<PAGE>
 
===============================================================================
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
(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 NUMBER: 000-23169
 
                               ----------------
 
                            SEAGATE SOFTWARE, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                       77-0397623
        (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NUMBER)
</TABLE>
 
                915 DISC DRIVE, SCOTTS VALLEY, CALIFORNIA 95066
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
                                (831) 438-6550
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
          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 or any
amendment to this Form 10-K. [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
 
===============================================================================
<PAGE>
 
                                    PART I
 
CERTAIN FORWARD-LOOKING INFORMATION
 
  The information contained in this Form 10-K 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. Certain sections of this Form 10-K 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
 
                                       1
<PAGE>
 
NerveCenter provide the combination of Information Availability and
Information Analysis by integrating 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>
 

 .  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>
 
  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
 
--------
* 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>
 
and storage management software products. Many of the Company's current and
prospective 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>
 
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.
 
                                       6
<PAGE>
 

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 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.
 
  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.*

--------
* 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>
 
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. 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. The following data should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-K 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.................    6,905   (64,033)  (137,806)  (80,166)  (11,068)
Net loss....................   (8,490)  (57,700)  (129,668)  (82,864)   (6,884)
Net loss per common share
 (basic and diluted)........   (51.59)  (852.11)
Total assets................  136,040   143,594    201,598   101,928    20,854
Stockholders' equity........ $ 54,149  $ 61,618  $ 115,602  $ 47,215  $  6,978
Weighted average common
 shares outstanding.........  164,571    67,714
</TABLE>
 
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") and contained elsewhere in this
Form 10-K 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 Future Operating
Results". Certain sections in this Form 10-K 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
 
  The Company develops and markets software products and provides related
services enabling business users and information technology ("IT")
professionals to 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 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 was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to the Parent Company's merger with Crystal
Computer Services, Inc., a company engaged in
 
                                       8
<PAGE>
 
developing and marketing report writing software. From August 1994 to June
1996, the Parent Company 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, the Parent Company
merged with Conner Peripherals, Inc. ("Conner") in a transaction accounted for
as a pooling-of-interests. In connection with the merger, the Parent Company
purchased the outstanding minority interests in Conner's storage management
software operations under Arcada Holdings, Inc. ("Arcada"). 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. ("Eastman"), a company engaged
in developing, producing and marketing HSM 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 estimated
value of in-process technology that had not yet reached technological
feasibility, had no alternative future uses and was charged to the Company'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 the Company's operations since the acquisition
was completed. Pro forma financial information is not presented as such
amounts are not material.
 
  The Company 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
represent fiscal years unless otherwise noted.
 
  Arcada, which was acquired by the Company 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 the Company's statement of operations
for the year ended June 30, 1995. In order to conform Arcada's fiscal year end
to the Company's fiscal year end, the Company'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 the Company's
consolidated statement of operations for the year ended June 30, 1995.
 
1998 VERSUS 1997
 
  REVENUES. The Company's revenues are primarily derived from the sale of
product licenses, software maintenance, technical support, training and
consulting. The Company recognizes license revenues in accordance with
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition". Revenues from software license agreements are
recognized at the time of product delivery, provided there are no significant
vendor obligations remaining to be fulfilled and collectibility is probable.
Service revenues from customer maintenance fees for ongoing customer support
and product updates are recognized ratably over the maintenance term, which is
typically 12 months. Service revenues from training and consulting are
recognized when such services are performed.
 
  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 Seagate Backup Exec, NSMG'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, IMG's leading business intelligence products
featuring enterprise report writing and scheduling technologies. The Company
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 the Company's continued expansion
 
                                       9
<PAGE>
 

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 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.*
 
  COST OF REVENUES. The cost of revenues consists of amortization of acquired
developed technology, royalties, product packaging, documentation,
duplication, production and the cost of maintenance, technical support and
consulting services. Acquired developed technology is amortized based on the
greater of the straight-line method over its estimated useful life (30 to 48
months) or the ratio of current revenues to the total of current and
anticipated future 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 the Company's
professional services workforce necessary to support the growth in training
and consulting revenues. 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.
 
  SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel-related expenses, advertising, sales and marketing promotions and
customer technical support costs. 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 the Company's
sales force and increases in advertising, promotion and technical support
costs necessary to support revenue growth. Such increases were partially
offset by reductions in workforce in 1997 within the NSMG business unit due to
facility consolidations.
 
  RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel-related expenses, depreciation of development equipment
and facilities and occupancy costs. In accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed", software development costs are
expensed as incurred until technological feasibility has been established, at
which time such costs are capitalized until the product is available for
general release to customers. To date, the establishment of technological
feasibility of the Company's products and general release of such software has
substantially coincided. As a result, software development costs qualifying
for capitalization have been insignificant.
 
  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 NSMG
business unit.
 
 
--------
* 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.
 
                                      10
<PAGE>
 
  GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel-related expenses for finance, legal, information
technology, human resources, general management, fixed asset provisions and
outside services. 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 NSMG business unit.
 
  WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. As a result of its
acquisitions, the Company has acquired a number of projects and products that
were considered in-process research and development on the date of
acquisition. The Company 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. The Company 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. Goodwill represents the
excess of the purchase price of acquired companies over the estimated fair
values of the tangible and intangible net assets acquired. Goodwill is
amortized on a straight-line basis over five to seven years. Other intangible
assets consist of acquired trademarks, assembled workforces, distribution
networks, developed technology, customer bases, and covenants not to compete.
Amortization of other intangibles, other than acquired developed technology,
which is included in the cost of revenues, is provided based on the straight-
line method over the respective useful lives of the assets ranging from one to
five years. The decrease in the amortization of goodwill and other intangibles
to $15,421,000 in 1998 from $27,202,000 in 1997, representing 5% and 13% 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 goodwill and other intangible assets of
approximately $1,900,000 in 1998 versus $10,259,000 in 1997 as a result of
asset values that had become impaired based on reductions in estimated future
cash flows.
 
  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 NSMG business 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, the Company 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 the Company and recorded the remaining $4,554,000 paid to non-
employee shareholders as additional purchase price.
 
  The Company released the funds prior to the expiration of the contingency
period, because in order to position the IMG business unit for future growth
and product development, the Company 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. The Company 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 the Company. Accordingly, the
Company elected to make the full payment of $18,000,000.
 
 
                                      11
<PAGE>
 
  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. The Company recorded a $15,385,000 provision for income taxes
at an effective rate of 223% in 1998 compared with a $8,714,000 benefit from
income taxes at an effective rate of 13% 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.
 
1997 VERSUS 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 IT infrastructure
management software products and related services, expansion of the Company's
European distribution channels and market demand for NSMG'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 and other revenues
of approximately $26,039,000, $842,000 and $14,758,000, respectively, in 1997
as compared with 1996.
 
  During 1997 the Company generated export revenues from the United States of
approximately $44,129,000. Revenues and expenses from the Company'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 IMG'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 the Company
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 the Company's phasing out of certain products.
 
  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 the Company's European distribution channel. Additionally, the
1997 results included a full year of operations for the Company'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 NSMG business unit. Additionally, the 1997
results included a full year of operations for the Company's 1996 acquisitions
compared with a partial year of operations in 1996.
 
                                      12
<PAGE>
 
  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
the Company's growth. Additionally, the 1997 results included a full year of
operations for the Company'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. The Company
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 the
Company's 1996 acquisitions.
 
  AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles increased to $27,202,000 in 1997 from $13,035,000 in 1996,
representing 13% 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.
 
  RESTRUCTURING. Restructuring charges were $2,524,000 in 1997 and $9,502,000
in 1996, representing 1% and 7% of total revenues, respectively. The
restructuring charges were incurred in both years as a result of
reorganizations and closures within the NSMG business 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. In connection with the June 1996 acquisition of Holistic, the
Company 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 the Company.
 
  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. The Company recorded a $8,714,000 benefit from income taxes at
an effective rate of 13% 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
 
  The Company'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
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 payable
balance to the Parent Company, 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.
 
  The Company's operations have been financed by cash flows from operating
activities and borrowings from the Parent Company. Such borrowings are
available to the Company under a Revolving Loan Agreement, between the Company
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 the Company's working capital requirements. The Revolving
 
                                      13
<PAGE>
 
Loan Agreement, which provides for maximum borrowings of up to $60,000,000, is
renewable every two years. 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, the Company made investments in property
and equipment totaling approximately $10,387,000 for new office facilities,
leasehold improvements, computers, furniture and office equipment. The Company
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.* The Company expects
that such investments will be funded from existing cash balances and cash
flows from operations.*
 
  The Company believes its current cash balances, its available borrowings
from the Parent Company and cash flows generated from the Company'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, the
Company anticipates that future operating and investing activities may be
financed by additional borrowings from the Parent Company, equity financing or
other sources.* The Company believes that additional financing from the Parent
Company 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.
 
