new products are delayed or fail to achieve
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected. In addition, significant order
deferrals due to customers waiting for the introduction of new or announced
products could have a material adverse effect on the Company's business,
operating results or financial condition.
 
     RELIANCE ON SALES STAFF AND CHANNEL PARTNERS. The Company sells and
supports its products through its sales staff and third party distributors and
OEMs. In particular, the Company has a strategic relationship with Microsoft
pursuant to which (i) the Company's products are bundled with Microsoft's
products and (ii) the Company has in the past and is currently participating in
the development of certain utilities and products for inclusion in Microsoft's
products. Any material diminution in the level and breadth of activities with
Microsoft could have a material adverse effect on the Company's business,
operating results or financial condition. The Company has made significant
expenditures in recent years for the expansion of its sales and marketing force
and plans to continue to expand its sales and marketing force.* The Company's
future success will depend in part upon the productivity of its sales and
marketing force and the ability of the Company to continue to attract,
integrate, train, motivate and retain new sales and marketing personnel.*
Competition for sales and marketing personnel in the software industry is
intense. There can be no assurance that the Company will be successful in hiring
and retaining such personnel in accordance with its plans. There can be no
assurance that the Company's recent and other planned expenses in sales and
marketing will ultimately prove to be successful
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       23
<PAGE>   25
 
or that the incremental revenue generated will exceed the significant
incremental costs associated with these efforts. In addition, there can be no
assurance that the Company's sales and marketing organization will be able to
compete successfully against the significantly more extensive and better funded
sales and marketing operations of many of the Company's current and potential
competitors. If the Company is unable to develop and manage its sales and
marketing force expansion effectively, the Company's business, operating results
and financial condition would be materially adversely affected.
 
     The Company derives a substantial portion of its revenue from the marketing
and distribution of its products by its distributors and OEMs. The Company's
agreements with distributors and OEMs typically allow such resellers to carry
product lines that are competitive with those of the Company and in many cases
may be terminated by either party without cause. There can be no assurance that
such distributors and OEMs will place high priority on the marketing of the
Company's products or that they will continue to carry the Company's products.
Loss of the Company's current distributors and OEMs or the inability to attract
new distributors and OEMs could materially adversely affect the Company's
business, operating results or financial condition.
 
     COMPETITION. The markets for the Company's products are highly competitive
and characterized by rapidly changing technology and evolving standards. The
Company expects additional competition from other established and/or emerging
companies and as a result of future software industry consolidations.* Increased
competition can be expected to cause price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results or financial condition. Current and
potential competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products than
the Company.* It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. In addition, network
operating system vendors could introduce new or upgrade existing operating
systems or environments that could render the Company's products obsolete and
unmarketable. There can be no assurance that the Company will successfully
compete against current or future competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business,
operating results or financial condition.
 
     DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends to a
significant degree upon the continued service of its key members of management
as well as marketing, sales and product development personnel.* The loss of one
or more of the Company's key personnel would have a material adverse effect on
the Company's business, operating results and financial condition. The Company
believes its future success will also depend in large part upon its ability to
attract and retain highly skilled management, marketing, sales and product
development personnel.* Competition for such personnel is intense, and there can
be no assurance that the Company will be able to retain its key employees or
that it will be successful in attracting, assimilating and retaining them in the
future.
 
     MANAGEMENT OF GROWTH. The Company is in the process of expanding the
geographic scope of its customer base and operations. This expansion has
resulted and will continue to result in substantial demands on the Company's
management resources.* The Company's future operating results will depend on the
ability of its officers and other key employees to continue to implement and
improve its operations, customer support and financial control systems and to
effectively expand, train and manage its employee base.
 
     RISK OF ACQUISITIONS. The Company has acquired numerous businesses and
intends to enter into future business combinations and acquisitions of
complementary companies, products and technologies. There can, however, be no
assurance that suitable companies, divisions or products will be available for
acquisition.* Such acquisitions are inherently subject to certain risks,
including the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of the Company's ongoing business,
the
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       24
<PAGE>   26
 
potential inability to retain key technical and managerial personnel, additional
expenses associated with the amortization of acquired intangible assets, and the
potential impairment of relationships with employees and customers as a result
of any integration of new personnel. There can be no assurance that the Company
will be successful in overcoming these risks or that such transactions will not
have a material adverse effect upon the Company's business, financial condition
or results of operations.
 
     RISKS OF INFRINGEMENT. The Company's success depends to a substantial
degree on its proprietary technology. The Company relies on a combination of
patent, copyright, trademark and trade secret rights, confidentiality
procedures, employee and third party nondisclosure agreements and licensing
arrangements to protect its proprietary rights. As part of its confidentiality
procedures, the Company enters into license agreements with respect to its
software, documentation and other proprietary information. In licensing its
products, the Company relies in part on shrink wrap licenses that are not signed
by the end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Despite the precautions undertaken by the Company, it may be
possible for a third party to copy or otherwise obtain and use the Company's
products and technology without authorization. Policing unauthorized use of the
Company's products is difficult and, although the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem.*
 
     PROTECTION OF INTELLECTUAL PROPERTY. No assurance can be given that
competitors will not successfully challenge the validity or scope of the
Company's patents, copyrights and trademarks and that such patents, copyrights
and trademarks will provide a competitive advantage to the Company. As part of
its confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and license
agreements with respect to its software documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently. Effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the Company's protection of
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around any patents issued to the Company or other intellectual
property rights of the Company.
 
     The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company believes that software product
developers will be increasingly subject to claims of infringement as the number
of products and competitors in the Company's industry segment grows and the
functionality of products in the industry segment overlaps.* Any such claims,
with or without merit, could result in costly litigation that could absorb
significant management time, which could have a material adverse effect on the
Company's business, operating results or financial condition.* Such claims might
require the Company to enter into royalty or license agreements. Such royalty or
license agreements, if required, may not be available on terms acceptable to the
Company or at all, and the Company's inability to enter such agreements could
have a material adverse effect on the Company's business, operating results or
financial condition.
 
     PRODUCT LIABILITY. The Company markets its products to customers for
information technology system management and resource optimization and to
access, analyze, report and deliver enterprise data. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in the Company's
license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
The sale and support of its products by the Company may entail the risk of such
claims, which could be substantial in light of the use of such products in
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       25
<PAGE>   27
 
system management, resource optimization and BI applications. A successful
product liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results or financial
condition.
 
     POTENTIAL LITIGATION/LIABILITY RELATED TO YEAR 2000 READINESS. It is likely
that, commencing in the Year 2000, the functionality of certain operating
environments will be adversely affected when one or more component products of
the environment is unable to process four-digit characters representing years.*
This could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00.
 
     The Company's products are used in numerous operating environments. The
Company considers a product Year 2000 ready if the product's performance and
functionality are unaffected by processing dates prior to, during, and after the
Year 2000, but only if all products (for example hardware, firmware, and
software) used with the product properly exchange accurate date data with it.
The Company has determined that certain of its software products are not and
will not be Year 2000 ready and is taking measures to inform its customers of
that fact. The inability of one or more of the Company's products to properly
manage and manipulate data related to the Year 2000 could result in a material
adverse effect on the Company's business, financial condition or results of
operations, including increased warranty costs, customer satisfaction issues and
potential lawsuits.
 
     Even if the Company successfully brings certain of its products into Year
2000 readiness and publicizes the non-readiness of its other products, the
Company anticipates that substantial litigation may be brought against vendors
of all component products of noncompliant operating environments, including the
Company.* The Company's agreements with its customers typically contain
provisions designed to limit the Company's liability for such claims. It is
possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions. The Company believes that any
such claims, with or without merit, could result in costly litigation (and
possible adverse judgment) that could absorb significant management and product
development time and potentially result in significant liability to the Company,
which could have a material adverse effect on the Company's business, operating
results or financial condition.*
 
     The Company has initiated a program to address Year 2000 readiness in its
internal systems. It has also initiated communications with its large suppliers
and customers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
Company is still in the process of conducting its Year 2000 audit and therefore
is unable to make a reasonable estimate of the costs associated with Year 2000
readiness. Accordingly, no assurance can be given that the costs required to
address the Year 2000 issue will not have a material adverse effect on the
Company's business, financial condition or results of operations. Assessment and
remediation are proceeding in tandem, and the Company intends to have its
critical internal systems in Year 2000 compliance by July 3, 1999.* These
activities are intended to encompass all major categories of systems in use by
the Company, including manufacturing, engineering, sales, finance and human
resources. The costs incurred to date related to these programs have not been
and are not expected to be material.*
 
     While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems and in the systems of its suppliers, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sale of products.*
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       26
<PAGE>   28
 
Therefore, the Company is developing contingency plans for continuing operations
in the event such problems arise.
 
     The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 readiness.* These expenditures may result in reduced funds available
to purchase products such as those offered by the Company, which could have a
material adverse effect on the Company's business, operating results or
financial condition.*
 
     SOFTWARE PRODUCT ERRORS OR DEFECTS. Software products as complex as those
offered by the Company frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Despite
product testing, the Company's recently introduced products or any products may
contain defects or software errors and, as a result, the Company may experience
delayed or lost revenues during the period required to correct any defects or
errors.* Any such defects or errors could result in adverse customer reactions,
negative publicity regarding the Company and its products, harm to the Company's
reputation or loss of or delay in market acceptance, or could require extensive
product changes, any of which could have a material adverse effect upon the
Company's business, operating results or financial condition.
 
     RISK OF INTERNATIONAL SALES. The Company's international business involves
a number of risks, including lack of acceptance of localized products, cultural
differences in the conduct of business, longer accounts receivable payment
cycles, greater difficulty in accounts receivable collection, seasonality due to
the slow down in European business activity during the summer months, unexpected
changes in regulatory requirements, royalties and withholding taxes that
restrict repatriation of earnings, tariffs and other trade barriers, difficulty
in hiring qualified personnel, economic and political conditions in each
country, management of an enterprise spread over various countries, the burden
of complying with a wide variety of foreign laws and an increase in
international competition. A majority of the Company's international sales are
currently denominated in U.S. dollars, and an increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products more
expensive and potentially less competitive in foreign markets. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international sales and therefore the overall operating results
and financial condition of the Company.
 
     The Company continues to expand its international operations, which
requires significant management attention and financial resources and could
materially adversely affect the Company's operating results. To the extent the
Company is unable to effect this expansion in a timely manner, the Company
growth, if any, in international sales will be limited and the Company's
business, operating results or financial condition could be materially adversely
affected.
 
     The Company anticipates that the recent deterioration of the underlying
economic conditions in certain Asian countries may have an impact on its sales
to customers or OEMs located in those countries due to the impact of currency
fluctuations on the relative price of the Company's products and/or restrictions
on government spending imposed by the International Monetary Fund (the "IMF") on
those countries receiving the IMF's assistance.* In addition, customers in those
countries may face reduced access to working capital to fund component
purchases, such as the Company's products, due to higher interest rates, reduced
bank lending due to contractions in the money supply or the deterioration in the
customer's or its bank's financial condition or the inability to access local
equity financing. During fiscal 1998, sales to OEMs or end-user customers
located in or to OEMs whose end customers were located in the countries of
Japan, Korea, Malaysia, Thailand, Taiwan and Hong Kong were not material to the
Company's business, operating results or financial condition.
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       27
<PAGE>   29
 
     The Company is in the process of addressing the issues raised by the
introduction of the Single European Currency ("Euro") as of January 1, 1999 and
during the transition period through January 1, 2002. The Company expects that
its internal systems that will be affected by the initial introduction of the
Euro will be Euro-capable by January 1, 1999 and does not expect the costs of
system modifications to be material. The Company does not presently expect that
introduction and use of the Euro will materially affect the Company's foreign
exchange activities, or the Company's use of derivative instruments, or will
result in any material increase in costs to the Company.* While the Company will
continue to evaluate the impact of the Euro introduction over time, based on
currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's financial condition or overall trends in results of operations.*
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       28
<PAGE>   30
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
<TABLE>
<CAPTION>
                        DESCRIPTION                           PAGE
                        -----------                           ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   30
Consolidated Balance Sheets as of July 3, 1998 and June 27,
  1997......................................................   31
Consolidated Statements of Operations for the Years Ended
  July 3, 1998, June 27, 1997 and June 28, 1996.............   32
Consolidated Statements of Cash Flows for the Years Ended
  July 3, 1998, June 27, 1997 and June 28, 1996.............   33
Consolidated Statements of Stockholders' Equity for the
  Years Ended July 3, 1998, June 27, 1997 and June 28,
  1996......................................................   34
Notes to the Consolidated Financial Statements..............   35
</TABLE>
    
 
---------------
 
* This statement is a forward-looking statement reflecting current expectations.
  There can be no assurance
 that the Company's actual future performance will meet the Company's current
  expectations. Readers are
 cautioned that other sections and other sentences not so identified may also
  contain forward-looking
 information.
                                       29
<PAGE>   31
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Seagate Software, Inc.
 
     We have audited the accompanying consolidated balance sheets of Seagate
Software, Inc. as of July 3, 1998 and June 27, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 3, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Seagate Software, Inc. at July 3, 1998 and June 27, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 3, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
 
   
     As discussed more fully in the Summary of Significant Accounting Policies
footnote, Seagate Software, Inc. has modified the methods used to assess
impairment of goodwill and, accordingly, has restated the consolidated financial
statements for the fiscal years ended July 3, 1998 and June 27, 1997 to reflect
this change.
    
 
                                          /s/ Ernst & Young LLP
 
San Jose, California
   
July 17, 1998, except for the second paragraph of the Summary of Significant
Accounting Policies footnote, as to which the date is April 8, 1999
    
 
                                       30
<PAGE>   32
 
                             SEAGATE SOFTWARE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
                                     ASSETS
 
   
<TABLE>
<CAPTION>
                                                              JULY 3,     JUNE 27,
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Cash........................................................  $ 15,130    $ 12,085
Accounts receivable, net....................................    46,564      28,172
Inventories.................................................     1,117       3,206
Other current assets........................................     2,474       4,040
                                                              --------    --------
          Total current assets..............................    65,285      47,503
Property, equipment and leasehold improvements, net.........    16,876      20,785
Goodwill and other intangibles, net.........................    56,836      79,043
                                                              --------    --------
          Total assets......................................  $138,997    $147,331
                                                              ========    ========
 
                                   LIABILITIES
Loan payable to Seagate Technology..........................  $ 16,054    $ 28,971
Accounts payable............................................    10,994       9,116
Accrued employee compensation...............................    14,365      10,267
Accrued expenses............................................    15,339      16,035
Accrued income taxes........................................     5,562       2,699
Deferred revenue............................................    13,714       8,354
                                                              --------    --------
          Total current liabilities.........................    76,028      75,442
Deferred income taxes.......................................     1,691       6,233
Other liabilities...........................................       255         301
                                                              --------    --------
          Total liabilities.................................    77,974      81,976
Common stock subject to repurchase..........................     3,917          --
 
                               STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value--
73,000,000 shares authorized; Series A: shares issued and
  outstanding -- 54,633,333 in 1998 and 1997 (aggregate
  liquidation preference of $409,750 in 1998 and 1997)......        55          55
Common stock, $.001 par value -- 95,600,000 shares
  authorized; shares issued and outstanding -- 235,502 in
  1998 and 83,355 in 1997...................................        --          --
Additional paid-in capital..................................   343,526     342,091
Accumulated deficit.........................................  (286,218)   (276,948)
Foreign currency translation adjustment.....................      (257)        157
                                                              --------    --------
          Total stockholders' equity........................    57,106      65,355
                                                              --------    --------
          Total liabilities and stockholders' equity........  $138,997    $147,331
                                                              ========    ========
</TABLE>
    
 
                See notes to consolidated financial statements.
 
                                       31
<PAGE>   33
 
                             SEAGATE SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
   
<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED
                                                         -------------------------------------
                                                         JULY 3,       JUNE 27,      JUNE 28,
                                                           1998          1997          1996
                                                         --------    ------------    ---------
<S>                                                      <C>         <C>             <C>
Revenues:
  Licensing............................................  $243,285    $    183,556    $ 124,380
  Licensing from Seagate Technology....................     5,469           5,762        9,374
  Maintenance, support and other.......................    44,472          27,632        7,832
                                                         --------    ------------    ---------
     Total revenues....................................   293,226         216,950      141,586
Cost of revenues:
  Licensing............................................    16,963          17,535       14,885
  Licensing from Seagate Technology....................       539           1,834        3,999
  Maintenance, support and other.......................    19,687           6,560          194
  Amortization of developed technologies...............    13,271          21,860        9,941
                                                         --------    ------------    ---------
     Total cost of revenues............................    50,460          47,789       29,019
                                                         --------    ------------    ---------
Gross profit...........................................   242,766         169,161      112,567
Operating expenses:
  Sales and marketing..................................   129,343         107,706       71,129
  Research and development.............................    47,173          42,842       36,897
  General and administrative...........................    37,124          36,861       22,852
  In-process research and development..................     6,800           2,613       96,958
  Amortization of goodwill and other intangibles.......    16,201          23,465       13,035
  Restructuring costs..................................        --           2,524        9,502
  Unusual items........................................        --          13,446           --
                                                         --------    ------------    ---------
     Total operating expenses..........................   236,641         229,457      250,373
                                                         --------    ------------    ---------
Income (loss) from operations..........................     6,125         (60,296)    (137,806)
Interest expense.......................................    (1,021)         (2,688)        (970)
Other, net.............................................     1,011             307          360
                                                         --------    ------------    ---------
  Interest and other, net..............................       (10)         (2,381)        (610)
                                                         --------    ------------    ---------
Income (loss) before income taxes......................     6,115         (62,677)     (13,416)
Benefit from (provision for) income taxes..............   (15,385)          8,714        8,748
                                                         --------    ------------    ---------
Net loss...............................................  $ (9,270)   $    (53,963)   $(129,668)
                                                         ========    ============    =========
Net loss per common share:
  Basic................................................  $ (56.33)   $    (796.93)
  Diluted..............................................  $ (56.33)   $    (796.93)
Number of shares used in per share computations:
  Basic................................................   164,571          67,714
  Diluted..............................................   164,571          67,714
</TABLE>
    
 
                See notes to consolidated financial statements.
                                       32
<PAGE>   34
 
                             SEAGATE SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED
                                                              --------------------------------
                                                               JULY 3,    JUNE 27,   JUNE 28,
                                                                1998        1997       1996
                                                              ---------   --------   ---------
<S>                                                           <C>         <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................  $  (9,270)  $(53,963)  $(129,668)
Adjustments to reconcile net income to net cash from
  operating activities:
  Depreciation and amortization.............................     39,932     41,730      24,737
  Deferred income taxes.....................................     (4,542)    (7,505)     (3,021)
  Write-off of in-process research and development..........      6,800      2,613      96,958
  Write-off or write-down of goodwill and intangibles.......      1,900     13,106       2,157
  Unusual items.............................................         --     13,446          --
  Write-offs due to restructure.............................         --      1,494       4,427
  Changes in operating assets and liabilities:
     Accounts receivable....................................    (18,157)     4,583     (12,129)
     Inventories............................................      2,099     (1,581)        (11)
     Other current assets...................................      1,575     (1,207)      1,080
     Accounts payable.......................................      1,552     (1,609)      4,887
     Accrued employee compensation..........................      4,020      2,078       2,570
     Accrued expenses.......................................       (725)     2,430       4,629
     Accrued income taxes...................................      3,633      5,796      (3,297)
     Deferred revenue.......................................      5,285      2,648       1,613
     Other liabilities......................................        (46)        44      (3,267)
                                                              ---------   --------   ---------
  Net cash provided by (used in) operating activities.......     34,056     24,103      (8,335)
INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired............    (10,000)        --     (94,007)
Acquisition of property, equipment and leasehold
  improvements, net.........................................     (7,992)   (15,823)    (10,167)
Escrow establishment........................................         --         --     (18,000)
Decrease in other non-current assets, net...................         --         --       1,560
Acquisition of intangibles..................................     (4,270)        --          --
                                                              ---------   --------   ---------
  Net cash (used in) investing activities...................    (22,262)   (15,823)   (120,614)
FINANCING ACTIVITIES
Sale of common stock........................................        665         79          --
Sale of common stock subject to repurchase..................      3,917         --          --
Funding by Seagate Technology for acquisitions of
  businesses................................................         --         --     108,400
Borrowings from Seagate Technology..........................    261,917    217,513     150,117
Payment to Seagate Technology...............................   (274,834)  (221,533)   (129,699)
                                                              ---------   --------   ---------
  Net cash provided by (used in) financing activities.......     (8,335)    (3,941)    128,818
Effect of exchange rate changes on cash.....................       (414)       151           8
                                                              ---------   --------   ---------
  Increase (decrease) in cash...............................      3,045      4,490        (123)
  Elimination of Arcada's net cash activity for the
     duplicated six months ended December 31, 1995..........         --         --       1,768
Cash at the beginning of the year...........................     12,085      7,595       5,950
                                                              ---------   --------   ---------
Cash at the end of the year.................................  $  15,130   $ 12,085   $   7,595
                                                              =========   ========   =========
SUPPLEMENTAL CASH FLOW INFORMATION
  Cash paid for interest....................................  $      50   $    214   $      36
  Cash paid for income taxes................................      7,945      2,357       4,892
</TABLE>
    
 
                See notes to consolidated financial statements.
 
                                       33
<PAGE>   35
 
                             SEAGATE SOFTWARE, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
   
<TABLE>
<CAPTION>
                                           SERIES A
        FOR THE YEARS ENDED               CONVERTIBLE            COMMON                       FOREIGN
    JULY 3, 1998, JUNE 27, 1997         PREFERRED STOCK          STOCK         ADDITIONAL    CURRENCY
         AND JUNE 28, 1996            -------------------   ----------------    PAID-IN     TRANSLATION   ACCUMULATED
 (IN THOUSANDS, EXCEPT SHARE DATA)      SHARES     AMOUNT   SHARES    AMOUNT    CAPITAL     ADJUSTMENT      DEFICIT       TOTAL
 ---------------------------------    ----------   ------   -------   ------   ----------   -----------   -----------   ---------
<S>                                   <C>          <C>      <C>       <C>      <C>          <C>           <C>           <C>
BALANCE AT JUNE 30, 1995............          --    $--          --    $--      $140,610       $   2       $ (93,397)   $  47,215
Acquisition by Seagate Technology of
  OnDemand Software, Inc. and
  minority interest of Arcada
  Holdings, Inc.....................          --     --          --     --        98,249          --              --       98,249
Issuance of convertible preferred
  stock and common stock to Seagate
  Technology pursuant to the
  formation of Seagate Software.....  34,500,000     34      62,500     --           (34)         --              --           --
Issuance of convertible preferred
  stock to Seagate Technology
  pursuant to the acquisition of
  Calypso Software Systems, Inc.....   1,733,333      2          --     --        13,797          --              --       13,799
Issuance of convertible preferred
  stock to Seagate Technology
  pursuant to the acquisition of
  Holistic Systems, Ltd.............  11,200,000     11          --     --        84,046          --              --       84,057
Income tax benefit from Seagate
  Technology stock option
  exercises.........................          --     --          --     --         1,866          --              --        1,866
Foreign currency translation
  adjustment........................          --     --          --     --            --           4              --            4
Net loss............................          --     --          --     --            --          --        (129,668)    (129,668)
Elimination of Arcada Holdings, Inc.
  activity for the duplicated six
  months ended December 31, 1995....          --     --          --     --            --          --              80           80
                                      ----------    ---     -------    ---      --------       -----       ---------    ---------
BALANCE AT JUNE 28, 1996............  47,433,333     47      62,500     --       338,534           6        (222,985)     115,602
Income tax benefit from Seagate
  Technology stock option
  exercises.........................          --     --          --     --         3,486          --              --        3,486
Issuance of common stock upon
  exercise of employee stock
  options...........................          --     --      20,855     --            79          --              --           79
Issuance of convertible preferred
  stock pursuant to the transfer to
  the Company of IMG Vancouver......   7,200,000      8          --     --            (8)         --              --           --
Foreign currency translation
  adjustment........................          --     --          --     --            --         151              --          151
Net loss............................          --     --          --     --            --          --         (53,963)     (53,963)
                                      ----------    ---     -------    ---      --------       -----       ---------    ---------
BALANCE AT JUNE 27, 1997............  54,633,333     55      83,355     --       342,091         157        (276,948)      65,355
Income tax benefit from Seagate
  Technology stock option
  exercises.........................          --     --          --     --           770          --              --          770
Issuance of common stock upon
  exercise of employee stock
  options...........................          --     --     152,147     --           665          --              --          665
Foreign currency translation
  adjustment........................          --     --          --     --            --        (414)             --         (414)
Net loss............................          --     --          --     --            --          --          (9,270)      (9,270)
                                      ----------    ---     -------    ---      --------       -----       ---------    ---------
BALANCE AT JULY 3, 1998.............  54,633,333    $55     235,502    $--      $343,526       $(257)      $(286,218)   $  57,106
                                      ==========    ===     =======    ===      ========       =====       =========    =========
</TABLE>
    
 
                See notes to consolidated financial statements.
 
                                       34
<PAGE>   36
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     DESCRIPTION OF BUSINESS. Seagate Software, Inc. ("Seagate Software")
develops and markets software products and provides related services enabling
business users and information technology professionals to manage enterprise
information. Headquartered in Scotts Valley, California, Seagate Software has
over 40 offices and operations in 17 countries worldwide. Seagate Software is a
majority-owned and consolidated subsidiary of Seagate Technology, Inc. (the
"Parent Company" or "Seagate Technology"), a data technology company that
provides products for storing, managing and accessing digital information on
computer systems. As of July 3, 1998, Seagate Technology and one of its
subsidiaries held 99.7% of Seagate Software's outstanding capital stock. On a
diluted basis, the outstanding minority interests of Seagate Software amounted
to approximately 17.8%, which consisted of Common Stock and options to purchase
Common Stock issued pursuant to the Option Plan. Such options to purchase
Seagate Software's Common Stock are held by certain employees, directors and
consultants of Seagate Software and Seagate Technology.
 
   
     RESTATEMENT OF FINANCIAL STATEMENTS. Seagate Software had previously
allocated a portion of goodwill to developed technology and evaluated the
impairment of goodwill based on the revenues from the related software. Using
this method, Seagate Software recorded write-downs and write-offs of goodwill in
fiscal 1997 in the amount of $10,259,000. Seagate Software has re-evaluated its
methodology and determined that goodwill should not be allocated to developed
technology under Accounting Principles Board Opinion 17, "Intangible Assets". As
a result, Seagate Software has made adjustments to decrease the amounts of
goodwill previously written-down and written-off from $10,259,000 to $6,173,000
in fiscal 1997. The additional goodwill of $4,086,000 is being amortized over
the remaining estimated useful lives of approximately 5 years. The effect of
this adjustment on previously reported consolidated financial statements as of
and for the years ended July 3, 1998 and June 27, 1997 is as follows (in
thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                       AS REPORTED                    AS RESTATED
                                               ----------------------------   ----------------------------
                                               JULY 3, 1998   JUNE 27, 1997   JULY 3, 1998   JUNE 27, 1997
                                               ------------   -------------   ------------   -------------
<S>                                            <C>            <C>             <C>            <C>
Amortization of goodwill.....................   $  15,421       $  27,202      $  16,201       $  23,465
Income(loss) from operations.................       6,905         (64,033)         6,125         (60,296)
Net (loss)...................................      (8,490)        (57,700)        (9,270)        (53,963)
Basic and diluted (loss) per share...........      (51.59)        (852.11)        (56.33)        (796.93)
Goodwill and other intangible assets, net....      53,879          75,306         56,836          79,043
Accumulated deficit..........................    (289,175)       (280,685)      (286,218)       (276,948)
</TABLE>
    
 
     BASIS OF PRESENTATION. These financial statements are presented as if
Seagate Software had existed as an entity separate from Seagate Technology
during the periods presented and include the historical assets, liabilities,
revenues and expenses that are directly related to Seagate Software's
operations. Intercompany transactions and balances have been eliminated.
 
     Seagate Software was incorporated in Delaware in November 1993 and
commenced operations in May 1994 pursuant to Seagate Technology's merger with
Crystal Computer Services, Inc., a company engaged in developing and marketing
report writing software. From August 1994 to June 1996, Seagate Technology
acquired eight software companies, which were engaged in developing and
marketing business intelligence or network and/or storage management software
products. The amount of capital contributed by Seagate Technology for
acquisitions was determined by the amounts paid for such acquisitions by Seagate
Technology on behalf of Seagate Software. In February 1996, Seagate Technology
merged with Conner Peripherals, Inc. in a transaction accounted for as a
pooling-of-interests. In connection with the merger, Seagate Technology
purchased the outstanding minority interests in Conner's storage management
software operations under Arcada Holdings, Inc. In April 1996, Seagate
Technology consolidated its software operations into Seagate Software.
 
     Prior to December 1996, Seagate Technology International, a wholly-owned
subsidiary of Seagate Technology, owned all outstanding capital stock of
Information Management Group Vancouver (formerly Crystal Services, Inc.).
Pursuant to an agreement among Seagate Technology, Seagate Software and
Information Management Group Vancouver dated December 19, 1996, Seagate
Technology surrendered the
 
                                       35
<PAGE>   37
 
Information Management Group Stock (which was subsequently cancelled by
Information Management Group Vancouver) in exchange for 7,200,000 Convertible
Preference Shares of Information Management Group Vancouver. On December 26,
1996, the Convertible Preference Shares were exchanged for 7,200,000 Class B
Exchangeable Shares of Information Management Group Vancouver. These Class B
Exchangeable Shares do not have voting rights except as required by law, but can
be exchanged at Seagate Technology's sole discretion for 7,200,000 shares of
Seagate Software Series A Preferred Stock. In connection with the issuance of
the Class B Exchangeable Shares described above, Seagate Technology was granted
voting rights in Seagate Software equivalent to 7,200,000 shares of Series A
Preferred Stock. Also on December 26, 1996, Information Management Group
Vancouver issued 10,000 Class A Common Shares, which carry the right to vote, to
Seagate Software. Seagate Software therefore now owns all voting shares of
Information Management Group Vancouver. For financial reporting purposes,
Seagate Software has control over Information Management Group Vancouver and
therefore consolidates the results of Information Management Group Vancouver.
Additionally, the 7,200,000 shares of Series A Preferred Stock of Seagate
Software which Seagate Technology could elect to receive in exchange for the
Class B Exchangeable Shares of Information Management Group Vancouver have been
treated as issued and outstanding shares of Series A Preferred Stock of Seagate
Software.
 
     In June 1998, Seagate Software Company acquired all of the outstanding
capital stock of Eastman Software Storage Management Group, Inc., a company
engaged in developing, producing and marketing hierarchical storage management
products for the Windows NT platform. The purchase price of approximately
$10,000,000 was paid in cash. Approximately $6,800,000 of the total purchase
price represented the value of in-process technology that had not yet reached
technological feasibility, had no alternative future use and was charged to
Seagate Software's operations in the quarter ended July 3, 1998. The Company
accounted for the acquisition using the purchase method, and the results of
operations of Eastman are only included in Seagate Software's operations since
the acquisition was completed. Pro forma financial information is not presented
as such amounts are not material.
 
     Seagate Software operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996 ended
on June 28, 1996. Fiscal 1998 was comprised of 53 weeks and fiscals 1997 and
1996 were comprised of 52 weeks. Fiscal 1999 will be a 52-week year and will end
on July 2, 1999. All references to years in the notes to consolidated financial
statements represent fiscal years unless otherwise noted.
 
     Arcada, which was acquired by Seagate Software pursuant to Seagate
Technology's merger with Conner, had a fiscal year that ended on the Saturday
closest to December 31. Accordingly, Arcada's statement of operations for the
year ended December 30, 1995 has been combined with Seagate Software's statement
of operations for the year ended June 30, 1995. In order to conform Arcada's
fiscal year end to Seagate Software's fiscal year end, Seagate Software's
consolidated statement of operations for the year ended June 28, 1996 includes
six months (July 1, 1995 through December 31, 1995) for Arcada which are also
included in Seagate software's consolidated statement of operations for the year
ended June 30, 1995.

   
     ECONOMIC DEPENDENCE ON SEAGATE TECHNOLOGY. Seagate Software has incurred
net losses since inception and had net losses aggregating $192,901,000 during
the three year period ended July 3, 1998 and had a working capital deficit at
July 3, 1998 of $10,743,000. On July 4, 1998 Seagate Software and Seagate
Technology renewed the Revolving Loan Agreement on substantially the same terms
and conditions as the prior agreement which was dated June 28, 1996. Under the
Revolving Loan Agreement, Seagate Technology finances certain of Seagate
Software's working capital needs. The Revolving Loan Agreement provides for
maximum outstanding borrowings of up to $60,000,000 and is renewable every two
years. Outstanding borrowings from the Parent Company were $16,054,000 and
$28,971,000 at July 3, 1998 and June 27, 1997, respectively. Borrowings from
Seagate Technology consist primarily of amounts used to fund Seagate Software's
operating activities. Beginning in fiscal 1999, Seagate Software will pay
interest at the LIBOR rate plus 2% per annum on such borrowings; Seagate
Software previously paid interest at 6%. Seagate Software is economically
dependent on Seagate Technology and believes that to the extent future cash
flows from operations and borrowings under the existing loan agreement with
Seagate Technology are not sufficient to
 
                                       36
<PAGE>   38
 
fund Seagate Software's working capital deficit and planned activities during
the next 12 months, that additional funding will be available at a reasonable
cost from Seagate Technology.
 
     ACCOUNTING ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
 
     CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject Seagate Software to significant concentrations of credit risk consist
primarily of cash and accounts receivable. Seagate Software places its cash and
cash equivalents in high credit quality financial institutions. Accounts
receivable are derived from revenues earned from customers primarily located in
North America and Europe. Seagate Software performs ongoing credit evaluations
of its customers and generally does not require collateral. Seagate Software
maintains reserves for potential credit losses and historically such losses have
been immaterial. Revenue from one third party customer, Ingram Micro Inc.,
accounted for 22%, 18% and 16% of Seagate Software's total revenues in 1998,
1997 and 1996, respectively.
 
     FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency
for most of Seagate Software's foreign operations. Gains and losses on the
remeasurement into U.S. dollars of amounts denominated in foreign currencies are
included in net income for those operations whose functional currency is the
U.S. dollar. Gains and losses on translation into U.S. dollars of foreign
operations whose functional currency is the local currency are recorded as a
separate component of stockholders' equity.
 
     CASH MANAGEMENT. Seagate Technology uses a centralized cash management
function for all of its domestic operations, including certain domestic
operations of Seagate Software. A substantial majority of Seagate Software's
cash is from balances maintained by Seagate Software's foreign subsidiaries.
 
     CASH AND CASH EQUIVALENTS. Seagate Software considers all highly liquid
investments with an original maturity of 90 days or less at the time of purchase
to be cash equivalents. Seagate Software typically uses available cash in excess
of amounts required for operating activities to pay amounts due under the
Revolving Loan Agreement. Accordingly, Seagate Software has not had significant
cash equivalents to date.
 
     INVENTORIES. Inventories are stated at the lower of cost (first in, first
out method) or market, and consist primarily of materials used in software
products, related supplies and packaging materials.
 
     PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property and equipment,
including leasehold improvements, are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from two to five years. Assets under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the remaining lease term.
 
     GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of the
purchase price of acquired companies over estimated fair values of tangible and
intangible net assets acquired. Goodwill is amortized on a straight-line basis
over five to seven years. The carrying values of long-term assets and
intangibles other than developed technology ("other intangibles") are reviewed
if facts and circumstances suggest that they may be impaired. If this review
indicates that carrying values of long-term assets and other intangibles and
associated goodwill will not be recoverable based on projected undiscounted
future cash flows, carrying values are reduced to estimated fair values by first
reducing goodwill and second by reducing long-term assets and other intangibles.
 