--------
* 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>
 
 
--------
* 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.
 
  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 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
 
--------
* 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.
 
                                      15
<PAGE>
 
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 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

--------
* 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.


                                      16
<PAGE>
 
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 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

--------
* 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.
 
                                      17
<PAGE>
 
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 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
unlikely 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

--------
* 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.
 
                                      18
<PAGE>
 
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.* 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

--------
* 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.
 
                                      19
<PAGE>
 
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.
 
  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.
 
                                      20
<PAGE>
 
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..........................  22
Consolidated Balance Sheets as of July 3, 1998 and June 27, 1997...........  23
Consolidated Statements of Operations for the Years Ended
 July 3, 1998, June 27, 1997 and June 28, 1996.............................  24
Consolidated Statements of Cash Flows for the Years Ended
 July 3, 1998, June 27, 1997 and June 28, 1996.............................  25
Consolidated Statements of Stockholders' Equity for the Years Ended
 July 3, 1998, June 27, 1997 and June 28, 1996.............................  26
Notes to the Consolidated Financial Statements.............................  27
</TABLE>
 
                                       21
<PAGE>
 
               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.
 
                                          /s/ ERNST & YOUNG LLP
 
San Jose, California
July 17, 1998
 
                                      22
<PAGE>
 
                             SEAGATE SOFTWARE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                           JULY 3,   JUNE 27,
                                                            1998       1997
                                                          ---------  ---------
                         ASSETS
                         ------
<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......................    53,879     75,306
                                                          ---------  ---------
    Total assets......................................... $ 136,040  $ 143,594
                                                          =========  =========
<CAPTION>
                       LIABILITIES
                       -----------
<S>                                                       <C>        <C>
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        --
<CAPTION>
                  STOCKHOLDERS' EQUITY
                  --------------------
<S>                                                       <C>        <C>
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......................................  (289,175)  (280,685)
Foreign currency translation adjustment..................      (257)       157
                                                          ---------  ---------
    Total stockholders' equity...........................    54,149     61,618
                                                          ---------  ---------
    Total liabilities and stockholders' equity........... $ 136,040  $ 143,594
                                                          =========  =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       23
<PAGE>
 
                             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..................................    15,421    27,202     13,035
  Restructuring costs...........................       --      2,524      9,502
  Unusual items.................................       --     13,446        --
                                                  --------  --------  ---------
    Total operating expenses....................   235,861   233,194    250,373
                                                  --------  --------  ---------
Income (loss) from operations...................     6,905   (64,033)  (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...............     6,895   (66,414)  (138,416)
Benefit from (provision for) income taxes.......   (15,385)    8,714      8,748
                                                  --------  --------  ---------
Net loss........................................  $ (8,490) $(57,700) $(129,668)
                                                  ========  ========  =========
Net loss per common share:
  Basic.........................................  $ (51.59) $(852.11)
  Diluted.......................................  $ (51.59) $(852.11)
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.
 
                                       24
<PAGE>
 
                             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........................................  $ (8,490) $(57,700) $(129,668)
Adjustments to reconcile net income to net cash
 from operating activities:
  Depreciation and amortization.................    39,152    41,381     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    17,192      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, net.........   (12,917)   (4,020)    20,418
                                                  --------  --------  ---------
  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.
 