     Other intangible assets consist of trademarks, assembled workforces,
distribution networks, developed technology, customer bases, and covenants not
to compete related to acquisitions accounted for by the purchase method. See
Note on Business Combinations and Acquisitions. Amortization of purchased
intangibles, other than acquired developed technology, is provided on the
straight-line basis over the respective useful lives of the assets ranging from
36 to 60 months for trademarks, 24 to 48 months for assembled workforces and
distribution networks, 12 to 36 months for customer bases and 18 to 24 months
for covenants
 
                                       37
<PAGE>   39
 
not to compete. In-process research and development without alternative future
use is expensed when acquired.
 
     DEVELOPED TECHNOLOGY. Seagate Software applies Statement of Financial
Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed", to software technologies
developed internally, acquired in business acquisitions, and purchased.
 
     Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
Seagate Software's development process generally occurs upon the completion of a
working model. As the time period between the completion of a working model and
the general availability of software has been short, capitalization of internal
development costs has not been material to date. Capitalized costs are amortized
based on the greater of the straight-line basis over the estimated product life
(generally 30 to 48 months) or the ratio of current revenues to the total of
current and anticipated future revenues.
 
     Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenues to the total of current and anticipated future
revenues. The recoverability of the carrying value of purchased developed
technology and associated goodwill is reviewed periodically. The carrying value
of developed technology is compared to the estimated future gross revenues from
that product reduced by the estimated future costs of completing and disposing
of that product, including the costs of performing maintenance and customer
support (net undiscounted cash flows ) and to the extent that the carrying value
exceeds the undiscounted cash flows the difference is written off.
 
     FAIR VALUE DISCLOSURES. Seagate Software maintains its cash principally
with major banks in interest-and non-interest-bearing bank accounts. There are
no realized or unrealized gains or losses and fair value approximates carrying
value for all cash balances.
 
     PUSHDOWN AND CARVEOUT ACCOUNTING. Seagate Technology has provided
substantial services to Seagate Software, including general management,
treasury, tax, financial reporting, benefits administration, insurance,
information technology, legal, accounts payable and receivable and credit
functions. Seagate Technology has charged Seagate Software for these services
through corporate expense allocations. The amount of corporate expense
allocations is dependent upon the total amount of allocable costs incurred by
Seagate Technology on behalf of Seagate Software less amounts charged as a
specific cost or expense rather than by allocation. Such costs were
proportionately allocated to Seagate Software based on detailed inquiries and
estimates of time incurred by Seagate Technology's corporate marketing and
general and administrative departmental managers. Included in general and
administrative expenses are corporate allocation charges of $1,004,000,
$1,939,000 and $2,242,000 for 1998, 1997 and 1996, respectively. Included in
sales and marketing expenses are corporate allocation charges of $769,000,
$19,000 and $18,000 for 1998, 1997 and 1996, respectively. The increase in sales
and marketing expenses in 1998 was due to proportional costs allocations from
Seagate Technology's corporate branding program, which consisted of television
and newspaper advertisements.
 
     Seagate Software participated in Seagate Technology's profit sharing plan
through the first quarter of fiscal 1998 and in Seagate Technology's management
bonus plan during 1997. Seagate Software has since adopted its own bonus plan.
Compensation expenses recorded by Seagate Software under Seagate Technology's
plans totaled $0, $3,158,000 and $910,000 for 1998, 1997 and 1996, respectively.
 
     The employees of Seagate Software also participate in the Seagate
Technology Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
permits eligible employees who have completed thirty days of employment prior to
the inception of the offering period to purchase common stock of Seagate
Technology through payroll deductions at the lower of 85% of the fair market
value of the common stock at the beginning or at the end of each six-month
offering period. Under the plan, 115,058, 80,643 and 41,574 shares of common
stock of Seagate Technology were issued to Seagate Software's employees in 1998,
1997 and 1996, respectively.
 
                                       38
<PAGE>   40
 
     The employees of Seagate Software also participate in the Seagate
Technology tax-deferred savings plan, the Seagate Technology, Inc. Savings and
Investment Plan ("the 401(k) plan"). The 401(k) plan is designed to provide
qualified employees with an accumulation of funds at retirement. Qualified
employees may elect to make contributions to the 401(k) plan on a monthly basis.
Seagate Software may make annual contributions to the 401(k) plan at the
discretion of the Board of Directors. No material contributions were made by
Seagate Software in fiscal years 1998, 1997 or 1996.
 
     REVENUE RECOGNITION. Seagate Software recognizes revenue in accordance with
the American Institute of Certified Public Accountants Statement of Position
91-1, "Software Revenue Recognition". Seagate Software's total revenues are
derived from license revenues for its various software products as well as
maintenance, support, training and consulting. Revenues for maintenance, support
services, training and consulting are recognized separately from software
licenses. License revenues are recognized upon delivery of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. Allowances for estimated future returns are provided upon shipment.
Maintenance and support revenues consist of ongoing support and product updates
and are recognized ratably over the term of the contract, which is typically
twelve months. Revenues from training and consulting are recognized when the
services are performed.
 
     Revenues from resellers, including VARs, OEMs, distributors and Seagate
Technology, are primarily recognized at the time of product delivery to the
reseller. Seagate Software's policy to defer such revenues if resale
contingencies exists. Some of the factors that are considered to determine the
existence of such contingencies include payment terms, collectibility and past
history with the customer.
 
     Product returns are reserved for in accordance with SFAS 48. Such returns
are estimated based on historical return rates. Seagate Software considers other
factors such as fixed and determinable fees, resale contingencies, arms length
contract terms and the ability to reasonably estimate returns to ensure
compliance with SFAS 48. Additionally, Seagate Software continually reviews its
estimated product return provisions to ensure that they are reasonable in
relation to actual product returns, which are quantified based on approved
return authorization forms received prior to fiscal cutoff dates. Historically,
Seagate Software's estimated product return rates have not varied materially
from actual product return rates.
 
     In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which Seagate Software
currently is required to adopt for transactions entered into after July 3, 1998.
SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. Seagate Software has assessed the impact of
the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its
policies and procedures. Seagate Software believes that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on Seagate Software's revenues
or results of operations.
 
     ADVERTISING EXPENSE. The cost of advertising is expensed as incurred.
Seagate Software does not incur any direct response advertising costs.
Advertising costs totaled $19,112,000, $21,617,000 and $15,748,000 for 1998,
1997 and 1996, respectively.
 
     NET LOSS PER SHARE. The net loss per common share is computed using the
weighted average number of shares of common stock outstanding during the period.
Common equivalent shares from common stock options and convertible preferred
stock are excluded from the computation of diluted net loss per share, as their
effect is antidilutive. The net loss per common share for 1996 is not presented
because Seagate Software's current capital structure did not exist prior to
April 1996, making presentation for prior periods not meaningful. During 1998,
Seagate Software adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). The adoption of SFAS 128 and the required
restatement of the 1997 net loss per share had no impact on Seagate Software
because the weighted average shares used in the per share computations were
unchanged under SFAS 128 because the effect of stock options would have been
 
                                       39
<PAGE>   41
 
antidilutive. Below is a reconciliation of the numerator and denominator used to
calculate earnings per share (in thousands, except share and per share data):
 
<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED
                                                          JULY 3,    JUNE 27,
                                                           1998        1997
                                                          -------    --------
<S>                                                       <C>        <C>
Net loss per share computation -- basic and diluted:
  Numerator: Net loss...................................  $(9,270)   $(53,963)
                                                          -------    --------
  Denominator:
     Weighted average number of common shares
       outstanding during the period....................  164,571      67,714
                                                          -------    --------
       Net loss per share -- basic and diluted..........  $(56.33)   $(796.93)
                                                          =======    ========
</TABLE>
 
     Incremental common shares attributable to the exercise of outstanding
options and common stock subject to repurchase (assuming the proceeds would be
used to purchase treasury stock) aggregating 2,118,034 shares for the year ended
July 3, 1998 and 317,453 shares for 1997 were not included in the diluted net
loss per share computations because the effect would have been antidilutive.
 
     ACCOUNTS RECEIVABLE. Accounts receivable are summarized below, in
thousands:
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Accounts receivable......................................  $48,200    $29,442
Less allowance for non-collection........................   (1,636)    (1,270)
                                                           -------    -------
                                                           $46,564    $28,172
                                                           =======    =======
</TABLE>
 
     INVENTORY. The write-downs of inventory to the lower of cost or market were
$3,674,000, $531,000 and $800,000 in 1998, 1997, and 1996 respectively. The
write-down in fiscal 1998 was a result of consolidating Seagate Software's
fulfillment warehouses and changing their strategy to have fulfillment
activities handled by an outsourcing partner. As a result of this consolidation
excess and obsolete components and finished goods were written down. The
write-down in fiscal 1997 and 1996 related to excess and obsolete components and
finished goods inventory.
 
     PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property, equipment and
leasehold improvements consisted of the following, in thousands:
 
<TABLE>
<CAPTION>
                                                    ESTIMATED
                                                   USEFUL LIFE        1998       1997
                                                -----------------    -------    -------
<S>                                             <C>                  <C>        <C>
Equipment.....................................  Two to five years    $30,999    $30,009
Building and leasehold improvements...........    Life of lease        9,424      6,428
                                                                     -------    -------
                                                                      40,423     36,437
Less accumulated depreciation and
  amortization................................                       (23,547)   (15,652)
                                                                     -------    -------
                                                                     $16,876    $20,785
                                                                     =======    =======
</TABLE>
 
     Depreciation expense was $11,727,000, $8,911,000 and $3,918,000 in 1998,
1997 and 1996, respectively.
 
                                       40
<PAGE>   42
 
     GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles consisted of
the following, in thousands:
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Goodwill.................................................  $49,039    $50,286
Developed technology.....................................   48,049     46,136
Trademarks...............................................    9,972      9,972
Assembled workforce......................................    4,596      6,666
Distribution network.....................................    2,925      2,925
Other intangibles........................................   13,813     12,853
                                                           -------    -------
                                                           128,394    128,838
Accumulated amortization.................................  (71,558)   (49,795)
                                                           -------    -------
Goodwill and other intangibles...........................  $56,836    $79,043
                                                           =======    =======
</TABLE>
 
     Amortization of developed technologies is included in costs of revenues. In
1998, 1997 and 1996 the amortization of goodwill and other intangibles includes
write-offs and write-downs to the estimated fair value of $1,900,000, $6,173,000
and $2,157,000, respectively. In 1997 the amortization of acquired developed
technologies included in cost of revenues includes write-downs and write-offs to
net realizable value of $6,918,000.
 
     Periodically, Seagate Software reviews the carrying value of its
intangibles other than developed technology to ascertain if there has been any
impairment. In 1996 the former owner of Frye computer Systems, Inc. (a 1995
acquisition), Mr. Frye, left Seagate Software. With his departure, Seagate
Software decided to release Mr. Frye from the remaining period of his covenant
not to compete and to not use the Frye name trademark in future products. As a
result, the remaining carrying value of the covenant not to compete and
trademark and associated goodwill totaling $1,932,000 were written off.
 
     Seagate Software also periodically reviews the net realizable value of
developed technology under the guidance of SFAS No. 86. Seagate Software
compares the estimated undiscounted future cash flows on a product by product
basis to the unamortized cost of developed technology and unamortized costs in
excess of the estimated undiscounted cash flows are written off. The impairment
write-offs for developed technology recorded in 1997 were caused by a number of
factors including Seagate Software's decision to stop selling products or
technologies such as DOS, new acquisitions, or new product designs. Seagate
Software is not currently generating revenue from any products for which the
related developed technology has been impaired.
 
     In addition, Seagate Software assesses the impairment of goodwill not
included in the scope of SFAS 121 under Accounting Principles Board Opinion No.
17, "Intangible Assets", (APB17). During 1997, Seagate Software wrote-off and
wrote-down goodwill amounting to $6,173,000. The write-offs and write-downs
related to the decision to abandon and stop selling all current and future
products acquired from Frye Computer Systems, Inc., the decision to abandon and
stop selling virtually all current and future products acquired in the
acquisition of Palindrome Corporation, and the decision to close down and sell
Calypso Software Systems, Inc.
 
     Seagate Software has capitalized the assembled workforce in most of its
acquisitions. When Seagate Software reviews the carrying value of its
intangibles, if there remains less than 5% of the original workforce, the
related intangible is deemed impaired. In 1998, Seagate Software wrote off the
workforces for three previous acquisitions, Network Computing, Inc., Netlabs,
Inc., and Creative Interaction Technologies, Inc., because less than 5% of the
original workforces remained.
 
                                       41
<PAGE>   43
 
     The following table provides quantitative information about the write-offs
and write-downs of goodwill and other intangibles, in thousands:
 
<TABLE>
<CAPTION>
                                                 1996                    1997                     1998
                                        ----------------------   ---------------------   ----------------------
                                                                 DEVELOPED
                                        INTANGIBLES   GOODWILL   TECHNOLOGY   GOODWILL   INTANGIBLES   GOODWILL
                                        -----------   --------   ----------   --------   -----------   --------
<S>                                     <C>           <C>        <C>          <C>        <C>           <C>
Covenant not to compete
  Frye Computer Systems, Inc..........    $1,188        $744
Trademark
  Frye Computer Systems, Inc..........    $  225
Developed Technology
  Netlabs, Inc........................                             $  780
  Palindrome Corporation..............                              2,740      $2,930
  Calypso Software Systems, Inc.......                              1,627       2,573
  Creative Interaction Technologies,
     Inc..............................                              1,176
  Frye Computer Systems, Inc..........                                463         670
  Network Computing, Inc..............                                132
Assembled Workforce
  Network Computing, Inc..............                                                      $120        $  155
  Netlabs, Inc........................                                                       431         1,045
  Creative Interaction Technologies,
     Inc..............................                                                        82            67
                                          ------        ----       ------      ------       ----        ------
          Total.......................    $1,413        $744       $6,918      $6,173       $633        $1,267
                                          ======        ====       ======      ======       ====        ======
</TABLE>
 
     COMMON STOCK SUBJECT TO REPURCHASE. Current employees and directors of
Seagate Software and of Seagate Technology have exercised 740,065 shares of
common stock under the Option Plan. At July 3, 1998, 176,455 shares were vested
and 563,610 shares were unvested. At the option of the employee or director,
within 30 days of termination such vested and unvested shares may be sold back
to Seagate Software at the original issue price. In addition, upon termination,
unvested shares are subject to repurchase at the option of Seagate Software at
original issue price. Because of the obligation to repurchase vested and
unvested shares of common stock, Seagate Software has excluded the amounts
associated with the repurchase obligation from Stockholders' Equity in the
accompanying balance sheet. At July 3, 1998, the repurchase obligation amounted
to $3,917,000.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"), which Seagate Software
currently is required to adopt for transactions entered into after July 3, 1998.
SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. Seagate Software has assessed the impact of
the requirements of SOP 97-2 and SOP 98-4 and has changed certain of its
policies and procedures. Seagate Software believes that the adoption of SOP 97-2
and SOP 98-4 will not have a significant impact on Seagate Software's revenues
or results of operations.
 
     Seagate Software intends to adopt Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") during fiscal 1999. Both standards will require additional disclosure, but
will not have a material effect on Seagate Software's financial position or
results of operations. SFAS 130 establishes standards for the reporting and
display of comprehensive income and is expected to first be reflected in Seagate
Software's first quarter of 1999 interim financial statements. The components of
comprehensive income include net income and items that are currently reported
directly as a component of stockholders' equity such as changes in foreign
currency translation adjustments and changes in the fair value of
available-for-sale financial instruments. SFAS 131 changes the way companies
report segment information
 
                                       42
<PAGE>   44
 
and requires segments to be determined based on how management measures
performance and makes decisions about allocating resources. SFAS 131 will first
be reflected in Seagate Software's 1999 Annual Report on Form 10-K.
 
     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. Seagate Software has not yet determined the
impact, if any, of adopting this statement. The disclosures prescribed by SOP
98-1 will be effective for Seagate Software's consolidated financial statements
for the fiscal year ending June 30, 2000.
 
BUSINESS COMBINATIONS AND ACQUISITIONS
 
     Seagate Software acquired Eastman Software Storage Management Group, Inc.
in 1998 and Arcada Holdings, Inc., Holistic Systems, Ltd., Calypso Software
Systems, Inc., OnDemand Software, Inc. and Sytron Corporation in 1996. There
were no acquisitions in 1997. Management is primarily responsible for estimating
the fair values of tangible and intangible assets and liabilities acquired.
 
     In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of the
cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price properly
attributed to incomplete research and development projects that should be
expenses according to the requirements of Interpretation 4 of SFAS No. 2.
 
     VALUATION OF ACQUIRED INTANGIBLE ASSETS. To determine the value of
in-process research and development, Seagate Software considered, among other
factors, the stage of development of each project, the time and cost needed to
complete each project, expected income, associated risks which included the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes to future target markets. This analysis resulted in amounts
assigned to in-process research and development for projects that had not yet
reached technological feasibility and which did not have alternative future
uses.
 
     The Income Approach, which includes analysis of markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each in-process research and development project. The
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of in-process research and
development projects.
 
     To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account risks
related to the characteristics and applications of each product, existing and
future markets and assessments of the life cycle stage of each product. Based on
this analysis, the existing technologies that had reached technological
feasibility were capitalized.
 
     To determine the value of the distribution networks and customer bases,
Seagate Software considered, among other factors, the size of the current and
potential future customer bases, the quality of existing relationships with
customers, the historical costs to develop customer relationships, the expected
income and associated risks. Associated risks included the inherent difficulties
and uncertainties in transitioning the business relationships from the acquired
entity to Seagate Software and risks related to the viability of and potential
changes to future target markets.
 