                                       25
<PAGE>
 
                             SEAGATE SOFTWARE, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                              SERIES A
                             CONVERTIBLE                                FOREIGN
FOR THE YEARS ENDED JULY   PREFERRED STOCK   COMMON STOCK  ADDITIONAL  CURRENCY
 3, 1998, JUNE 27, 1997   ----------------- --------------  PAID-IN   TRANSLATION ACCUMULATED
   AND JUNE 28, 1996        SHARES   AMOUNT SHARES  AMOUNT  CAPITAL   ADJUSTMENT    DEFICIT     TOTAL
------------------------  ---------- ------ ------- ------ ---------- ----------- ----------- ---------
                                                (IN THOUSANDS, EXCEPT SHARE DATA)
<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................         --     --      --     --        --        --        (57,700)   (57,700)
                          ----------  ----  -------  ----   --------     -----     ---------  ---------
BALANCE AT JUNE 27,
 1997...................  54,633,333    55   83,355    --    342,091       157      (280,685)    61,618
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................         --     --      --     --        --        --         (8,490)    (8,490)
                          ----------  ----  -------  ----   --------     -----     ---------  ---------
BALANCE AT JULY 3,
 1998...................  54,633,333  $ 55  235,502  $ --   $343,526     $(257)    $(289,175) $  54,149
                          ==========  ====  =======  ====   ========     =====     =========  =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       26
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  DESCRIPTION OF BUSINESS. Seagate Software, Inc. ("Seagate Software" or the
"Company") develops and markets software products and provides related
services enabling business users and information technology ("IT")
professionals to 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 Common Stock issued pursuant
to 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.
 
  BASIS OF PRESENTATION. These financial statements are presented as if the
Company 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 the Company's operations. Intercompany
transactions and balances have been eliminated.
 
  The Company was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to the Parent Company's merger with Crystal
Computer Services, Inc., a company engaged in developing and marketing report
writing software. From August 1994 to June 1996, the Parent Company 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, the Parent Company merged with Conner Peripherals,
Inc. ("Conner") in a transaction accounted for as a pooling-of-interests. In
connection with the merger, the Parent Company purchased the outstanding
minority interests in Conner's storage management software operations under
Arcada Holdings, Inc. ("Arcada"). In April 1996, the Parent Company
consolidated its software operations into Seagate Software.
 
  Prior to December 1996, Seagate Technology International ("STI"), a wholly-
owned subsidiary of Seagate Technology, owned all outstanding capital stock
(the "IMG Stock") of IMG Vancouver (formerly Crystal Services, Inc.). Pursuant
to an agreement among STI, Seagate Software and IMG Vancouver dated
December 19, 1996, STI surrendered the IMG Stock (which was subsequently
cancelled by IMG Vancouver) in exchange for 7,200,000 Convertible Preference
Shares of IMG Vancouver. On December 26, 1996, the Convertible Preference
Shares were exchanged for 7,200,000 Class B Exchangeable Shares of IMG
Vancouver. These Class B Exchangeable Shares do not have voting rights except
as required by law, but can be exchanged at STI'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, STI was
granted voting rights in Seagate Software equivalent to 7,200,000 shares of
Series A Preferred Stock. Also on December 26, 1996, IMG 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 IMG
Vancouver. For financial reporting purposes, Seagate Software has control over
IMG Vancouver and therefore consolidates the results of IMG Vancouver.
Additionally, the 7,200,000 shares of Series A Preferred Stock of the Company
which STI could elect to receive in exchange for the Class B Exchangeable
Shares of IMG Vancouver have been treated as issued and outstanding shares of
Series A Preferred Stock of the Company.
 
  In June 1998, the Company 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
 
                                      27
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
technology that had not yet reached technological feasibility, had no
alternative future use and was charged to the Company'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 the Company's operations since the acquisition was completed. Pro
forma financial information is not presented as such amounts are not material.
 
  The Company 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 the Company 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 the Company's statement of operations
for the year ended June 30, 1995. In order to conform Arcada's fiscal year end
to the Company's fiscal year end, the Company'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 the Company's
consolidated statement of operations for the year ended June 30, 1995.
 
  ECONOMIC DEPENDENCE ON SEAGATE TECHNOLOGY. The Company has incurred net
losses since inception and had net losses aggregating $195,858,000 during
1998, 1997 and 1996, and had a working capital deficit at July 3, 1998 of
$10,743,000. On July 4, 1998 the Company 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 the Company'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 the Parent Company
consist primarily of amounts used to fund the Company's operating activities.
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%.
The Company 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 fund the
Company'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
the Company to significant concentrations of credit risk consist primarily of
cash and accounts receivable. The Company 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. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company 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 the Company's total revenues in 1998, 1997 and 1996,
respectively.
 
  FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the
remeasurement into U.S. dollars of amounts denominated in foreign
 
                                      28
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 the Company. A substantial majority of the Company's cash is
from balances maintained by the Company's foreign subsidiaries.
 
  CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with an original maturity of 90 days or less at the time of
purchase to be cash equivalents. The Company typically uses available cash in
excess of amounts required for operating activities to pay amounts due under
the Revolving Loan Agreement. Accordingly, the Company 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 not to compete. In-process research and development
without alternative future use is expensed when acquired.
 