     To determine the value of trademarks, Seagate Software considered, among
other factors, the assumption that in lieu of ownership of a trademark, a
company would be willing to pay a royalty in order to exploit the related
benefits of such trademark.
 
     To determine the value of assembled workforces, Seagate Software
considered, among other factors, the costs to replace existing employees
including search costs, interview costs and training costs.
 
                                       43
<PAGE>   45
 
     Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionally until there was no negative
goodwill.
 
     ACQUISITION OF EASTMAN SOFTWARE STORAGE MANAGEMENT GROUP, INC. In June
1998, Seagate Software acquired all of the outstanding capital stock of Eastman
Software Storage Management Group, Inc. ("Eastman"), a company engaged in
developing, producing and marketing hierarchical storage management products for
the Windows NT platform. The purchase price of approximately $10,000,000 was
paid in cash. Approximately $6,800,000 of the total purchase price represented
the value of in-process technology that had not yet reached technological
feasibility, had no alternative future uses and was charged to Seagate
Software's operations in the quarter ended July 3, 1998. Seagate Software
accounted for the acquisition using the purchase method, and the results of
operations of Eastman are only included in Seagate Software's operations since
the date the acquisition was completed. Pro forma financial information is not
presented as such amounts are not material. The following is a summary of the
purchase price allocation, in thousands:
 
<TABLE>
<S>                                                          <C>
Current assets and other tangible assets...................  $   535
Liabilities assumed........................................     (508)
Assembled workforce........................................      340
Developed technology.......................................      500
In-process research and development........................    6,800
Microsoft agreement........................................    1,500
Goodwill...................................................      833
                                                             -------
                                                             $10,000
                                                             =======
</TABLE>
 
  Overview
 
     Eastman's two primary products are OPEN/stor for Windows NT and AvailHSM
for NetWare. By integrating Eastman's product line, Seagate will be able to
convert their Storage Migrator product into a stand-alone HSM application for
Windows NT environments. As of the date of acquisition, the Company abandoned
the AvailHSM product and technology due to dated features and functionality; the
valuation analysis did not include a fair value for the AvailHSM product.
 
     As for OPEN/stor at the date of acquisition, the Company planned to phase
out the product over the following 12 to 15 months. Seagate's purpose for the
acquisition was for the next generation technologies that were underway at
Eastman, referenced by project names Sakkara and Phoenix. These projects were
complete re-writes of Eastman's prior generation technology that would allow the
product to be sold stand-alone upon completion.
 
     In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate purchased existing products from Eastman, the
existing products did not operate on a stand-alone basis. Therefore, as
mentioned above, all of the original underlying code and base technology for the
next generation products were in the process of being completely re-written as
date of valuation.
 
  Assumptions
 
     Revenue
 
     Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately
 
                                       44
<PAGE>   46
 
$3.9 million and $7.1 million for fiscal years 1999 and 2000 when most of the
in-process projects were expected to be complete and shipping. Thereafter,
revenue was estimated to increase at rates ranging from 20% to 30% for fiscal
years 2001 through 2006. Revenue estimates were based on (i) aggregate revenue
growth rates for the business as a whole, (ii) individual product revenues,
(iii) growth rates for the storage management software market, (iv) the
aggregate size of the storage management software market, (v) anticipated
product development and introduction schedules, (vi) product sales cycles, and
(vii) the estimated life of a product's underlying technology.
 
     Operating expenses
 
     Operating expenses used in the valuation analysis of Eastman included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate and Eastman's overall
business model, specific product results, including both historical and expected
direct expense levels (as appropriate), and an assessment of general industry
metrics was conducted.
 
     Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies was estimated to be
approximately 5% throughout the estimation period. Seagate Software's cost of
goods sold was 20% for fiscal 1996 and 22% for fiscal 1997.
 
     General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
 
     Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
 
     Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 5% of revenue for the developed and
in-process technologies throughout the estimation period.
 
     In addition, as of the date of acquisition, Seagate Software's management
anticipated the costs to complete the in-process technologies at approximately
$1.8 million.
 
     Effective tax rate
 
     The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
 
     Discount rate
 
     The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the Weighted Average Cost of
Capital (approximately 15% at the date of acquisition) and (ii) the Weighted
Average Return on Assets (approximately 18%). The discount rate utilized for the
in-process technology was determined to be higher than Seagate's WACC due to the
fact that the technology had not yet reached technological feasibility as of the
date of valuation. In utilizing a discount rate greater than Seagate's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
 
                                       45
<PAGE>   47
 
ACQUISITION OF HOLISTIC SYSTEMS, LTD.
 
     In June 1996, Seagate Software acquired all of the outstanding shares of
Holistic Systems, Ltd. a company engaged in developing, producing and marketing
OLAP-compliant, integrated enterprise business intelligence systems encompassing
facilities for executive information, decision support and other business
intelligence applications. The purchase price of approximately $85,458,000 was
paid in cash, and a portion of such consideration ($18,000,000) was placed in
escrow for contingent consideration. The escrow was released by Seagate Software
during the third quarter of fiscal 1997. Seagate Software accounted for the
acquisition using the purchase method, and the results of operations of Holistic
are only included in Seagate Software's operations since the date the
acquisition was completed. The following is a summary of the initial purchase
price allocation, in thousands:
 
<TABLE>
<S>                                                          <C>
Current assets and other tangible assets...................  $ 9,993
Liabilities assumed........................................   (5,087)
Trademarks.................................................    5,889
Assembled workforce........................................    1,890
Developed technology.......................................   16,453
Customer base..............................................    3,746
In-process research and development........................   35,892
Restricted cash held in escrow.............................   18,000
Deferred tax liability.....................................   (1,318)
Goodwill...................................................       --
                                                             -------
                                                             $85,458
                                                             =======
</TABLE>
 
     The discount rates selected for Holistic's developed and in-process
technologies were 15% and 17.5%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (approximately 15% at the date of the acquisition) and (ii) the
Weighted Average Return on Assets (approximately 17%). The discount rate
utilized for the in-process technology was determined to be higher than
Seagate's WACC due to the fact that the technology has not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than Seagate's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
 
     The underlying in-process project acquired was the most significant and
uncertain assumption utilized in the valuation analysis of the in-process
research and development. Management was primarily responsible for estimating
the fair value of the purchased R&D in the Holistic acquisition.
 
     As noted above, $18,000,000 of the acquisition consideration was held in
escrow as contingent consideration. Seagate Software decided to release to the
former shareholders of Holistic the escrow funds of $18,000,000 in the third
quarter of fiscal 1997 even though the required contingencies had not been
satisfied. As a result, Seagate Software recorded compensation expense as an
unusual item amounting to $13,446,000 for payments made to Company employees who
were also former shareholders of Holistic and an additional purchase price
amount of $4,554,000 for payments to former shareholders of Holistic who were
not employees of Seagate Software. The additional purchase price was allocated
based on the same methodology as the original purchase price and in the third
quarter of 1997, Seagate Software recorded an additional in-process research and
development write-off of $2,613,000, acquired intangible assets of $2,037,000
and a deferred tax liability of $96,000.
 
     As of the date of the acquisition, Holistic was in the process of
developing the next generation of Holos, version 6.0, which was planned for
release during the summer of 1997. Actual release of Holos, version 6.0,
occurred in the fourth quarter of fiscal 1997.
 
                                       46
<PAGE>   48
 
ACQUISITION OF CALYPSO SOFTWARE SYSTEMS, INC.
 
     In May 1996, Seagate Software acquired all of the outstanding shares of
Calypso Software Systems, Inc. ("Calypso"), a company engaged in developing,
producing and marketing software for managing systems and applications in
complex, distributed client/server computer networks. The purchase price of
approximately $13,865,000 was paid in cash. Seagate Software accounted for the
acquisition using the purchase method, and the results of operations of Calypso
are only included in Seagate Software's operations since the date the
acquisition was completed. The following is a summary of the purchase price
allocation, in thousands:
 
<TABLE>
<S>                                                          <C>
Current assets and other tangible assets...................  $ 1,209
Liabilities assumed........................................     (245)
Assembled workforce........................................      400
Developed technology.......................................    3,600
Customer base..............................................      540
In-process research and development........................    5,400
Goodwill...................................................    2,961
                                                             -------
                                                             $13,865
                                                             =======
</TABLE>
 
     As of the date of acquisition, Calypso had undergone or was in the process
of undergoing the re-write of code in C+, adding navigator capabilities,
developing web server and browser interoperability, developing CORBA
interoperability, and developing Network OLE/COM interoperability for Atrium EMS
(stand-alone). The estimated cost to complete the in-process research and
development projects acquired from Calypso was estimated to be approximately
$750,000 as of the date of the acquisition. These in process research and
development projects were successfully completed prior to a restructuring of
operations in the third quarter of fiscal 1997. As a result of this
restructuring and a change in Seagate Software's strategic direction, in the
first quarter of fiscal 1998, Seagate Sofware disposed of all the developed and
in process technologies originally acquired from Calypso.
 
     ACQUISITION OF ONDEMAND SOFTWARE, INC. In March 1996, Seagate Software
acquired all of the outstanding shares and stock options of OnDemand Software,
Inc. ("OnDemand"), a company engaged in developing, producing and marketing
WinINSTALL, a product which automates installation, upgrades and uninstalls of
network applications throughout the enterprise. The purchase price of
approximately $13,425,000 was paid in cash. Seagate Software accounted for the
acquisition using the purchase method, and the results of operations of OnDemand
are only included in Seagate Software's operations since the date the
acquisition was completed. The following is a summary of the purchase price
allocation, in thousands:
 
<TABLE>
<S>                                                          <C>
Current assets and other tangible assets...................  $   832
Liabilities assumed........................................     (227)
Assembled workforce........................................      270
Developed technology.......................................    2,000
Covenant not to compete....................................       50
In-process research and development........................    8,900
Goodwill...................................................    1,600
                                                             -------
                                                             $13,425
                                                             =======
</TABLE>
 
     ACQUISITION OF MINORITY INTEREST OF ARCADA HOLDINGS, INC. The combination
of Seagate Software with Arcada Holdings, Inc. ("Arcada"), a company which
developed, marketed and supported data protection and storage management
software products that operated across multiple desktop and client/server
environments, was accounted for as a pooling-of-interests and, accordingly, all
prior periods presented in the accompanying
 
                                       47
<PAGE>   49
 
consolidated financial statements include the accounts and operations of Arcada.
Arcada's results of operations for the duplicated six months ended December 30,
1995 were as follows, in thousands:
 
<TABLE>
<CAPTION>
                                                          FOR THE SIX
                                                         MONTHS ENDED
                                                       DECEMBER 30, 1995
                                                       -----------------
<S>                                                    <C>
Net revenues.........................................       $37,700
Operating expenses...................................        29,320
Other income.........................................           588
Net loss.............................................           (80)
</TABLE>
 
     In connection with the pooling-of-interests, Seagate Software acquired the
then outstanding minority interest of Arcada. The minority interest was
approximately 31% on a fully diluted basis. The acquisition of the minority
interest was accounted for as a purchase and in connection with the acquisition,
Seagate Technology issued 2,553,000 shares of common stock with a fair market
value of approximately $52,009,000 and 1,817,000 options to purchase common
stock with a fair market value of approximately $33,065,000 (aggregate fair
value of $85,074,000). The value of the shares of Seagate Technology common
stock issued to shareholders of Arcada was determined based on the average
market price of Seagate Technology's common stock five days before and five days
after October 3, 1995, the date that the terms of the acquisition were agreed
to. The options were issued to employees of Arcada and Conner, Arcada's parent,
in exchange for options of Arcada. The options have a term of 10 years and vest
1/16 per quarter over 4 years. The value of the options were based on the
intrinsic value of options, which approximates the fair value The following is a
summary of the purchase price allocation for the acquisition of the minority
interest, in thousands:
 
<TABLE>
<S>                                                          <C>
Assembled workforce........................................  $ 1,355
Distribution network.......................................       94
Corporate accounts.........................................      375
Strategic alliances........................................    1,437
OEM agreements.............................................    3,217
Value added resellers......................................    2,030
Trademarks.................................................    2,811
Developed technology.......................................    4,623
In-process research and development........................   43,949
Deferred tax liability.....................................   (6,254)
Goodwill...................................................   31,437
                                                             -------
                                                             $85,074
                                                             =======
</TABLE>
 
     Intangible assets were identified through (i) analysis of the acquisition
agreement, (ii) consideration of the Network & Storage Management Group's
intentions for future use of the acquired assets, and (iii) analysis of data
available concerning Arcada's products, technologies, markets, historical
financial performance, estimates of future performance and the assumptions
underlying those estimates. The economic and competitive environment in which
the Network & Storage Management Group and Arcada operate was also considered in
the valuation analysis.
 
     Specifically, purchased research and development ("purchased R&D") was
identified and valued through extensive interviews and discussions with the
Network & Storage Management Group and Arcada management and the analysis of
data provided by Arcada concerning Arcada's developmental products, their
respective stage of development, the time and resources needed to complete them,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each purchased R&D project. A portion of the purchase price
was allocated to the developmental projects based on the appraised fair values
of such projects.
 
                                       48
<PAGE>   50
 
     DISCUSSION OF IN-PROCESS RESEARCH & DEVELOPMENT ONE TIME WRITE-OFF
 
  Overview
 
     As of the acquisition date, Arcada had spent a significant amount of money
on research and development related to the re-development efforts to add
features and utilities to the Desktop, NetWare and Windows NT products such as
disk grooming, hierarchical storage management, upgraded graphical user
interfaces, file and server replication, and server mirroring in order to
continue to meet increasingly complex user needs.
 
     In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Seagate purchased existing products from Arcada, since the
majority of the original underlying code and base technology for the NetWare and
Windows NT product families was completed in the 1990 time frame, the
technologies, as of the date of valuation, were desperately in need of, and
therefore, as mentioned above, was undergoing significant re-development.
 
  Assumptions
 
     Revenue
 
     Future revenue estimates were generated for the following product families:
(i) Desktop, (ii) NetWare, and (iii) Windows NT. Aggregate revenue for Arcada
products was estimated to be approximately $94 million for the ten and one-half
months ending December 31, 1996. Revenues were estimated to increase to
approximately $161 million and $233 million for calendar years 1997 and 1998
when most of the in-process projects were expected to be complete and shipping.
Thereafter, revenue was estimated to increase at rates ranging from 35% to 40%
for calendar years 1999 through 2002. Revenue estimates were based on (i)
aggregate revenue growth rates for the business as a whole, (ii) individual
product revenues, (iii) growth rates for the storage management software market,
(iv) the aggregate size of the storage management software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology. The
estimated product development cycle for the new products ranged from 12 to 18
months.
 
     Operating expenses
 
     Operating expenses used in the valuation analysis of Arcada included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate Software and Arcada's
overall business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
 
     Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies ranged from approximately
5% to 30% (30% for Desktop, 10% for NetWare, and 5% for Windows NT). Seagate
Software's cost of goods sold was 20% for fiscal 1996, 22% for fiscal 1997, and
17% for fiscal 1998.
 
     General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies ranged from
12% in calendar 1996 to 8% in calendar 1998 and beyond.
 
     Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 30% throughout the estimation period.
 
     Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These
 
                                       49
<PAGE>   51
 
activities include routine changes and additions. The maintenance R&D expense
was estimated to be 5% of revenue for the developed technologies and 3% of
revenue for the in-process technologies throughout the estimation period.
 
     In addition, as of the date of acquisition, the Network & Storage
Management Group management anticipated the costs to complete the Desktop,
NetWare, and Windows NT technologies at approximately $6.8 million, $4.5
million, and $7.5 million, respectively. Since the acquisition date, all
projects originally acquired from Arcada were commercially released prior to the
end of the fourth quarter of fiscal 1997.
 
     Effective tax rate
 
     The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
 
     Discount rate
 
     The discount rates selected for Arcada's developed and in-process
technologies were 15% and 17.5%, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (approximately 13% to 15% at the date of acquisition) and (ii)
the Weighted Average Return on Assets (approximately 18%). The discount rate
utilized for the in-process technology was determined to be higher than
Seagate's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than Seagate's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
 
ACQUISITION OF SYTRON CORPORATION.
 
     In July 1995, Arcada Software, Inc., a majority-owned subsidiary of Arcada,
acquired the assets and liabilities of Sytron Corporation, a company which
developed, produced and marketed software products for data storage management.
The purchase price of approximately $5,017,000 was paid in cash. Arcada
accounted for the acquisition using the purchase method, and the results of
operations of Sytron are only included in Seagate Software's operations since
the acquisition was completed. The following is a summary of the purchase price
allocation, in thousands:
 
<TABLE>
<S>                                                           <C>
Current assets and other tangible assets....................  $  848
Liabilities assumed.........................................    (508)
Developed technology........................................   1,487
In-process research and development.........................   2,817
Goodwill....................................................     373
                                                              ------
                                                              $5,017
                                                              ======
</TABLE>
 
STOCKHOLDERS' EQUITY
 
     Seagate Software's authorized capital stock consists of 95,600,000 shares
of common stock and 73,000,000 shares of preferred stock, 54,633,333 of which
have been designated as Series A preferred stock and 18,366,667 of which remain
undesignated.
 
     PREFERRED STOCK. The Series A preferred have the following rights,
preferences and privileges:
 
     Conversion. The holders of the Series A preferred stock have the right to
convert the Series A preferred stock at any time into common stock. The Series A
preferred stock will be automatically converted into common stock, at the
then-effective conversion price, upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended. The initial conversion rate will
be one share of preferred stock for each share of common stock. The
 
                                       50
<PAGE>   52
 
conversion price of the Series A preferred stock will be subject to adjustment
to reduce the effect of dilution in the event that Seagate Software issues
additional shares of common stock or equivalents.
 
     Voting. Each share of Series A preferred stock entitles the holder to one
vote for each share of common stock into which such share could then be
converted. Except as required by law, the holders of shares of Series A
preferred stock and the holders of shares of common stock shall vote together as
one class on all matters submitted to a vote of stockholders of Seagate
Software.
 