  DEVELOPED TECHNOLOGY. The Company 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 the Company'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.
 
 
                                      29
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  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. If estimated
undiscounted future cash flows are not sufficient to recover combined carrying
value of the purchased developed technology and associated goodwill, the
carrying value of goodwill is first reduced and then the carrying value of
purchased developed technology is reduced by any remaining differences.
 
  FAIR VALUE DISCLOSURES. The Company 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 the Company, including general management, treasury,
tax, financial reporting, benefits administration, insurance, information
technology, legal, accounts payable and receivable and credit functions.
Seagate Technology has charged the Company 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. 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 Company 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. The Company has since adopted its own bonus plan.
Compensation expenses recorded by the Company under Seagate Technology's plans
totaled $0, $3,158,000 and $910,000 for 1998, 1997 and 1996, respectively.
 
  The employees of the Company 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 the Company's employees in 1998,
1997 and 1996, respectively.
 
  The employees of the Company 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. The Company
may make annual contributions to the 401(k) plan at the discretion of the
Board of Directors. No material contributions were made by the Company in
fiscal years 1998, 1997 or 1996.
 
  REVENUE RECOGNITION. The Company recognizes revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition". The Company'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 and price protection 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
 
                                      30
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
is typically twelve months. Revenues from training and consulting are
recognized when the services are performed.
 
  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.
 
  ADVERTISING EXPENSE. The cost of advertising is expensed as incurred. The
Company 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 the Company's current capital structure did not exist
prior to April 1996, making presentation for prior periods not meaningful.
During 1998, the Company 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 the
Company 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 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>
                                                             JULY 3,  JUNE 27,
                                                              1998      1997
                                                             -------  --------
     <S>                                                     <C>      <C>
     Net loss per share computation -- basic and diluted:
       Numerator: Net loss.................................. $(8,490) $(57,700)
                                                             -------  --------
       Denominator:
         Weighted average number of common shares
          outstanding during the period..................... 164,571    67,714
                                                             -------  --------
           Net loss per share -- basic and diluted.......... $(51.59) $(852.11)
                                                             =======  ========
</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>
 
                                      31
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  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.
 
  GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles consisted of
the following, in thousands:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                             --------  --------
     <S>                                                     <C>       <C>
     Goodwill............................................... $ 44,953  $ 46,200
     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
                                                             --------  --------
                                                              124,308   124,752
     Accumulated amortization...............................  (70,429)  (49,446)
                                                             --------  --------
     Goodwill and other intangibles......................... $ 53,879  $ 75,306
                                                             ========  ========
</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,
$10,259,000 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.
 
  COMMON STOCK SUBJECT TO REPURCHASE. Current employees and directors of the
Company 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 the Company at the original issue price. In addition, upon termination,
unvested shares are subject to repurchase at the option of the Company at
original issue price. Because of the obligation to repurchase vested and
unvested shares of common stock, the Company 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 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
 
                                      32
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 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 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.
 
BUSINESS COMBINATIONS AND ACQUISITIONS
 
  The Company 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.
 
  VALUATION OF ACQUIRED INTANGIBLE ASSETS. Values assigned to acquired in-
process research and development, developed technology, distribution networks,
customer bases, trademarks, and assembled workforces were determined using
independent valuations obtained by the Company.
 
  To determine the value of in-process research and development, the Company
considered, among other factors, the state 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.
 
  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, the
Company 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.
 
                                      33
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Associated risks included the inherent difficulties and uncertainties in
transitioning the business relationships from the acquired entity to the
Company and risks related to the viability of and potential changes to future
target markets.
 
  To determine the value of trademarks, the Company 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, the Company considered,
among other factors, the costs to replace existing employees including search
costs, interview costs and training costs.
 
  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,
the Company 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 the Company'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 the Company'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>
 
                                      34
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  ACQUISITION OF HOLISTIC SYSTEMS, LTD. In June 1996, the Company acquired all
of the outstanding shares of Holistic Systems, Ltd. ("Holistic"), 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 the Company during the
third quarter of fiscal 1997. The Company accounted for the acquisition using
the purchase method, and the results of operations of Holistic are only
included in the Company'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>
 
  As noted above, $18,000,000 of the acquisition consideration was held in
escrow as contingent consideration. The Company 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, the Company 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 the Company. The additional purchase price was allocated
based on the same methodology as the original purchase price and in the third
quarter of 1997, the Company 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.
 