     Dividend Preference. The holders of shares of Series A preferred stock
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, an annual cash dividend in the
amount of $0.45 per share (as adjusted to reflect any stock split, stock
dividend, combination, recapitalization and the like (collectively a
"Recapitalization") with respect to the Series A preferred stock), prior and in
preference to any declaration or payment of any dividend (payable other than in
common stock) on the common stock of Seagate Software. Such dividends shall not
be cumulative, and no right shall accrue to holders of Series A preferred stock
by reason of the fact that dividends on such shares are not declared or paid in
any year. On the date that is the end of the first fiscal year in which Seagate
Software recognizes net income after taxes, the holders of shares of Series A
preferred stock shall be entitled to receive, out of funds legally available for
the purpose, an annual cash dividend in the amount of $0.45 per share (as
adjusted to reflect any Recapitalization) prior and in preference to any
declaration or payment of any dividend (payable other than in common stock) on
the common stock of Seagate Software (the "Cumulative Dividend"). The Cumulative
Dividend shall accrue from the Cumulative Dividend Date and shall be payable
only when, as and if determined by the Board, provided, that if the Cumulative
Dividend shall not have been paid and a sum sufficient for the payment thereof
set apart, the deficiency shall first be fully paid before any dividend or other
distribution (other than dividends payable solely in common stock) shall be paid
or declared and set apart for the common stock of Seagate Software. In the event
any dividend shall be paid to the holders of common stock such dividend shall be
distributed among the holders of the common stock and the Series A preferred
stock in proportion to the shares of common stock then held by them and the
shares of common stock which they then have the right to acquire upon the
conversion of the Series A preferred stock held by them.
 
     Liquidation Preference. In the event of any liquidation, dissolution or
winding up of Seagate Software or other reorganization, a distribution of $7.50
per share, as adjusted to reflect any Recapitalization of Series A preferred
stock, plus all accrued or declared but unpaid dividends, if any, shall be made
to the holders of Series A preferred stock before any amount shall be paid to
the holders of common stock.
 
     DIVIDENDS. No dividends have been declared, or paid, to date by Seagate
Software on any of the outstanding common stock or preferred stock.
 
     STOCK OPTION PLANS. The Option Plan provides for the issuance of either
incentive or nonstatutory stock options to employees and consultants of Seagate
Software. Seagate Software has reserved a total of 12,600,000 shares under the
Plan. Options granted under Seagate Software's Plan are granted at fair market
value, expire ten years from the date of the grant and vest over four years; 20%
at the end of years one and two and 30% at
 
                                       51
<PAGE>   53
 
the end of years three and four. Following is a summary of stock option activity
from the inception of the plan through the year ended July 3, 1998:
 
<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING
                                      --------------------------------------------------
                                      NUMBER OF SHARES   WEIGHTED AVERAGE EXERCISE PRICE
                                      ----------------   -------------------------------
<S>                                   <C>                <C>
Balance at June 30, 1995............             --                   $  --
  Granted...........................      3,276,200                    4.00
  Exercised.........................             --                      --
  Canceled..........................        (45,088)                   4.00
                                         ----------
Balance at June 28, 1996............      3,231,112                    4.00
  Granted...........................      2,851,255                    5.42
  Exercised.........................        (20,855)                   4.00
  Canceled..........................       (973,733)                   4.36
                                         ----------
Balance at June 27, 1997............      5,087,779                    4.73
  Granted...........................      8,039,707                    9.04
  Exercised.........................       (892,212)                   5.13
  Canceled..........................     (1,299,143)                   5.27
                                         ----------
Balance at July 3, 1998.............     10,936,131                    7.81
                                         ==========
</TABLE>
 
     Options available for grant were 750,802, 7,491,366 and 9,368,888 at the
end of fiscal 1998, 1997 and 1996, respectively. The following tables summarize
information about options outstanding at July 3, 1998.
 
<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING             EXERCISABLE OPTIONS
                                           ---------------------------------------   --------------------
                                                           WEIGHTED
                                                            AVERAGE       WEIGHTED               WEIGHTED
                                                           REMAINING      AVERAGE                AVERAGE
                EXERCISE                   NUMBER OF      CONTRACTUAL     EXERCISE    NUMBER     EXERCISE
                 PRICES                      SHARES     LIFE (IN YEARS)    PRICE     OF SHARES    PRICE
                --------                   ----------   ---------------   --------   ---------   --------
<S>                                        <C>          <C>               <C>        <C>         <C>
$ 4.00...................................   2,288,427         8.0          $4.00       891,653    $4.00
$ 6.00...................................   3,860,158         9.0           6.00       305,374     6.00
$ 7.50 - 11.00...........................   2,043,397         9.6           8.83        11,760     7.86
$12.75...................................   2,744,149        10.0          12.75            --       --
                                           ----------                                ---------
  Total..................................  10,936,131         9.1           7.81     1,208,787     4.54
                                           ==========                                =========
</TABLE>
 
     PRO FORMA INFORMATION. In October 1995, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an alternative to
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APBO 25") and requires additional disclosures. Seagate Software has
elected to follow APBO 25 in accounting for stock options granted. Under APBO
25, Seagate Software generally recognized no compensation expense with respect
to such options.
 
     Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if Seagate
Software had accounted for its stock options under the fair value method of SFAS
123. The fair value of Seagate Software's stock options was estimated using a
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions,
including the expected stock price volatility. Because Seagate Software's stock
options granted to employees have characteristics significantly different from
those of exchange-traded options (and are not fully transferable) and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the Black-Scholes model does not necessarily
provide a reliable single measure of the fair value of its stock options granted
to employees. The fair value of Seagate Software's stock options granted to
employees was estimated assuming no expected dividends and the following
weighted average assumptions:
 
                                       52
<PAGE>   54
 
<TABLE>
<CAPTION>
                                                                                  SEAGATE
                                                      SEAGATE SOFTWARE           TECHNOLOGY
                                                         INCENTIVE             EMPLOYEE STOCK
                                                        STOCK OPTION              PURCHASE
                                                        PLAN SHARES             PLAN SHARES
                                                    --------------------    --------------------
                                                    1998    1997    1996    1998    1997    1996
                                                    ----    ----    ----    ----    ----    ----
<S>                                                 <C>     <C>     <C>     <C>     <C>     <C>
Expected life (in years)..........................  3.67    3.65    3.65    .56     .50     .50
Risk-free interest rate...........................   5.7%    6.2%    5.6%   5.5%    5.4%    5.4%
Volatility........................................   .55     .55     .55    .63     .46     .46
</TABLE>
 
     The weighted average exercise price and weighted average fair value of
stock options granted in 1998 under Seagate Software's Plan were $9.04 and $4.20
per share, respectively. The weighted average purchase price and weighted
average fair value of shares granted in 1998 under the Seagate Technology
Employee Stock Purchase Plan (the "Purchase Plan") were $26.99 and $12.03,
respectively.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
over the six-month purchase period for stock purchases under the Purchase Plan.
Pro forma net loss per common share for 1996 is not presented because Seagate
Software's current capital structure did not exist prior to April 1996, making
presentation for prior periods not meaningful. Seagate Software's pro forma
information follows, in thousands:
 
<TABLE>
<CAPTION>
                                                      1998        1997        1996
                                                    --------    --------    ---------
<S>                                                 <C>         <C>         <C>
Net loss..........................................  $(16,496)   $(57,831)   $(130,043)
Net loss per common share.........................  $(100.24)   $(854.05)
</TABLE>

The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, and Seagate Software did not commence granting stock options for the
purchase of Seagate Software common stock until June 1996, the pro forma effect
will not be fully reflected until 2000.
 
INCOME TAXES
 
     Seagate Software is included in the consolidated federal and certain
combined and consolidated foreign and state income tax returns of Seagate
Technology. Seagate Technology and Seagate Software have entered into a tax
sharing agreement (the "Tax Allocation Agreement") pursuant to which Seagate
Software computes hypothetical tax returns (with certain modifications) as if
Seagate Software was not included in consolidated or combined returns with
Seagate Technology. Seagate Software must pay Seagate Technology the positive
amount of any such hypothetical taxes. If the hypothetical tax returns show
entitlement to refunds, including any refunds attributable to a carryback, then
Seagate Technology will pay Seagate Software the amount of such refunds. At the
end of fiscal 1998, $8,500,000 in intercompany tax-related balances was due from
Seagate Software to Seagate Technology. At the end of fiscal 1997 and 1996,
there were no intercompany tax-related balances outstanding between Seagate
Software and Seagate Technology.
 
     The (benefit from) provision for income taxes consisted of the following,
in thousands:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Current Tax Expense
  Federal.............................................  $ 9,444    $(5,007)   $(7,196)
  State...............................................    1,575       (384)      (762)
  Foreign.............................................    8,908      4,182        996
                                                        -------    -------    -------
Total Current Tax Expense.............................   19,927     (1,209)    (6,962)
Deferred Tax Expense
  Federal.............................................   (3,831)    (6,330)    (1,498)
  State...............................................     (711)    (1,175)      (288)
                                                        -------    -------    -------
Total Deferred Tax Expense............................   (4,542)    (7,505)    (1,786)
                                                        -------    -------    -------
(Benefit from) Provision for Income Taxes.............  $15,385    $(8,714)   $(8,748)
                                                        =======    =======    =======
</TABLE>
 
                                       53
<PAGE>   55
 
     The (benefit from) provision for income taxes has been computed on a
separate return basis (with certain modifications), except that pursuant to the
Tax Allocation Agreement, the tax benefits of certain of Seagate Software's
fiscal 1997 and 1996 tax losses and credits were recognized in the year such
losses and credits were utilized by Seagate Technology in its tax returns. In
fiscal 1998, Seagate Software did not recognize the benefit of certain tax
credits because they were not expected to be utilized by Seagate Technology in
its tax returns.
 
     The pro forma information assuming a tax benefit based on a separate return
basis is as follows, in thousands:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                           JULY 3, 1998
                                                           ------------
<S>                                                        <C>
Income before provision for income taxes.................     $6,115
Provision for income taxes...............................      4,548
                                                              ------
Net income...............................................     $1,567
                                                              ======
</TABLE>
 
     The income tax benefits related to the exercise of employee stock options
reduced amounts due to or increased amounts due from Seagate Technology pursuant
to the Tax Allocation Agreement and were credited to additional paid-in capital.
Such amounts approximated $770,000, $3,486,000 and $1,866,000 in 1998, 1997 and
1996, respectively.
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of Seagate Software's deferred tax assets and liabilities were as
follows, in thousands:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
<S>                                                      <C>         <C>
DEFERRED TAX ASSETS
Receivable reserves....................................  $  1,951    $  1,859
Accrued warranty.......................................       244         192
Inventory write-downs not currently deductible.........       504         299
Accrued compensation and benefits......................     1,329       1,517
Depreciation...........................................      (986)        827
Accrued restructuring..................................        --         963
Accrued expenses not currently deductible..............     2,532         850
Acquisition related items..............................    36,264      34,745
Domestic and foreign net operating loss
  carryforwards........................................    13,116      13,098
Tax credit carryforwards...............................     8,686       1,155
Other..................................................     2,164       2,372
                                                         --------    --------
  Total Deferred Tax Assets............................    65,804      57,877
Valuation allowance....................................   (65,804)    (57,877)
                                                         --------    --------
  Net Deferred Tax Assets..............................        --          --
                                                         ========    ========
DEFERRED TAX LIABILITIES
Acquisition related items..............................    (1,691)     (6,233)
                                                         --------    --------
  Total Deferred Tax Liabilities.......................    (1,691)     (6,233)
                                                         --------    --------
Net Deferred Tax Liabilities...........................  $ (1,691)   $ (6,233)
                                                         ========    ========
</TABLE>
 
     A valuation allowance has been provided for the deferred tax assets as of
the end of fiscal 1998 and 1997. Realization of the deferred tax assets is
dependent on future earnings, the timing and amount of which are uncertain. In
addition, the net operating loss and tax credit carryforwards of acquired
subsidiaries are subject to further limitations on utilization due to the
"change in ownership" provisions of Internal Revenue Code Section 382 and the
"separate return limitation year" rules of the federal consolidated return
regulations. Approximately $8,213,000 of the valuation allowance in fiscal 1998
and 1997 is attributable to deferred tax assets that when realized, will reduce
unamortized goodwill or other intangible assets of the acquired
 
                                       54
<PAGE>   56
 
subsidiaries. The valuation allowance increased by $7,927,000, $11,946,000 and
$26,038,000 in 1998, 1997 and 1996, respectively.
 
     As of June 27, 1997, Seagate Software has domestic and foreign net
operating loss carryforwards of approximately $37,515,000 expiring in 2003
through 2010 if not used to offset future taxable income. In addition, Seagate
Software, as of July 3, 1998, has research and development tax credit
carryforwards of approximately $1,155,000 expiring in 2005 through 2011 and
foreign tax credit carryforwards of $7,351,000, expiring in 2003, if not used to
offset future tax liabilities.
 
     The reconciliation between the (benefit from) provision for income taxes at
the U.S. statutory rate and the effective rate is summarized as follows, in
thousands:
 
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                      -------    --------    --------
<S>                                                   <C>        <C>         <C>
(Benefit) provision at U.S. statutory rate..........  $ 2,140    $(21,937)   $(48,446)
State income taxes (benefit), net...................      393        (382)       (762)
Foreign taxes in excess of the U.S. statutory
  rate..............................................    2,084         255          25
In-process research and development.................       --          --      15,382
Goodwill and other acquisition related items........    2,894       4,358       2,833
Valuation allowance.................................    7,927       8,871      22,216
Other...............................................      (53)        121           4
                                                      -------    --------    --------
                                                      $15,385    $ (8,714)   $ (8,748)
                                                      =======    ========    ========
</TABLE>
 
     Cumulative undistributed earnings of certain foreign operations of Seagate
Software of $2,633,000 are considered to be permanently invested in non-U.S.
operations. No U.S. federal and state income tax has been provided on these
amounts. Additional U.S. federal and state income taxes that would have to be
provided if these earnings were repatriated to the U.S. cannot be determined at
this time.
 
RESTRUCTURING COSTS
 
     Restructuring charges were $9.5 million in fiscal 1996 and $2.5 million in
fiscal 1997. The 1996 restructuring charges pertain to the acquisition of Arcada
Holdings, Inc. in February 1996. As a result of the acquisition, Seagate
Software had obtained duplicate technologies and product lines in data
protection and storage management software as those assets acquired in the
Palindrome Corporation (Palindrome) acquisition in fiscal 1995. Seagate Software
determined that it would be beneficial to consolidate the world-wide sales,
marketing, research and development, technical support and other operations and
administrative functions of its network and storage management business. A
restructuring plan was approved by the Board of Directors in March 1996 and the
plan resulted in facility closures and staff reductions of 43 at the Arcada
facilities in Westboro, Massachusetts, the United Kingdom and France, as well as
staff reductions of 69 at the former Palindrome facility in Naperville,
Illinois. In addition, because Arcada had a better industry reputation and
superior products to those of Palindrome, Seagate Software's plan and strategy
going forward was to focus on the technologies and products acquired from
Arcada. The revenue and net operating loss relating to products acquired from
Palindrome in fiscal 1996 was $15.9 million and $2.1 million respectively. For
fiscal 1997, the revenue and net operating loss relating to products acquired
from Palindrome was $3.3 million and $3.7 million respectively.
 
     The non-cash restructuring charges included amounts for abandonment of the
Palindrome trademarks, impairment of the capitalized workforce intangible assets
pertaining to the acquisition of Palindrome because of the planned layoff of
personnel, write-off of a duplicate trade show booth, and write-off of obsolete
Palindrome marketing materials. Cash restructuring charges included amounts for
severance and benefits to terminated Palindrome employees, costs for facilities
lease termination, other contract cancellation fees, and merger related costs
incurred by Arcada in the acquisition of the Arcada minority interests by
Seagate Technology.
 
     The fiscal 1997 restructuring charges netted to $2.5 million, comprised of
a $3.4 million restructuring charge that included the closure of Seagate
Software's Network & Storage Management Group's facility
 
                                       55
<PAGE>   57
 
located in Cupertino, California. This facility closure resulted in cash charges
for severance and benefits for 69 employee terminations and non-charges for
excess facilities and the write down of equipment. In addition, the $3.4 million
included amounts related to the Company's decision, after concluding a sale was
no longer viable, to no longer pursue the technologies acquired in the 1996
acquisition of Calypso Software Systems, Inc. and to shutdown its operations.
This decision resulted in cash charges for severance and benefits for 35
employee terminations and non-cash charges for the write off of certain
remaining intangible assets of Calypso. The revenue and net operating loss
relating to Calypso for fiscal 1996 was $444,000 and $53,000 respectively. For
fiscal 1997, the revenue and net operating loss relating to Calypso was $640,000
and $47,000 respectively.
 
     The restructuring charges recorded in fiscal 1997 were reduced by $957,000
for the reversal of amounts pertaining to the fiscal 1996 restructuring charges
as a result of a higher than planned number of voluntary employee terminations
without severance benefits prior to the facility shutdown and completion of
other aspects of the restructuring plan at less than the originally estimated
cost, net of an increase in the accrual for facilities lease payments due to
changes in estimates of the costs to terminate leases after facilities closure.
 
     A summary of Seagate Software's restructuring activities for the past three
years is provided below (in thousands):
<TABLE>
<CAPTION>
                       SEVERANCE
                          AND                                                           CONTRACT     LEGAL AND
                       EMPLOYEE                                                       CANCELLATION   ACCOUNTING    OTHER
                       BENEFITS    FACILITIES   EQUIPMENT   INVENTORY   INTANGIBLES       FEES          FEES      EXPENSES
                       ---------   ----------   ---------   ---------   -----------   ------------   ----------   --------
<S>                    <C>         <C>          <C>         <C>         <C>           <C>            <C>          <C>
1996 charges.........   $1,554       $1,571      $ 1,018      $ 300       $ 4,312         $ 67         $ 525       $ 155
Cash charges.........     (518)          --           --         --            --           --          (568)         --
Non-cash charges.....       --         (121)        (116)        --        (4,052)          --            --        (138)
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1996........    1,036        1,450          902        300           260           67           (43)         17
1997 charges.........      770          505          728         --         1,378           --            --         100
Cash charges.........     (975)        (915)          --         --            --           --            --          --
Non-cash charges.....       --          (72)         (44)        --        (1,378)          --            --          --
Adjustment...........     (351)         267         (172)      (300)         (260)         (67)           43        (117)
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1997........      480        1,235        1,414         --            --           --            --          --
Cash charges.........     (373)        (519)          (9)        --            --           --            --          --
Non-cash charges.....       --           --       (1,045)        --            --           --            --          --
Adjustment...........     (107)         467         (360)        --            --           --            --          --
                        ------       ------      -------      -----       -------         ----         -----       -----
Reserves 1998........   $   --       $1,183      $    --      $  --       $    --         $ --         $  --       $  --
                        ======       ======      =======      =====       =======         ====         =====       =====
 
<CAPTION>
 
                        TOTAL
                       -------
<S>                    <C>
1996 charges.........  $ 9,502
Cash charges.........   (1,086)
Non-cash charges.....   (4,427)
                       -------
Reserves 1996........    3,989
1997 charges.........    3,481
Cash charges.........   (1,890)
Non-cash charges.....   (1,494)
Adjustment...........     (957)
                       -------
Reserves 1997........    3,129
Cash charges.........     (901)
Non-cash charges.....   (1,045)
Adjustment...........       --
                       -------
Reserves 1998........  $ 1,183
                       =======
</TABLE>
 
     Seagate Software's remaining restructuring reserves pertain to continuing
lease payments on facilities that were closed and abandoned as a result of the
Palindrome restructuring. Seagate Software has been unable to sublease these
facilities and anticipates that the remaining restructuring reserves will be
utilized over the period through lease termination in fiscal 2002.
 
     In fiscal 1996, Seagate Software recorded a restructuring reserve of
$9,502,000 for the following items:
 
     Severance and employee benefits ($1,554,000) -- Severance and employee
benefits included amounts for consolidation of operations and termination of
employees at the Arcada facilities in Westboro, Massachusetts, the United
Kingdom and France, as well as at the former Palindrome facility in Naperville,
Illinois.
 
     Excess facilities ($1,571,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities located in Naperville,
Westboro, the United Kingdom and France that are to be closed as a result of the
restructuring actions.
 
     Equipment ($1,018,000) -- This amount is a reserve for equipment at the
Naperville, Westboro, the United Kindgom and France facilities. It consists of
computer equipment, furniture and fixtures and software at these facilities that
will not be used after the locations are closed. All of the equipment provided
for in this reserve has been abandoned.
 
     Inventory ($300,000) -- This consists of obsolete packaging material that
will no longer be used and OEM inventory of $80,000 that will no longer be sold.
 
                                       56
<PAGE>   58
 
     Intangibles ($4,312,000) -- This write down consists of Palindrome
intangible assets of $3,534,000, $390,000 of developed technology related to
Atlas and $388,000 of goodwill related to the Sytron acquisition. The Palindrome
intangible assets were further broken down into trademark of $1,000,000,
workforce of $1,188,000, distribution network of $69,000 and goodwill of
$1,277,000. Seagate Software decided to pursue the Arcada brand name and
trademark and abandon the Palindrome trademark. As a result, Seagate Software
determined that it would lay off substantially all of the 121 employees of
Palindrome located at the Naperville facility. At the time of original purchase,
Seagate Software proportionally allocated goodwill to long-lived intangible
assets based upon the original purchase price. The amounts of goodwill included
in the restructuring reserve relate to the remaining unamortized goodwill
associated with the intangible assets written off.
 
     Contract Cancellation ($67,000) -- This $67,000 item is a canceled contract
for outsourced Technical Support with a vendor used by Palindrome.
 
     Legal/Accounting Fees ($525,000) -- This $525,000 represents and estimate
of the legal and accounting fees that were to be incurred by Arcada from the
acquisition of Arcada stock by Seagate Technology.
 
     Other ($155,000) -- This represents a trade show booth valued at $100,000
that is redundant and $55,000 worth of obsolete marketing materials.
 
     The above assets were not impaired in a prior period because their
impairment arose specifically from the restructuring actions taken as a result
of the acquisition of the minority interest in Arcada in the third quarter of
fiscal 1996. Prior to the acquisition, Palindrome products were marketed and
sold as part of the Seagate Software portfolio. Seagate Software has not
generated any income from these activities in subsequent periods.
 
     In fiscal 1997, Seagate Software recorded an additional restructuring
reserve of $3,481,000 that resulted primarily from the plan to shutdown
Manchester operations and the decision to try to sell the Calypso technology and
a separate decision to consolidate Network & Storage Management Group operations
which resulted in the shutdown of Seagate Software's facility in Cupertino,
California.
 
     Severance and employee benefits ($770,000) -- Severance and employee
benefits included amounts for the shutdown and termination of employees at the
Cupertino, California facility due to a consolidation of operations and the
shutdown and termination of employees at the Calypso facility in Manchester, New
Hampshire due to a decision to no longer pursue the Calypso products and
technologies.
 
     Excess facilities ($505,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities closures in Manchester,
New Hampshire and Cupertino, California.
 
     Equipment ($728,000) -- This equipment is in the Manchester and Cupertino
facilities that would not be used after the shutdowns. It consisted largely of
computer equipment but also included amounts for furniture and fixtures and
software. All of the equipment provided for in this reserve has been abandoned.
 
     Intangibles ($1,378,000) -- This asset consisted of Calypso related
intangibles first capitalized upon the acquisition of Calypso in fiscal 1996.
The amounts written down included net developed technology of $1,086,000 and
assembled workforce of $292,000. These assets were written down based on
management's plan to sell Calypso and its products and technologies.
 
     Other ($100,000) -- This represents miscellaneous additional costs related
to the Manchester (Calypso) shutdown.
 
     The above assets were not impaired in a period prior to recording the
restructuring reserves because their impairment arose specifically from the
business decision and plan in the fourth quarter of fiscal 1997 to close the
Manchester (Calypso) facility and abandon that technology and the additional
decision to consolidate operations of the company and close the Cupertino
facility.
 
LINES OF CREDIT
 
     In addition to the Revolving Loan Agreement with Seagate Technology,
certain foreign subsidiaries have line of credit facilities with third party
financial institutions. These line of credit facilities provide for additional
 
                                       57
<PAGE>   59
 
borrowings of up to an equivalent of approximately $1,100,000 at July 3, 1998.
Interest rates payable on borrowings are based on local bank prime interest
rates. At July 3, 1998, there were no outstanding borrowings under any of these
lines of credit.
 
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
 
     Seagate Software operates in a single industry segment by developing,
marketing and supporting business intelligence and systems infrastructure
management software products, and related professional services. The following
tables summarize Seagate Software's operations in different geographic areas, in
thousands:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED JULY 3, 1998
                                          -------------------------------------------------
                                                                ADJUSTMENTS
                                           NORTH                    AND
                                          AMERICA     EUROPE    ELIMINATIONS   CONSOLIDATED
                                          --------   --------   ------------   ------------
<S>                                       <C>        <C>        <C>            <C>
Revenues from unaffiliated customers....  $275,606   $ 17,620     $    --        $293,226
Transfers between geographic areas......     2,368         30      (2,398)             --
                                          --------   --------     -------        --------
Total net sales.........................  $277,974   $ 17,650      (2,398)       $293,226
Income (loss) from operations...........    19,954    (13,829)         --           6,125
Other income (expense), net.............       287       (297)         --             (10)
                                          --------   --------     -------        --------
Income (loss) before income taxes.......  $ 20,241   $(14,126)    $    --        $  6,115
                                          --------   --------     -------        --------
Identifiable assets.....................  $114,086   $ 24,911     $    --        $138,997
                                          ========   ========     =======        ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED JUNE 27, 1997
                                           ------------------------------------------------
                                                                ADJUSTMENTS
                                            NORTH                   AND
                                           AMERICA    EUROPE    ELIMINATIONS   CONSOLIDATED
                                           --------   -------   ------------   ------------
<S>                                        <C>        <C>       <C>            <C>
Revenues from unaffiliated customers....   $203,324   $13,626     $    --        $216,950
Transfers between geographic areas......        861       841      (1,702)             --
                                           --------   -------     -------        --------
Total net sales.........................   $204,185   $14,467     $(1,702)       $216,950
Loss from operations....................    (55,225)   (5,071)         --         (60,296)
Other expense, net......................     (2,315)      (66)         --          (2,381)
                                           --------   -------     -------        --------
Loss before income taxes................   $(57,540)  $(5,137)    $    --        $(62,677)
                                           ========   =======     =======        ========
Identifiable assets.....................   $107,617   $39,714     $    --        $147,331
                                           ========   =======     =======        ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 28, 1996
                                         --------------------------------------------------
                                                                ADJUSTMENTS
                                           NORTH                    AND
                                          AMERICA     EUROPE    ELIMINATIONS   CONSOLIDATED
                                         ---------   --------   ------------   ------------
<S>                                      <C>         <C>        <C>            <C>
Revenues from unaffiliated
  customers...........................   $ 139,123   $  2,463      $  --        $ 141,586
Transfers between geographic areas....         312         --       (312)              --
                                         ---------   --------      -----        ---------
Total net sales.......................   $ 139,435   $  2,463      $(312)       $ 141,586
Loss from operations..................    (102,273)   (35,533)        --         (137,806)
Other income (expense), net...........        (644)        34         --             (610)
                                         ---------   --------      -----        ---------
Loss before income taxes..............   $(102,917)  $(35,499)     $  --        $(138,416)
                                         =========   ========      =====        =========
Identifiable assets...................   $ 155,730   $ 45,868      $  --        $ 201,598
                                         =========   ========      =====        =========
</TABLE>
 
     The loss from operations includes net revenues less operating expenses. The
loss from operations in Europe for the year ended June 28, 1996 is primarily
related to the write-off of $35,892,000 of in-process research and development
in connection with the Holistic acquisition. The loss from operations in Europe
for the year ended June 27, 1997 includes approximately $7,662,000 of
amortization of intangible assets relating to the Holistic acquisition and
$2,613,000 relating to the write-off of in-process research and development for
contingent payments made to the former shareholders of Holistic during 1997. The
loss from operations in Europe for the year ended July 3, 1998 includes
approximately $9,138,000 of amortization of intangible assets
 
                                       58
<PAGE>   60
 
relating to the Holistic acquisition. The identifiable assets by geographic area
are those assets used in Seagate Software's operations in each area.
 
     Seagate Software generated export revenues from the United States of
approximately $66,250,000, $44,129,000 and $33,617,000 in 1998, 1997 and 1996,
respectively.
 
COMMITMENTS
 
     LEASES. Seagate Software leases certain property, facilities and equipment
under non-cancelable lease agreements. Facility leases expire at various dates
through 2008 and contain various provisions for rental adjustments. The leases
require Seagate Software to pay property taxes, insurance and normal maintenance
costs. Seagate Software also occupies certain facilities owned by Seagate
Technology. Future minimum payments for operating leases were as follows at July
3, 1998, in thousands:
 
<TABLE>
<CAPTION>
                                                             OPERATING
                                                              LEASES
                                                             ---------
<S>                                                          <C>
1999.......................................................   $ 8,918
2000.......................................................     7,581
2001.......................................................     5,507
2002.......................................................     4,953
2003.......................................................     3,866
After 2003.................................................    35,992
                                                              -------
                                                              $66,817
                                                              =======
</TABLE>
 
     Total rent expense for all facility and equipment operating leases was
approximately $8,023,000, $5,292,000 and $3,181,000 for 1998, 1997 and 1996,
respectively.
 
     NON-CANCELABLE CAPITAL OBLIGATIONS. Non-cancelable capital obligations
totaled $384,291 as of July 3, 1998.
    
 
LEGAL PROCEEDINGS
 
     On November 10, 1997, Vedatech Corporation commenced an action in the High
Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral agreement
and infringement of a Vedatech U.K. copyright in the Japanese translation of one
of Seagate Software's products (the "Complaint") and seeking monetary and
injunctive relief. No specific damage amount has yet been claimed. Seagate
Software has hired local counsel in the U.K., reviewed documents and conducted
interviews. Seagate Software filed an initial response in the U.K. court on
January 13, 1998 and is now in the discovery process. Seagate Software believes
the Complaint has no merit and intends to vigorously defend the action. However,
if an unfavorable outcome were to arise, there can be no assurance that such
outcome would not have a material adverse effect on Seagate Software's
liquidity, financial position or results of operations.
 
     In addition to the foregoing, Seagate Software is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on Seagate
Software's financial position, liquidity or results of operations.
 
                                       59
<PAGE>   61
 
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
     Summarized quarterly financial information for fiscal years 1998 and 1997
are summarized below:
 
     The quarterly information for 1998 and 1997 has been restated to reflect
the adjustment described in the Summary of Significant Accounting Policies note.
 
   
<TABLE>
<CAPTION>
                                                                  AS REPORTED
                                             -----------------------------------------------------
                                             1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
Fiscal year 1998
  Net revenues.............................   $ 63,022      $ 72,344      $ 78,588      $ 79,272
  Gross profit.............................     49,226        60,842        65,314        67,384
  Income (loss) from operations............     (3,399)        1,343         7,015         1,946
  Net income (loss)........................     (2,915)        2,353         1,757        (9,685)
  Basic net income (loss) per share........     (28.12)        15.30          9.22        (46.08)
  Diluted net income (loss) per share......     (28.12)         0.04          0.03        (46.08)
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                  AS RESTATED
                                             -----------------------------------------------------
                                             1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
Fiscal year 1998
  Net revenues.............................   $ 63,022      $ 72,344      $ 78,588      $ 79,272
  Gross profit.............................     49,226        60,842        65,314        67,384
  Income (loss) from operations............     (3,594)        1,148         6,820         1,751
  Net income (loss)........................     (3,110)        2,158         1,562        (9,880)
  Basic net income (loss) per share........     (30.00)        14.03          8.19        (47.01)
  Diluted net income (loss) per share......     (30.00)         0.04          0.03        (47.01)
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                  AS REPORTED
                                             -----------------------------------------------------
                                             1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
Fiscal year 1997
  Net revenues.............................   $ 51,463      $ 55,136      $ 54,174      $ 56,177
  Gross profit.............................     39,837        43,328        39,777        46,219
  Loss from operations.....................     (7,608)       (9,187)      (37,182)      (10,056)
  Net loss.................................     (7,864)       (8,669)      (27,636)      (13,531)
  Basic and diluted net loss per share.....    (125.82)      (138.70)      (442.18)      (162.33)
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                  AS RESTATED
                                             -----------------------------------------------------
                                             1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
Fiscal year 1997
  Net revenues.............................   $ 51,463      $ 55,136      $ 54,174      $ 56,177
  Gross profit.............................     39,837        43,328        39,777        46,219
  Loss from operations.....................     (6,523)       (8,053)      (35,469)      (10,251)
  Net loss.................................     (6,779)       (7,535)      (25,923)      (13,726)
  Basic and diluted net loss per share.....    (108.46)      (120.56)      (414.77)      (164.67)
</TABLE>
    
 
                                       60
<PAGE>   62
 
     The following reconciles previously reported amounts to restated amounts by
quarter for the years ended July 3, 1998 and June 27, 1997:
 
<TABLE>
<CAPTION>
                                          1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                          -----------   -----------   -----------   -----------
<S>                                       <C>           <C>           <C>           <C>
Fiscal year 1998
  Net income (loss) as originally
     reported...........................    $(2,915)      $ 2,353       $ 1,757       $(9,685)
  Increase in the amortization of
     goodwill and intangibles...........       (195)         (195)         (195)         (195)
                                            -------       -------       -------       -------
  Net income (loss) as restated.........    $(3,110)      $ 2,158       $ 1,562       $(9,880)
                                            =======       =======       =======       =======
</TABLE>
 
   
<TABLE>
<CAPTION>
                                          1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                          -----------   -----------   -----------   -----------
<S>                                       <C>           <C>           <C>           <C>
Fiscal year 1997
  Net loss as originally reported.......    $(7,864)      $(8,669)     $(27,636)     $(13,531)
  Reversal of goodwill write-offs and
     write-downs........................      1,085         1,184         1,817            --
  Increase in the amortization of
     goodwill and intangibles...........         --           (50)         (104)         (195)
                                            -------       -------      --------      --------
  Net loss as restated..................    $(6,779)      $(7,535)     $(25,923)     $(13,726)
                                            =======       =======      ========      ========
</TABLE>
     
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       61
<PAGE>   63
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
 
     The directors and executive officers of Seagate Software and certain
information about them as of September 2, 1998, are as follows:
 
<TABLE>
<CAPTION>
                                                                            DIRECTOR OR
                                                                             EXECUTIVE
         NAME            AGE                    POSITION                   OFFICER SINCE
         ----            ---                    --------                   -------------
<S>                      <C>   <C>                                         <C>
Stephen J. Luczo.......  41    Chairman of the Board of Directors              1996
Gary B. Filler.........  57    Director                                        1996
Lawrence Perlman.......  60    Director                                        1996
Donald L. Waite........  65    Director                                        1996
Terence R.               39    President and Chief Operating Officer           1996
  Cunningham...........
Gregory B. Kerfoot.....  38    Chief Strategic Officer                         1996
Ellen E. Chamberlain...  41    Senior Vice President, Treasurer and Chief      1996
                               Financial Officer
</TABLE>
 
     Mr. Luczo currently serves as Chairman of the Board of Directors of Seagate
Software and as Chief Executive Officer, President and Director of Seagate
Technology. Prior to becoming the Company's Board Chairman in July 1997, Mr.
Luczo served as the Company's Chief Operating Officer between March 1995 and
July 1997. Mr. Luczo joined Seagate Technology in October 1993 as Senior Vice
President, Corporate Development and was promoted to Executive Vice President,
Corporate Development in March 1995, where he served until September 1997. He
was promoted to President and Chief Operating Officer in September 1997, serving
in the latter capacity until August 1998. In July 1998, Mr. Luczo was promoted
to Chief Executive Officer and appointed to the Board of Directors. Before
joining Seagate Technology in 1993, Mr. Luczo was Senior Managing Director and
Co-head of the Bear Stearns and Co. Global Technology Group from February 1992
to October 1993. Mr. Luczo also serves on the Boards of Directors of Gadzoox
Microsystems, Inc. and Dragon Systems, Inc.
 