  ACQUISITION OF CALYPSO SOFTWARE SYSTEMS, INC. In May 1996, the Company
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. The Company accounted for the acquisition using the purchase method, and
the results of operations of Calypso are only included in the Company'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>
 
                                      35
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  ACQUISITION OF ONDEMAND SOFTWARE, INC. In March 1996, the Company 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. The Company accounted for the
acquisition using the purchase method, and the results of operations of
OnDemand are only included in the Company'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
develops, markets and supports 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 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>
                                                               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, the Company 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 common stock and options to purchase
common stock with a fair market value of approximately $85,074,000. 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>
 
                                      36
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  ACQUISITION OF SYTRON CORPORATION. In July 1995, Arcada Software, Inc., a
majority-owned subsidiary of Arcada, acquired the assets and liabilities of
Sytron Corporation ("Sytron"), a company which develops, produces and markets
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 the Company'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
 
  The Company'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 conversion
price of the Series A preferred stock will be subject to adjustment to reduce
the effect of dilution in the event that the Company 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 the
Company.
 
  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 the Company. 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 the Company 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 the Company (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,
 
                                      37
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 the Company. 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 the Company 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 the Company
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 the
Company. The Company has reserved a total of 12,600,000 shares under the Plan.
Options granted under the Company'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 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   WEIGHTED AVERAGE
                                                     SHARES     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>
 
                                      38
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  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>
                                                         EXERCISABLE
                          OPTIONS OUTSTANDING              OPTIONS
                  ----------------------------------- ------------------
                                WEIGHTED
                                 AVERAGE     WEIGHTED           WEIGHTED
                                REMAINING    AVERAGE            AVERAGE
     EXERCISE       NUMBER     CONTRACTUAL   EXERCISE  NUMBER   EXERCISE
     PRICES       OF 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. The
Company has elected to follow APBO 25 in accounting for stock options granted.
Under APBO 25, the Company 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 the
Company had accounted for its stock options under the fair value method of
SFAS 123. The fair value of the Company'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 the Company'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 the Company's stock options
granted to employees was estimated assuming no expected dividends and the
following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                 SEAGATE SOFTWARE
                                  INCENTIVE STOCK      SEAGATE TECHNOLOGY
                                    OPTION PLAN          EMPLOYEE STOCK
                                      SHARES          PURCHASE 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 the Company'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.
 
                                      39
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  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
the Company's current capital structure did not exist prior to April 1996,
making presentation for prior periods not meaningful. The Company's pro forma
information follows, in thousands:
 
<TABLE>
<CAPTION>
                                                   1998      1997      1996
                                                 --------  --------  ---------
     <S>                                         <C>       <C>       <C>
     Net loss................................... $(15,716) $(61,568) $(130,043)
     Net loss per common share.................. $ (95.50) $(909.24)
</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 the Company 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
 
  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 (with certain modifications) as if the Company was
not included 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 the end of
fiscal 1998, $8,500,000 in intercompany tax-related balances was due from the
Company to Seagate Technology. At the end of fiscal 1997 and 1996, there were
no intercompany tax-related balances outstanding between the Company 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>
 
  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 the Company'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, the Company did not recognize the benefit of certain tax credits
because they were not expected to be utilized by Seagate Technology in its tax
returns.
 
                                      40
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  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......................    $6,895
     Provision for income taxes....................................     4,548
                                                                       ------
     Net income....................................................    $2,347
                                                                       ======
</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 the Company'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
subsidiaries. The valuation allowance increased by $7,927,000, $11,946,000 and
$26,038,000 in 1998, 1997 and 1996, respectively.
 
                                      41
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  As of June 27, 1997, the Company 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, the Company, 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..... $ 2,413  $(23,245) $(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...   2,621     5,666     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 the
Company 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
 
  During 1996, the Company recorded restructuring charges totaling $9,502,000
as a result of the acquisition of Arcada, a majority-owned subsidiary of
Seagate Technology that was acquired in connection with Seagate Technology's
merger with Conner. During 1997, the Company recorded restructuring charges of
approximately $2,524,000, which consisted of $3,481,000 resulting from NSMG's
consolidation efforts, offset by an adjustment to reduce the 1996
restructuring by $957,000 based upon completion of certain aspects of the
restructuring at less than originally estimated. The restructuring activities
are substantially complete except for remaining liabilities pertaining to
long-term lease commitments on excess and duplicate facilities.
 