     Mr. Filler currently serves as a Director of the Company and as Co-chairman
of the Board of Directors of Seagate Technology. Mr. Filler has held various
positions on Seagate Technology's Board of Directors, including Vice Chairman
from October 1990 until September 1991, Chairman from September 1991 until
October 1992, and Co-chairman since July 1998. Mr. Filler has been a financial
consultant since September 1996. He was Senior Vice President and Chief
Financial Officer of Diamond Multimedia Systems, Inc., a multimedia and graphics
company, from January 1995 to September 1996. From June 1994 to January 1995,
Mr. Filler was a business consultant and private investor. From February 1994
until June 1994, he served as Executive Vice President and Chief Financial
Officer of ASK Group, Inc., a computer systems company. Mr. Filler also serves
on the Board of Directors of Sento Corporation.
 
     Mr. Perlman currently serves as a Director of the Company and as
Co-chairman of the Board of Directors of Seagate Technology. He was appointed
Chairman of the Board of Directors of Ceridian Corporation (formerly Control
Data Corporation), a technology-based services company, in November 1992. Mr.
Perlman previously held several executive positions at Ceridian Corporation,
including President and Chief Executive Officer of Imprimis Technology
Incorporated, a subsidiary of Control Data Corporation. He was a regent of the
University of Minnesota from 1992 to 1995. Mr. Perlman also serves on the Boards
of Directors of Computer Network Technology Corporation, AMDOCS Limited, and
Valspar Corporation.
 
     Mr. Waite currently serves as a Director of the Company and as Executive
Vice President, Chief Administrative Officer, and Assistant Secretary of Seagate
Technology. Since joining Seagate Technology in 1983, Mr. Waite has served in
various roles, including Chief Financial Officer from 1983 to February 1998. He
has served as Executive Vice President and Chief Administrative Officer since
March 1995 and as Assistant Secretary since July 1998. Mr. Waite also serves on
the Boards of Directors of California Micro Devices and CVC Holdings, Inc.
 
                                       62
<PAGE>   64
 
     Mr. Cunningham currently serves as the Company's President and Chief
Operating Officer and as Executive Vice President and General Manager of NSMG.
He founded Crystal Computer Services, Inc. ("Crystal") in 1984 and served as its
President. In May 1994 he joined Seagate Technology in connection with its
acquisition of Crystal and continued as Crystal's President until May 1996, when
he was named President of the Storage Management Group. Later in 1996, he was
named Executive Vice President and General Manager of Seagate Software NSMG.
Since fiscal 1998 Mr. Cunningham has served as President and Chief Operating
Officer for the Company as well as Executive Vice President and General Manager
of NSMG. In his role as President and Chief Operating Officer of the Company,
Mr. Cunningham is responsible for the day to day operations of Seagate Software
and serves in a role functionally equivalent to that of a chief executive
officer of a corporation.
 
     Mr. Kerfoot currently serves as the Company's Chief Strategic Officer and
as Executive Vice President and General Manager of IMG. He joined Crystal in
September 1988 as the Director of Research and Development and Chief Architect
of Crystal Reports. In May 1994 he joined Seagate Technology in connection with
its acquisition of Crystal and continued as Crystal's Director of Research and
Development until May 1996, when he was named President of the Information
Management Group. Later in 1996, he was named Executive Vice President and
General Manager of Seagate Software IMG. Since fiscal 1998 Mr. Kerfoot has
served as Chief Strategic Officer for the Company as well as Executive Vice
President and General Manager of IMG.
 
     Ms. Chamberlain currently serves as the Company's Senior Vice President,
Treasurer, and Chief Financial Officer. She joined Seagate Technology in March
1985 and served in various finance positions, including Vice President and
Treasurer between November 1994 and February 1996. In March 1994, Ms.
Chamberlain began simultaneously supporting the development of the Company. She
served as the Company's Vice President between April and December 1996, when she
was promoted to Senior Vice President and Chief Financial Officer. Ms.
Chamberlain was also promoted to Treasurer of the Company in fiscal 1998 after
serving as its Assistant Treasurer since April 1996.
 
                                       63
<PAGE>   65
 
ITEM 11. EXECUTIVE COMPENSATION
 
                           SUMMARY COMPENSATION TABLE
 
     The following table sets forth the compensation paid by the Company to the
President and to the three next most highly compensated executive officers of
the Company (the "Named Executive Officers") whose compensation exceeded
$100,000 in the fiscal year ended July 3, 1998.
 
<TABLE>
<CAPTION>
                                                                                           LONG-TERM
                                                                                          COMPENSATION
                                                                                          ------------
                                                                                           SECURITIES
                                                                                           UNDERLYING
             NAME AND                FISCAL                              OTHER ANNUAL       OPTIONS
        PRINCIPAL POSITION            YEAR    SALARY($)     BONUS($)    COMPENSATION($)    GRANTED(1)
        ------------------           ------   ---------     --------    ---------------   ------------
<S>                                  <C>      <C>           <C>         <C>               <C>
Stephen J. Luczo...................   1998    $ 92,756(2)   $     --        $ 2,971(2)      150,000
  Chairman of the Board of
     Directors                        1997     100,000(2)    195,000(2)       1,659(2)       80,000
Terence R. Cunningham..............   1998     155,002       803,800(3)          --         550,000
  President and Chief Operating
     Officer                          1997     150,530       537,127(3)          --         100,000
Gregory B. Kerfoot.................   1998     151,450       803,800(3)          --         550,000
  Chief Strategic Officer             1997     139,947       953,292(3)          --         100,000
Ellen E. Chamberlain...............   1998     155,002       391,500(3)      12,000         127,500
  Senior Vice President, Treasurer,
     and                              1997     155,000       221,500(4)       6,000          28,000
  Chief Financial Officer
</TABLE>
 
---------------
(1) The stock options listed in the table represent options to purchase Common
    Stock of the Company. See "Executive Compensation -- Option Grants in Fiscal
    1998" for additional information regarding options to purchase stock of the
    Company granted during fiscal year 1998.
 
(2) Amount represents the percentage of Mr. Luczo's salary that directly
    benefited the Company. This amount was directly paid by the Company to
    Seagate Technology under a General Services Agreement. See Pushdown and
    Carveout Accounting note to the Consolidated Financial Statements.
 
(3) Includes amounts earned under the Company's executive bonus plan.
 
(4) Includes amounts deferred under Seagate Technology's compensation plan.
 
                                       64
<PAGE>   66
 
                             OPTION GRANTS IN 1998
 
     The following table sets forth certain information concerning grants of
stock options to each of the Company's Named Executive Officers during the
fiscal year ended July 3, 1998.
 
<TABLE>
<CAPTION>
                                                                                   POTENTIAL REALIZABLE VALUE AT
                          NUMBER OF                                                   ASSUMED ANNUAL RATES OF
                          SECURITIES     % OF TOTAL      EXERCISE                  STOCK PRICE APPRECIATION FOR
                          UNDERLYING   OPTIONS GRANTED    OR BASE                         OPTION TERM(4)
                           OPTIONS     TO EMPLOYEES IN   PRICE PER    EXPIRATION   -----------------------------
          NAME            GRANTED(1)     FISCAL YEAR     SHARE(2)        DATE           5%              10%
          ----            ----------   ---------------   ---------    ----------   -------------   -------------
<S>                       <C>          <C>               <C>          <C>          <C>             <C>
Stephen J. Luczo........    50,000          0.62%          $6.00(3)    08/29/07     $  188,668      $  478,123
                            50,000          0.62%           8.75(3)    02/02/08        275,141         697,262
                            50,000          0.62%          12.75(3)    07/01/08        400,920       1,016,011
Terence R. Cunningham...   200,000          2.49%           6.00(3)    08/29/07        754,674       1,912,491
                           100,000          1.24%           8.75(3)    02/02/08        550,283       1,394,525
                           250,000          3.11%          12.75(3)    07/01/08      2,004,602       5,080,054
Gregory B. Kerfoot......   200,000          2.49%           6.00(3)    08/29/07        754,674       1,912,491
                           100,000          1.24%           8.75(3)    02/02/08        550,283       1,394,525
                           250,000          3.11%          12.75       07/01/08      2,004,602       5,080,054
Ellen E. Chamberlain....    40,000          0.50%           6.00(3)    08/29/07        150,935         382,498
                            25,000          0.31%           8.75(3)    02/02/08        137,571         348,631
                            62,500          0.78%          12.75(3)    07/01/08        501,150       1,270,014
</TABLE>
 
---------------
(1) All stock options granted in fiscal 1998 vest over four years; 20% at the
    end of years one and two and 30% at the end of years three and four. Under
    the Option Plan, the Company's Board retains discretion to modify the terms,
    including the price, of outstanding options.
 
(2) Options were granted at an exercise price equal to the fair market value of
    the Company's Common Stock on the grant date, as determined by the
    Compensation Committee of the Board of Directors of Seagate Software. To
    determine the fair market value of the Company's Common Stock, the
    Compensation Committee of the Board of Directors considers a number of
    factors, including, but not limited to, the Company's current financial
    performance and prospects for future growth and profitability, the status of
    product releases and product integration, the absence of a resale market for
    the Company's Common Stock, the liquidity preferences of the Company's
    Series A Preferred Stock, the control position held by Seagate Technology,
    and comparisons of certain key valuation metrics for the Company with
    similar metrics for comparable publicly traded companies, including measures
    of market capitalization based on revenue multiples, price-to-earnings
    ratios and operating margins.
 
(3) Exercise price and withholding obligations may be paid in cash or by
    delivery of already-owned shares subject to certain conditions.
 
(4) Potential realizable value is based on the assumption that the Company's
    Common Stock appreciates at the annual rate shown (compounded annually) from
    the date of grant until the expiration of the ten year option term. These
    numbers are calculated based on the requirements promulgated by the
    Securities and Exchange Commission and do not reflect the Company's estimate
    of future stock price growth.
 
                                       65
<PAGE>   67
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES
 
     The following table sets forth certain information regarding the exercise
of stock options in the last fiscal year by the persons named in the Summary
Compensation Table and the value of options held by such individuals at the end
of the fiscal year.
 
<TABLE>
<CAPTION>
                                                      NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                           NUMBER OF                 UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                            SHARES       VALUE      OPTIONS AT 1998 YEAR END         AT 1998 YEAR END(2)
                           ACQUIRED     RECEIVED   ---------------------------   ---------------------------
          NAME            ON EXERCISE     $(1)     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
          ----            -----------   --------   -----------   -------------   -----------   -------------
<S>                       <C>           <C>        <C>           <C>             <C>           <C>
Stephen J. Luczo........         --     $     --      34,000        216,000       $245,500      $1,007,000
Terence R. Cunningham...    400,000      200,000          --        350,000             --         400,000
Gregory B. Kerfoot......         --           --     100,000        650,000        755,000       2,545,000
Ellen E. Chamberlain....     12,000       12,800      14,400        161,100        110,000         635,200
</TABLE>
 
---------------
(1) Market value of the Company's Common Stock at the exercise date minus the
    exercise price.
 
(2) Market value of the Company's Common Stock at fiscal year end minus the
    exercise price. The fair market value of Seagate Software Common Stock on
    July 3, 1998, as determined by the Compensation Committee of the Board of
    Directors, was $12.75 per share. To determine the fair market value of the
    Company's Common Stock, the Compensation Committee of the Board of Directors
    considers a number of factors, including, but not limited to, the Company's
    current financial performance and prospects for future growth and
    profitability, the status of product releases and product integration, the
    absence of a resale market for the Company's Common Stock, the liquidity
    preferences of the Company's Preferred Stock, the control position held by
    Seagate Technology, and comparisons of certain key valuation metrics for the
    Company with similar metrics for comparable publicly traded companies,
    including measures of market capitalization based on revenue multiples,
    price-to-earnings ratios and operating margins.
 
EMPLOYMENT CONTRACTS, CHANGE-OF-CONTROL ARRANGEMENTS AND SEPARATION AGREEMENTS
 
     The Company currently has no employment contracts with any of the Named
Officers who are currently employees of the Company, and the Company has no
compensatory plan or arrangement with such current Named Officers where the
amount to be paid exceeds $100,000 and which are activated upon resignation,
termination or retirement of any such Named Officer upon a change in control of
the Company.
 
     In July 1998, Seagate Technology entered into a Separation Agreement and
Release with Alan F. Shugart pursuant to which Mr. Shugart is entitled to
receive $2.25 million in compensation (of which none will be paid by the
Company) plus certain benefits, the right to certain deferred compensation and
the continued vesting and lapse of repurchase rights in shares of the Parent
Company's common stock. In addition, options to purchase 88,000 shares of the
Company's common stock with exercise prices ranging from $4.00 to $12.75
previously granted to Mr. Shugart by the Company vested in full and will remain
exercisable until August 19, 2001.
 
                                       66
<PAGE>   68
 
DIRECTOR COMPENSATION
 
     Directors receive no additional cash compensation for service on the Board
of Directors and any of its committees or sub-committees. The following table
sets forth certain information concerning grants of stock options to each of the
Company's directors during the fiscal year ended July 3, 1998.
 
<TABLE>
<CAPTION>
                                                      NUMBER OF          EXERCISE OR
                                                SECURITIES UNDERLYING     BASE PRICE
                     NAME                        OPTIONS GRANTED(1)      PER SHARE(2)
                     ----                       ---------------------    ------------
<S>                                             <C>                      <C>
Alan F. Shugart(3)............................         30,000               $ 6.00
                                                       15,000                 8.75
                                                       25,000                12.75
Stephen J. Luczo..............................         50,000                 6.00
                                                       50,000                 8.75
                                                       50,000                12.75
Donald L. Waite...............................             --                   --
Gary B. Filler................................         15,000                 6.00
Lawrence Perlman..............................         15,000                 6.00
</TABLE>
 
---------------
(1) All stock options granted in fiscal 1998 vest over four years; 20% at the
    end of years one and two and 30% at the end of years three and four. Under
    the Option Plan, the Company's Board retains discretion to modify the terms,
    including the price, of outstanding options.
 
(2) Options were granted at an exercise price equal to the fair market value of
    the Company's Common Stock on the grant date, as determined by the
    Compensation Committee of the Board of Directors of Seagate Software. To
    determine the fair market value of the Company's Common Stock, the
    Compensation Committee of the Board of Directors considers a number of
    factors, including, but not limited to, the Company's current financial
    performance and prospects for future growth and profitability, the status of
    product releases and product integration, the absence of a resale market for
    the Company's Common Stock, the liquidity preferences of the Company's
    Series A Preferred Stock, the control position held by Seagate Technology,
    and comparisons of certain key valuation metrics for the Company with
    similar metrics for comparable publicly traded companies, including measures
    of market capitalization based on revenue multiples, price-to-earnings
    ratios and operating margins.
 
(3) Mr. Shugart resigned as a director of the Company effective August 6, 1998
    pursuant to the terms of the Separation Agreement and Release between
    Seagate Technology, Inc. and Mr. Shugart.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission
("Commission"). Executive officers, directors and greater than ten percent
stockholders are required by the Commission's regulation to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on its review of
the copies of such forms received by it, or written representations from certain
reporting persons, the Company believes that with the exception noted below,
during the period from December 2, 1997 to July 3, 1998, its executive officers
and directors complied with all filing requirements. The Company was delinquent
in filing the initial reports on Form 3 by such persons due upon the
effectiveness of the Company's Registration Statement on Form 10 but filed such
reports later in December 1997.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding shares of Common Stock and Series A
Preferred Stock on an as-converted basis (collectively with the Common Stock,
the "Common Equivalent Shares") as of July 3, 1998 by (i) each person who is
known to the Company to be the beneficial owner of 5% or more of the Company's
outstanding Common Equivalent Shares, (ii) each of the Company's executive
officers named in the Summary Compensation Table at Item 11,
 
                                       67
<PAGE>   69
 
(iii) each of the Company's directors in office as of July 3, 1998, and (iv) all
directors and executive officers as of July 3, 1998 as a group.
 
<TABLE>
<CAPTION>
                                             NUMBER OF COMMON     PERCENT OF COMMON
                                             EQUIVALENT SHARES   EQUIVALENT SHARES(1)
                                             -----------------   --------------------
<S>                                          <C>                 <C>
Seagate Technology, Inc.(2)................     54,695,833               98.4%
  920 Disc Drive
  Scotts Valley, CA 95066
Alan F. Shugart(3).........................     54,795,833               98.5%
Stephen J. Luczo(4)........................     54,729,833               98.4%
Donald L. Waite(5).........................     54,715,833               98.4%
Gary B. Filler(6)..........................     54,706,833               98.4%
Lawrence Perlman(7)........................     54,706,833               98.4%
Ellen E. Chamberlain(8)....................         26,400                  *
Terence R. Cunningham(9)...................        400,000                  *
Gregory B. Kerfoot(10).....................        100,000                  *
All directors and executive officers as a
  group (8 persons)(11)....................     55,398,233               99.6%
</TABLE>
 
---------------
  *  Less than one percent.
 
 (1) Applicable percentage ownership is based on 55,608,900 Common Equivalent
     Shares outstanding as of July 3, 1998 together with applicable options for
     such stockholder. The Company's Series A Preferred Stock is reflected on an
     as-converted basis assuming a 1:1 conversion. Beneficial ownership is
     determined in accordance with the rules of the Securities and Exchange
     Commission based on factors including voting and investment power with
     respect to shares subject to applicable community property laws. Common
     Equivalent Shares subject to options currently exercisable or exercisable
     within 60 days after July 3, 1998 are deemed outstanding for computing the
     percentage ownership of the person holding such options, but are not deemed
     outstanding for computing the percentage of any other person.
 