                                      42
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
  The following table summarizes the Company's restructuring activity for the
three years ended July 3, 1998, in thousands:
 
<TABLE>
<CAPTION>
                                               EQUIPMENT,                 CONTRACT
                         SEVERANCES            INTANGIBLES              CANCELLATIONS
                            AND       EXCESS    AND OTHER  PROFESSIONAL   AND OTHER
                          BENEFITS  FACILITIES   ASSETS        FEES       EXPENSES     TOTAL
                         ---------- ---------- ----------- ------------ ------------- -------
<S>                      <C>        <C>        <C>         <C>          <C>           <C>
1996 restructuring
 charges................   $1,554     $1,571     $ 5,630      $ 525         $ 222     $ 9,502
Cash charges............     (518)       --          --        (568)          --       (1,086)
Non-cash charges........      --        (121)     (4,168)       --           (138)     (4,427)
                           ------     ------     -------      -----         -----     -------
Reserve balances, June
 28, 1996...............    1,036      1,450       1,462        (43)           84       3,989
1997 restructuring
 charges................      770        505       2,106        --            100       3,481
Cash charges............     (975)      (915)        --         --            --       (1,890)
Non-cash charges........      --         (72)     (1,422)       --            --       (1,494)
Adjustments and
 reclassifications......     (351)       267        (732)        43          (184)       (957)
                           ------     ------     -------      -----         -----     -------
Reserve balances, June
 27, 1997...............      480      1,235       1,414        --            --        3,129
Cash charges............     (373)      (519)         (9)       --            --         (901)
Non-cash charges........      --         --       (1,045)       --            --       (1,045)
Adjustments and
 reclassifications......     (107)       467        (360)       --            --          --
                           ------     ------     -------      -----         -----     -------
Reserve balances, July
 3, 1998................   $  --      $1,183     $   --       $ --          $ --      $ 1,183
                           ======     ======     =======      =====         =====     =======
</TABLE>
 
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
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
 
  The Company 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 the Company'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.    20,734  (13,829)       --          6,905
   Other income (expense), net...       287     (297)       --            (10)
                                   -------- --------    -------      --------
   Income (loss) before income
    taxes........................  $ 21,021 $(14,126)   $   --       $  6,895
                                   ======== ========    =======      ========
   Identifiable assets...........  $111,129 $ 24,911    $   --       $136,040
                                   ======== ========    =======      ========
</TABLE>
 
                                      43
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
<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..........  (58,962)  (5,071)       --        (64,033)
   Other expense, net............   (2,315)     (66)       --         (2,381)
                                  --------  -------    -------      --------
   Loss before income taxes...... $(61,277) $(5,137)   $   --       $(66,414)
                                  ========  =======    =======      ========
   Identifiable assets........... $103,880  $39,714    $   --       $143,594
                                  ========  =======    =======      ========
</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
relating to the Holistic acquisition. The identifiable assets by geographic
area are those assets used in the Company's operations in each area.
 
  The Company 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.
 
                                      44
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
 
COMMITMENTS
 
  LEASES. The Company 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 the Company to pay property taxes, insurance and normal maintenance
costs. The Company 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 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.
 
  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.
 
                                      45
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
 
  The directors and executive officers of the Company and certain information
about them as of September 2, 1998, are as follows:
 
<TABLE>
<CAPTION>
                                                                  DIRECTOR OR
                                                                   EXECUTIVE
            NAME          AGE             POSITION               OFFICER SINCE
            ----          ---             --------               -------------
   <C>                    <C> <S>                                <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. Cunningham. 39  President and Chief Operating
                               Officer                               1996
   Gregory B. Kerfoot.... 38  Chief Strategic Officer                1996
   Ellen E. Chamberlain.. 41  Senior Vice President, Treasurer
                               and Chief Financial Officer           1996
</TABLE>
 
  Mr. Luczo currently serves as Chairman of the Board of Directors of the
Company 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.
 
                                      46
<PAGE>
 
  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.
 
  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.
 
                                      47
<PAGE>
 
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    1997   100,000(2)   195,000(2)       1,659(2)     80,000
  of Directors
Terence R. Cunningham...  1998   155,002      803,800(3)         --        550,000
 President and Chief      1997   150,530      537,127(3)         --        100,000
  Operating Officer
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,   1997   155,000      221,500(4)       6,000        28,000
 Treasurer, and 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.
 