 (2) Includes 7,200,000 shares of Class B Exchangeable Shares of Seagate
     Software Information Management Group (Canada), Inc., Vancouver, British
     Columbia ("IMG Vancouver"), which may be exchanged at the option of the
     holder, Seagate Technology International, a subsidiary of the Parent
     Company, for an equal number of shares of Series A Preferred Stock of the
     Company within 60 days of July 3, 1998. Excludes 176,000 shares of the
     Company's Common Stock held by or issuable pursuant to options granted to
     Messrs. Shugart, Luczo, Waite, Filler and Perlman over which Seagate
     Technology does not possess sole or shared voting or investment control and
     therefore of which Seagate Technology disclaims beneficial ownership.
 
 (3) Includes 88,000 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
     Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
     shares of Class B Exchangeable Shares of IMG Vancouver) beneficially owned
     by Seagate Technology to which Mr. Shugart may be deemed, in his capacity
     as an officer of Seagate Technology, to have shared power to vote or
     dispose of. However, Mr. Shugart disclaims such beneficial ownership. Mr.
     Shugart resigned as a director of the Company effective August 6, 1998.
 
 (4) Includes 34,000 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
     Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
     shares of Class B Exchangeable Shares of IMG Vancouver) beneficially owned
     by Seagate Technology to which Mr. Luczo may be deemed, in his capacity as
     an officer of Seagate Technology, to have shared power to vote or dispose
     of. However, Mr. Luczo disclaims such beneficial ownership.
 
 (5) Includes 12,000 shares of Common Stock that are subject to repurchase by
     the Company. The Company's repurchase right lapses for 6,000 and 6,000
     shares on April 4, 1999 and 2000, respectively. Includes 54,695,833 shares
     of Series A Preferred Stock (and 7,200,000 shares of Class B Exchangeable
     Shares of IMG Vancouver) beneficially owned by Seagate Technology to which
     Mr. Waite may be
 
                                       68
<PAGE>   70
 
     deemed, in his capacity as an officer of Seagate Technology, to have shared
     power to vote or dispose of. However, Mr. Waite disclaims such beneficial
     ownership.
 
 (6) Includes 11,000 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
     Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
     shares of Class B Exchangeable Shares of IMG Vancouver) beneficially owned
     by Seagate Technology to which Mr. Filler may be deemed, in his capacity as
     a director of Seagate Technology, to have shared power to vote or dispose
     of. However, Mr. Filler disclaims such beneficial ownership.
 
 (7) Includes 11,000 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
     Includes 54,695,833 shares of Series A Preferred Stock (and 7,200,000
     shares of Class B Exchangeable Shares of IMG Vancouver) beneficially owned
     by Seagate Technology to which Mr. Perlman may be deemed, in his capacity
     as a director of Seagate Technology, to have shared power to vote or
     dispose of. However, Mr. Perlman disclaims such beneficial ownership.
 
 (8) Includes 14,400 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
 
 (9) Includes 260,000 shares of Common Stock that are subject to repurchase by
     the Company on various dates through 2001.
 
(10) Includes 100,000 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
 
(11) Includes 258,400 shares of Common Stock that may be acquired upon the
     exercise of stock options exercisable within 60 days after July 3, 1998.
     See notes 2 through 7 to this table regarding reporting of shares held by
     Seagate Technology.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Pursuant to a General Services Agreement between the Company and Seagate
Technology dated June 28, 1997 (the "General Services Agreement"), Seagate
Technology provides administrative, accounting and similar services requested by
the Company. The services provided by Seagate Technology may include, but are
not limited to: (i) providing general accounting services, budgeting,
forecasting, cost control and other financial planning services; (ii) assisting
with employee benefits administration, hiring and payroll administration; (iii)
providing legal and government relations services such as preparing applications
for export licenses; (iv) tax analysis, documentation, reporting and withholding
for customs duties, import taxes, value-added taxes, and any other charges or
taxes imposed on the Company's products; (v) assisting the Company with federal,
state, and international tax planning, provisions, audits, and compliance,
including income, sales and use, property, VAT, and similar taxes; (vi)
providing assistance relating to the marketing, promotion, and sale of the
Company's products; (vii) providing services and support relating to information
technology and facilities; and (viii) managerial oversight, including screening
of potential acquisitions, partnerings, joint ventures, or similar transactions.
 
     During 1998, 1997 and 1996 Seagate Technology charged the Company
$1,773,000, $1,958,000 and $2,260,000, respectively, for various corporate
services. The Company pays service fees to the Parent Company each fiscal year
that represent a reasonable estimate of the Parent Company's direct and indirect
costs incurred in performing services for the Company. Service fees are to be
paid in equal monthly installments within 30 days after the end of the month.
Additionally, the Company and Seagate Technology are required to review, on an
annual basis, the actual level of services provided and the corresponding
reasonably determinable direct and indirect costs incurred by the Parent Company
pursuant to the General Services Agreement. If the reasonably determinable costs
are greater than or less than the service fees paid, the difference will be
charged to or refunded to the Company, as the case may be, within 30 days after
such review.
 
     The service fees assessed to the Company and the end of period adjustments
thereto are intended by the Company and Seagate Technology to allocate costs for
those services provided on a basis no less favorable
 
                                       69
<PAGE>   71
 
than the Company could obtain from an unaffiliated third party. The Company has
audit rights with respect to the computation and analysis of service fees
pursuant to the General Services Agreement. In addition, the Parent Company is
required to indemnify, defend and hold the Company harmless against any and all
claims, suits, actions, demands, proceedings, losses, damages, liabilities,
costs and expenses, including, without limitation, interest and reasonable
attorneys' fees, arising out of, relating to, or resulting from services
performed by the Parent Company pursuant to the General Services Agreement,
other than those liabilities that would not have arisen but for any act, error
and/or omission of the Company and/or any of its officers, directors, employees
and/or agents.
 
     Additionally, on July 4, 1998, the Company and Seagate Technology renewed
the Intercompany Revolving Loan Agreement ("Loan Agreement") on substantially
the same terms and conditions as the prior agreement which was dated June 28,
1996. Under the Revolving Loan Agreement, Seagate Technology finances certain of
the Company's working capital requirements. The Loan Agreement provides for
maximum borrowings of up to $60,000,000 and is renewable every two years.
Borrowings from the Parent Company were $16,054,000 and $28,971,000 at July 3,
1998 and June 27, 1997, respectively. Borrowings from the Parent Company consist
primarily of funding the Company's operating activities. During 1998, gross
borrowings and gross repayments under the Loan Agreement were $175,919,000 and
$188,836,000, respectively. Average outstanding borrowings under the Loan
Agreement were $14,656,000 during 1998. Beginning in fiscal 1999, the Company
will pay interest at the LIBOR rate plus 2% per annum on such borrowings; the
Company previously paid interest at 6%.
 
     Revenues from the Parent Company were $5,469,000, $5,762,000 and $9,374,000
in fiscal 1998, 1997 and 1996, respectively. This revenue primarily consisted of
shipments to Seagate Technology's OEM tape drive divisions located in Costa
Mesa, California and Scotland. Additionally, this revenue is supported by
license agreements, which have comparable terms and pricing as those agreements
between the Company and third party customers.
 
     The Company is included in the consolidated federal and certain combined
and consolidated foreign and state income tax returns of Seagate Technology.
Seagate Technology and the Company have entered into a tax sharing agreement
(the "Tax Allocation Agreement") pursuant to which the Company computes
hypothetical tax returns as if the Company was not joined in consolidated or
combined returns with Seagate Technology. The Company must pay Seagate
Technology the positive amount of any such hypothetical taxes. If the
hypothetical tax returns show entitlement to refunds, including any refunds
attributable to a carryback, then Seagate Technology will pay the Company the
amount of such refunds. At year end for both 1998 and 1997, there were no
outstanding intercompany tax-related balances between the Company and Seagate
Technology.
 
                                       70
<PAGE>   72
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as a part of this Report:
 
   
        1.Financial Statements. The consolidated financial statements of Seagate
          Software and subsidiaries and supplemental schedule of the registrant
          as set forth under Item 8 are filed as part of this Form 10-K/A.
    
 
   
        2. Financial Statement Schedules. The following consolidated financial
statement schedules of Seagate Software and subsidiaries are filed as part of
this Form 10-K/A and should be read in conjunction with the consolidated
financial statements of Seagate Software and subsidiaries.
    
 
<TABLE>
<CAPTION>
                        DESCRIPTION                           PAGE
                        -----------                           ----
<S>                                                           <C>
Schedule II -- Valuation and Qualifying Accounts............   74
</TABLE>
 
        Schedules not listed above have been omitted because they are not
        applicable or are not required or the information required to be set
        forth therein is included in the consolidated financial statements or
        notes thereto.
 
   
        The independent auditors' report with respect to the above-listed
        financial statements and schedules appears on page 25 of this report on
        Form 10-K/A.
    
 
        3. Exhibits
 
   
<TABLE>
<S>            <C>
 3.1+          Certificate of Incorporation of Registrant, as amended
 3.2+          Bylaws of Registrant, as amended
 4.1+          Voting Agreement dated December 26, 1996 among the
               Registrant, Seagate Software Information Management Group,
               Inc. and Seagate Technology International Holdings
10.1+          1996 Stock Option Plan, as amended, form of Stock Option
               Agreement and form of Amendment to Stock Option Agreement
10.2(A)        Seagate Technology, Inc. Employee Stock Purchase Plan, as
               amended
10.3+          Lease Agreement, dated December 27, 1994, between the
               Registrant and Clover Investments, Inc.
10.4+          Lease Agreement, dated March 21, 1996 between the Registrant
               and 400 International Parkway Development Company
10.5*+         General Services Agreement dated June 28, 1997 between the
               Registrant and Seagate Technology, Inc.
10.6+          Tax Allocation Agreement dated April 4, 1996 between the
               Registrant and Seagate Technology, Inc.
10.7+          Intercompany Revolving Loan Agreement dated June 28, 1996
               between the Registrant and Seagate Technology, Inc.
10.7.1(A)      Amendment No. 1 dated July 4, 1998 to Intercompany Revolving
               Loan Agreement between the Registrant and Seagate
               Technology, Inc.
10.8+          Form of Indemnification Agreement entered into between the
               Registrant and its directors and officers
10.9+          Support Agreement dated December 26, 1996 between the
               Registrant and Seagate Software Information Management
               Group, Inc.
10.10(A)       Lease Agreement dated as of November 1, 1997 by and among
               Seagate Technology, Inc., Seagate Software Information
               Management Group, Inc. and No. 163 Cathedral Ventures Ltd.
</TABLE>
    
 
                                       71
<PAGE>   73
 
   
<TABLE>
<S>          <C>
10.11(A)     Separation Agreement and Release dated July 29, 1998 between Seagate Technology, Inc. and Alan
             F. Shugart
13.1+        Holistic Systems Ltd. (now Seagate Software Information Management Group Limited) Statements of
             Consolidated Profits and Cash Flows and Related Notes Year Ended 31 March 1996
21.1(A)      Subsidiaries of the Registrant
23.1         Consent of Ernst & Young LLP, Independent Auditors
24.1(A)      Power of Attorney
27.1         Amended Financial Data Schedule
27.2         Amended Financial Data Schedule
</TABLE>
    
 
---------------
 *  Confidential treatment has been requested for a portion of this exhibit
    pursuant to a request for confidential treatment filed with the Securities
    and Exchange Commission. Omitted portions have been filed separately with
    the Commission.
 
 +  Incorporated by reference to exhibits filed in response to Item 15(a),
    "Exhibits" to the Registrant's Registration Statement on Form 10 as filed
    with the Securities and Exchange Commission on October 3, 1997 as amended on
    December 11, 1997.
 
(A) Incorporated by reference to exhibits filed in connection with Seagate
    Technology's Annual Report on Form 10-K for the fiscal year ended July 3,
    1998 as filed with the Securities and Exchange Commission on August 21, 1998
 
     (b) Reports on Form 8-K
 
        No reports on Form 8-K were filed by the registrant during the quarter
ended July 3, 1998.
 
                                       72
<PAGE>   74
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
    
 
                                          SEAGATE SOFTWARE, INC.
 
                                          By:                  *
 
                                            ------------------------------------
                                                   Terence R. Cunningham
                                               President and Chief Operating
                                                           Officer
 
   
Dated: April 16, 1999
    
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report on Form 10-K has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
 
   
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                     DATE
                      ---------                                     -----                     ----
<C>                                                      <C>                             <S>
                          *                                  President and Chief         April 16, 1999
-----------------------------------------------------         Operating Officer
               (Terence R. Cunningham)
 
                          *                                Chief Strategic Officer       April 16, 1999
-----------------------------------------------------
                (Gregory B. Kerfoot)
 
              /s/ ELLEN E. CHAMBERLAIN                      Senior Vice President,       April 16, 1999
-----------------------------------------------------        Treasurer and Chief
               (Ellen E. Chamberlain)                         Financial Officer
 
                          *                                 Chairman of the Board        April 16, 1999
-----------------------------------------------------            of Directors
                 (Stephen J. Luczo)
 
                          *                                        Director              April 16, 1999
-----------------------------------------------------
                  (Gary B. Filler)
 
                          *                                        Director              April 16, 1999
-----------------------------------------------------
                 (Lawrence Perlman)
 
                          *                                        Director              April 16, 1999
-----------------------------------------------------
                  (Donald L. Waite)
</TABLE>
    
 
*By: /s/ Ellen E. Chamberlain
 
     ------------------------------------------------------
     Ellen E. Chamberlain
     Attorney-in-fact
 
                                       73
<PAGE>   75
 
                                                                     SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                  BALANCE AT   CHARGED TO                 BALANCE AT
                                                  BEGINNING    COSTS AND    DEDUCTIONS-     END OF
                  DESCRIPTION                     OF PERIOD     EXPENSES    DESCRIBE(1)     PERIOD
                  -----------                     ----------   ----------   -----------   ----------
<S>                                               <C>          <C>          <C>           <C>
YEAR ENDED JULY 3, 1998:
  Deducted from asset accounts:
     Allowance for doubtful accounts............  $1,270,000   $1,177,000    $811,000     $1,636,000
                                                  ==========   ==========    ========     ==========
YEAR ENDED JUNE 27, 1997:
  Deducted from asset accounts:
     Allowance for doubtful accounts............  $  597,000   $1,522,000    $849,000     $1,270,000
                                                  ==========   ==========    ========     ==========
YEAR ENDED JUNE 28, 1996:
  Deducted from asset accounts:
     Allowance for doubtful accounts............  $  405,000   $  408,000    $216,000     $  597,000
                                                  ==========   ==========    ========     ==========
</TABLE>
 
---------------
(1) Uncollectible accounts written off, net of recoveries.
 
                                       74
<PAGE>   76
 
                             SEAGATE SOFTWARE, INC.
 
                               INDEX TO EXHIBITS
 
   
<TABLE>
<S>         <C>
 3.1+       Certificate of Incorporation of Registrant, as amended
 3.2+       Bylaws of Registrant, as amended
 4.1+       Voting Agreement dated December 26, 1996 among the
            Registrant, Seagate Software Information Management Group,
            Inc. and Seagate Technology International Holdings
10.1+       1996 Stock Option Plan, as amended, form of Stock Option
            Agreement and form of Amendment to Stock Option Agreement
10.2(A)     Seagate Technology, Inc. Employee Stock Purchase Plan, as
            amended
10.3+       Lease Agreement, dated December 27, 1994, between the
            Registrant and Clover Investments, Inc.
10.4+       Lease Agreement, dated March 21, 1996 between the Registrant
            and 400 International Parkway Development Company
10.5*+      General Services Agreement dated June 28, 1997 between the
            Registrant and Seagate Technology, Inc.
10.6+       Tax Allocation Agreement dated April 4, 1996 between the
            Registrant and Seagate Technology, Inc.
10.7+       Intercompany Revolving Loan Agreement dated June 28, 1996
            between the Registrant and Seagate Technology, Inc.
10.7.1(A)   Amendment No. 1 dated July 4, 1998 to Intercompany Revolving
            Loan Agreement between the Registrant and Seagate
            Technology, Inc.
10.8+       Form of Indemnification Agreement entered into between the
            Registrant and its directors and officers
10.9+       Support Agreement dated December 26, 1996 between the
            Registrant and Seagate Software Information Management
            Group, Inc.
10.10(A)    Lease Agreement dated as of November 1, 1997 by and among
            Seagate Technology, Inc., Seagate Software Information
            Management Group, Inc. and No. 163 Cathedral Ventures Ltd.
10.11(A)    Separation Agreement and Release dated July 29, 1998 between
            Seagate Technology, Inc. and Alan F. Shugart
13.1+       Holistic Systems Ltd. (now Seagate Software Information
            Management Group Limited) Statements of Consolidated Profits
            and Cash Flows and Related Notes Year Ended 31 March 1996
21.1(A)     Subsidiaries of the Registrant
23.1        Consent of Ernst & Young LLP, Independent Auditors
24.1(A)     Power of Attorney
27.1        Amended Financial Data Schedule
27.2        Amended Financial Data Schedule
</TABLE>
    
 
---------------
 *  Confidential treatment has been requested for a portion of this exhibit
    pursuant to a request for confidential treatment filed with the Securities
    and Exchange Commission. Omitted portions have been filed separately with
    the Commission.
 
 +  Incorporated by reference to exhibits filed in response to Item 15(a),
    "Exhibits" to the Registrant's Registration Statement on Form 10 as filed
    with the Securities and Exchange Commission on October 3, 1997 as amended on
    December 11, 1997.
 
   
(A) Incorporated by reference to exhibits filed in connection with Seagate
    Technology's Annual Report on Form 10-K for the fiscal year ended July 3,
    1998 as filed with the Securities and Exchange Commission on August 21, 1998