                                      48
<PAGE>
 
                             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
                                    % OF TOTAL                         VALUE AT ASSUMED
                         NUMBER OF   OPTIONS                         ANNUAL RATES OF STOCK
                         SECURITIES GRANTED TO EXERCISE               PRICE APPRECIATION
                         UNDERLYING EMPLOYEES   OR BASE               FOR OPTION TERM(4)
                          OPTIONS   IN FISCAL  PRICE PER  EXPIRATION ---------------------
    NAME                 GRANTED(1)    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.
 
 
                                      49
<PAGE>
 
  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.
 
 
                                      50
<PAGE>
 
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 SECURITIES      EXERCISE OR BASE PRICE
   NAME                     UNDERLYING 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.
 
                                      51
<PAGE>
 
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, (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  PERCENT OF
                                                            COMMON     COMMON
                                                          EQUIVALENT EQUIVALENT
                                                            SHARES   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 per-
 sons) (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.
 
                                      52
<PAGE>
 
 (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 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
 
                                      53
<PAGE>
 
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 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.
 
                                      54
<PAGE>
 
                                    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.
 
    2. Financial Statement Schedules. The following consolidated financial
  statement schedules of Seagate Software and subsidiaries are filed as part
  of this Form 10-K 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..........................  58
</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.
 
                                      55
<PAGE>
 
    3. Exhibits
 
<TABLE>
 <C>      <S>
  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   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    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     Subsidiaries of the Registrant
 23.1     Consent of Ernst & Young LLP, Independent Auditors
 24.1     Power of Attorney (see page 57)
 27.1     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.
 
                                      56
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          SEAGATE SOFTWARE, INC.
 
                                                /s/ TERENCE R. CUNNINGHAM
                                          By: _________________________________
                                                   TERENCE R. CUNNINGHAM
                                               PRESIDENT AND CHIEF OPERATING
                                                          OFFICER
 
Dated: September 2, 1998
 
                               POWER OF ATTORNEY
 
  KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS TERENCE R. CUNNINGHAM AND ELLEN E. CHAMBERLAIN,
JOINTLY AND SEVERALLY, HIS OR HER ATTORNEY-IN-FACT, EACH WITH THE POWER OF
SUBSTITUTION, FOR HIM OR HER IN ANY AND ALL CAPACITIES, TO SIGN ANY AMENDMENTS
TO THIS REPORT ON FORM 10-K AND TO FILE THE SAME, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-
IN-FACT, OR HIS SUBSTITUTE OR SUBSTITUTES, MAY DO OR CAUSE TO BE DONE BY
VIRTUE HEREOF.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
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>                                  <S>                        <C>
     /s/ TERENCE R. CUNNINGHAM        President and Chief        September 2, 1998
 ____________________________________  Operating
       (Terence R. Cunningham)         Officer
 
       /s/ GREGORY B. KERFOOT         Chief Strategic Officer    September 2, 1998
 ____________________________________
         (Gregory B. Kerfoot)
 
      /s/ ELLEN E. CHAMBERLAIN        Senior Vice President,     September 2, 1998
 ____________________________________  Treasurer
        (Ellen E. Chamberlain)         and Chief Financial
                                       Officer
 
        /s/ STEPHEN J. LUCZO          Chairman of the Board of   September 2, 1998
 ____________________________________  Directors
          (Stephen J. Luczo)
 
         /s/ GARY B. FILLER           Director                   September 2, 1998
 ____________________________________
           (Gary B. Filler)
 
        /s/ LAWRENCE PERLMAN          Director                   September 2, 1998
 ____________________________________
          (Lawrence Perlman)
 
        /s/ DONALD L. WAITE           Director                   September 2, 1998
 ____________________________________
          (Donald L. Waite)
 
</TABLE>
 
                                      57
<PAGE>
 
                 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.
 
                                       58
<PAGE>
 
                            SEAGATE SOFTWARE, INC.
 
                               INDEX TO EXHIBITS
 
<TABLE>
 <C>       <S>
  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    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     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      Subsidiaries of the Registrant
 23.1      Consent of Ernst & Young LLP, Independent Auditors
 24.1      Power of Attorney (see page 57)
 27.1      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